9 things government can do to reduce your living costs

A to-do list to control inflation and bring down the cost of goods, services, and housing.

The federal government is belatedly recognising that some of its economic policies are contributing to the inflation that the Reserve Bank of Australia (RBA) is trying to stamp out by raising interest rates.

Since April 2022 when rates first started to increase, it's as though we've been in a car with two drivers - one with its foot on the brake, the other with its foot on the accelerator.

Now, at last, the driver with his foot on the accelerator is showing signs of understanding that they're going to damage the engine of growth if they keep pulling it in two directions.

So they've determined to cut spending on road and rail projects after a blowout in costs on the $120 billion (US$78 billion) portfolio of current and proposed projects of $38 billion - more than 25 percent.

Cutting road and rail projects is not where I would necessarily start. Good road and rail projects actually add to the productivity of the country.

Think of all the trucks that go between Brisbane and Sydney. The upgrades of the Pacific Highway have so far cut the time to travel between the two major east coast cities by 2.5 hours, or somewhere around 20 percent.

That's a huge lift in productivity, and as logistics are a significant proportion of retail prices, a huge decrease in prices. It is therefore anti-inflationary, as well as helping truckies maintain their real earnings.

Not that all transport projects are that productive.

Former Victorian Premier Daniel Andrew's Melbourne Suburban Rail Loop and Queensland Premier Annastacia Palaszczuk's Cross River Rail are both products that provide negative benefits. They therefore increase costs and are pro-inflationary.

The federal government should step away from funding projects like these.

What else should it do?

Here's a short list.

1. Reduce Immigration Immediately

Australia has apparently taken in 630,000 new immigrants this year - that's eight regional Toowoombas.

In a population of 26 million, this puts too much pressure on infrastructure and is substantially responsible for the current housing crisis.

While immigration could help with various skills shortages, there is no evidence that is what the current surge in migration is actually doing.

And anyway, a skill shortage is a signal that either the education and training system needs to adapt, or the economy is exhausting its ability to fulfil all wishes with current resources.

2. Produce Budget Surpluses Going Forward, Not Just This Year

The government is less efficient at spending money than the private sector, partly because large bureaucracies, whether public or private, are inefficient, and partly because when it's not your money, you tend to be less careful.

Producing surpluses, without increasing taxation, means a decrease in the size of government and an increase in productivity.

Surpluses would mean they would need to control rapidly increasing costs in health, aged care, and the National Disability Insurance Scheme (NDIS). That should be relatively simple.

The NDIS should have always been means-tested, and restricted in what it was available for.

Aged care is a centrally micro-managed mess where most of the problems could be fixed by the government stepping away, and also requiring better-off retirees to meet more of their own costs.

In health, we spend proportionately around 50 percent more than countries with similar health outcomes like Israel and Singapore. We've got a generally good health system, but it could be better and cheaper.

Taking these steps would also increase productivity, and therefore reduce upward price pressure.

3. Reform Taxation

Delivering the Stage 3 tax cuts should absolutely happen. This is part of downsizing the government and putting resources in the hands of those who will use them most efficiently.

There is also a list of more radical reforms that should be implemented to raise the productivity of business.

Australia's productivity has been dropping partly because business has not been investing in productive capacity, and most investment in the economy actually comes from companies.

One easy way to boost investment is to allow businesses to accelerate the rate at which they write off assets.

Fast-growing companies are always chronically short of capital, and we exacerbate this by taxing them even when they are not cashflow positive.

Accelerated depreciation helps with this, and while it temporarily decreases government tax revenue, over the long run it should increase it as greater wealth is generated.

They could also look at abolishing company tax altogether and taxing profits entirely in the hands of shareholders.

They should also look at abolishing Capital Gains Tax (a tax that only came into being in 1985).

It is part of the reason there is a shortage of rental properties at the moment, which is increasing living costs for the 31 percent of Australians who rent. Once a homeowner doesn't pay capital gains tax, they have a big advantage over investors when it comes to purchasing a house.

4. Withdraw the 'Closing the Loopholes' Bill

This is a brutally misnamed bill that will make casual and self-employed work marginal.

It strikes at the heart of ambitious Australians who want to do things for themselves and will make our workforce significantly less flexible, increasing costs all around.

In fact, this bill ought to be known as the "Enabling Greater Union Power and Screwing the Small Business Sector" Bill.

The "loopholes" that it claims to close are in fact, not bugs, but features in what has been a remarkably flexible and productive workforce.

5. Reform Environmental Protection Laws

The Environmental Protection and Biodiversity Conservation Act is strangling the growth of projects in Australia and urgently needs review.

It gives too much power to objectors, who in many cases are environmental groups (not conservation groups) set on sabotaging wealth creation rather than protecting the environment.

There is enough sovereign risk in Australia these days without amplifying it.

6. Stop Capping Prices

When prices go up the government's first impulse appears to be to control the price.

They've certainly done this with gas which, in the long-term, actually sends prices up.

High prices are a signal to businesses of where to invest, and price caps are a signal of where not to invest.

7. Moderate the Energy Transition

The inflation in rail and road infrastructure projects is nothing compared to what is about to happen in the area of power generation.

It is already diverting labour and resources from everyday necessities like housing, but there is a looming shortage of the components that make up renewable energy and power networks.

In addition, proceeding without adequate storage is going to increase the need for gas-fired power generation, which is only going to get more expensive because of government policies making it difficult to start new gas projects.

8. Reform Federal-State Relations

Not all the fault for inflation lies with the federal government, a lot of it lies with the states who have borrowed profligately.

The Commonwealth either needs to reintroduce borrowing limits, as used to be the case under the Loans Council, or make it clear to lenders (and voters and governments) that they will not bail out state governments that can't repay their borrowings.

9. Nominate a Minimum Range for Interest Rates

A large slab of our problem is that the RBA pushed interest rates too low-to a historically unparalleled rate.

It should be clear to the RBA, and to voters, that official interest rates should never fall below, say 3.5 percent.

The record-low rate of 0.1 percent was absurd for a number of reasons.

Risk-averse investors, such as pensioners, need to have an asset class that gives them a reasonable return, and which is liquid. That is cash or bonds.

While an asset could wear a return of 0.1 percent if there was a reasonable chance of capital gains, at that rate there is a more than reasonable chance of a capital loss.

In fact, the RBA is apparently sitting on around $45 billion of unrealised losses because it invested in its own paper at this absurdly low rate.

The rate is also important because the government bond rate tends to be priced off it, and the return on government bonds is used as a hurdle rate by investors to gauge the return they need from an investment to make it viable.

When the official cash rate is too low people, businesses and governments invest in too many marginal projects which add nothing to national productivity and income, and often freeze out riskier, but ultimately more profitable, ones.

I wish I could say it is likely the government will pick up even one of these ideas, but it isn't.

Just a few days ago Treasurer Jim Chalmers boasted, "We've seen the highest quarterly wages growth in 26 years under an Australian Labor government. Real wages started falling under the Coalition due to a decade of deliberate wage stagnation and high inflation. We're turning it around."

Except they're not turning it around at all.

He's quoting nominal wages against real wages, and ignoring the fact that labour productivity has just suffered a record fall.

Those wage hikes aren't good for the economy, they are inflation in action.

If you can't see it when you stub your toe on it, in the end, you're unlikely to be able to do anything about it.