Building a ‘national savings culture’

Two Australian stories – inflation first. Prime Minister Rudd has worked out that, in order to slow the economy, C in the Y = C + I + G + NX has be attacked – and what better way than to boost Savings?

Householders could be offered incentives to cut spending and save more of their income as part of the Federal Government’s drive to control inflation.

Mapping out a five-point plan to fight inflation yesterday, Kevin Rudd said he wanted to build a national savings culture to help reduce demand pressures which were pushing up prices.

“Providing attractive incentives to save can help take the pressure off inflation, help people save for their future and help lift national savings,” the Prime Minister said.

While he did not give details, measures likely to be examined include encouraging higher superannuation contributions and tax breaks for savings.

Mr Rudd also promised to increase the budget surplus to around $18 billion next financial year and to speed up policies to train more skilled workers and get more people into the workforce.

“Householders” is a term of art – you don’t need to own a house in order to benefit (although you will certainly benefit more, thus). Rudd is also coming good on his technocrat’s credentials.

Cabinet also decided yesterday to go ahead with plans to establish Infrastructure Australia, a body to co-ordinate public and private investment in areas such as ports, roads and railways.

That should be interesting to watch – Lord knows, a lot of countries (the US in particular) could benefit from some thinking along those lines.

The news also comes at the same time as the demand factors behind Australia’s inflation are reinforced.

An official survey of the prices paid by businesses has found they are paying less than expected mainly due to falling prices for imported goods.

Prices paid by retailers, manufacturers and wholesalers rose by 0.6 per cent over the final three months of last year, nearly half the pace expected by economists.

But another survey of prices, those paid by consumers, is due out tomorrow and is still expected to show inflation running hot.

This is as opposed to, say, excess liquidity (I warned you) and cost-push, oil-and-food factors driving inflation elsewhere. Australia’s is a function of incomes: incomes increase, consumption increases. Demand increases, Prices increase (holding Supply relatively constant). Feeding back by way of information, Rudd’s plan to attack the propensities to save and consume (while the incentives further trim the budget) seems like a pretty smart move. We shall see.

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