Treasurer Jim Chalmers faces an uphill battle to get his Reserve Bank reforms through the parliament – with former treasurers, RBA governors and senior economists criticising key aspects of his legislation.
Chalmers accepted all the recommendations of last year’s RBA review board, including removing the government’s reserve powers to intervene and overrule the central bank if judged necessary, and appoint a second ‘governance’ board of economic academics.
The Reserve Bank reforms legislation would cement those changes and change how the bank and its leadership operate, including removing the ability of the government to intervene, a power which has never been used.
Chalmers’ mentor Paul Keating was an early critic of the proposal. Keating’s ideological foe, Peter Costello joined the criticism on Thursday, along with former RBA governors Bernie Fraser and Ian Macfarlane, who all agreed the change would be a mistake.
Appearing at a Senate economics committee hearing examining the legislation, Costello said removing the government’s reserve powers was “an idea which has been around a long time” but he couldn’t “see you’d improve things by removing section 11 [of the RBA Act]”.
“It’s really a question for the parliament here,” Costello said.
“It’s a question of sovereignty – does the parliament think that it should still have powers in this area?
“Or does it not? If it doesn’t trust itself, it should get rid of them. But frankly, I think that it’d be better to have them there to have some new power legislated in some extreme circumstance.”
Macfarlane, who headed the RBA during the Howard-Costello years said the powers existed for the “once or twice a century” situation where the central bank and the executive government were at loggerheads on how to guide the nation’s economy.
“We have to recognise that central bank independence is a good thing and no one has promoted it as much as I have,” he said.
“But it’s not God-given. It was delegated to the central banks, by elected governments, because they concluded it would lead to better decision making. But conflicts can arise, usually small ones, but how we would we resolve the situation if there was a really big one, a rare event, so far.
“… Section 11 imposes a very politically demanding process that governments would only be willing to use in the most extreme or rare circumstances.”
The power was created after Australia’s central bank, then the Commonwealth Bank, refused to release funds for a nation-building infrastructure program in 1930 which the Labor government had proposed to stave off the impact of the Great Depression.
In that period, Australia’s unemployment rate rose to 32% by 1932 and it took another decade for the economy to recover. The 1930s conflict between the central bank and the government gave rise to the section 11 powers in the RBA Act which was passed in 1959 when the Menzies government established a separate central bank from the Commonwealth Bank.
Macfarlane said it would take a scenario like the 1930 event, which ultimately led to section 11 being created for the powers to be used, but it was important the power was maintained.
Macfarlane’s predecessor at the RBA, Bernie Fraser, agreed.
“I think the removal of the section really risks the independence of the bank and its capacity to perform as we all want it to and to develop and maintain the credibility that a good reserve bank should have,” he said.
Fraser was also on a unity ticket with Costello and Macfarlane in agreeing a second, seperate “governance” RBA board made up of economic academics was unnecessary, as it would not offer a difference in opinion, but could increase complications.
“… We’re getting close to having a committee of super nerds on monetary theory and monetary policy making decisions on interest rates,” he said.
“And while inflation is very much a monetary phenomenon, the causes of inflation and the consequences of inflation go way beyond monetary theory and monetary policy.”
The RBA governor, Michele Bullock, said she was “agnostic” over the power, and agreed that “as it stands”, with the reserve powers in existence, the bank was independent.
Two members of the review board who had recommended the changes said the idea to remove the power came from “discussions within the panel” itself and that the idea for a second, separate board was based on ‘best practice’ of the UK and US central banks.
Greens senator Nick McKim, who had been an early critic of the proposed changes, said the Greens will move amendments to the government legislation next week to retain the government’s reserve powers to intervene on RBA decisions, if necessary.
“We now have three current and former RBA governors who say that the bank is independent enough,” he said.
“We also have Dr Chalmers’ hero Paul Keating, and former Liberal treasurer Peter Costello who are against this move.
“It seems that the only person who wants this change is Dr Chalmers himself.”
The Coalition has also expressed reservations against a second board and the loss of the emergency powers, which make it unlikely Chalmers’ legislation will pass the Senate without amendment.
