Scott Morrison (Cook, Liberal Party) Share this | Hansard source

The Reserve Bank Amendment (Enhanced Independence) Bill 2008 is a show bill that smacks of overcompensation for Labor’s very ordinary record on Reserve Bank independence. The shadow Treasurer has already made the point well about the failings of this bill and how, in his rush to symbolism on this issue, the Treasurer has dropped the ball. This bill screams, ‘He doth protest too much.’ The bill presents us with the absurd situation where we could have the Reserve Bank paralysed by the Treasurer’s ill-thought-through process where an incapacitated governor could continue to serve in the role. Or worse, according to the Parliamentary Library’s Bills Digest, the consequence of these amendments is that there is no longer any ability of either the government or the parliament to dismiss the governor or deputy governor on the grounds of misbehaviour.

The shadow Treasurer has also brought to our attention the poor record of Labor in their commitment to the independence of the Reserve Bank. In February of this year, the Prime Minister said, in an interview with Kerry O’Brien, ‘Kerry, if you accept the independence of the Reserve Bank, which we have done as a matter of policy for a long, long time.’ I do not know what constitutes a long time in the Labor Party but it clearly cannot extend to 1996 when the then Leader of the Opposition, Kim Beazley, was so committed to the policy of independence of the Reserve Bank that he was prepared to take the government to the High Court over the former Treasurer’s statement on monetary policy. That policy has done more to enhance the transparency and independence of the Reserve Bank than any other measure since the Reserve Bank Act itself. And the long, long time cannot extend to the time of the former Treasurer and Prime Minister Paul Keating, who boasted of having the Reserve Bank in his pocket. All I can conclude is that, to quote the member for Kingsford-Smith, the Prime Minister and the Treasurer must have a ‘short memory’. I will spare the House the musical version because the member for Kingsford-Smith does it much better.

I wish to commend the amendments flagged by the shadow Treasurer to take further the process established by the previous government with more regular appearances by the Reserve Bank Governor before the House of Representatives Standing Committee on Economics. The coalition do not need a show bill to demonstrate our commitment to the independence of the Reserve Bank. Our record speaks for itself. This is a bill, not unlike the budget, intended to send a message to the community to confect a perception that the government is trying to create, while actually doing nothing at all to address the object it pretends to address.

This is a political tactic that has been developed by Labor—which I have observed over some time—at a state level for over a decade, drawing on the experiences of their counterparts in the UK, where politics always triumphs over policy. The former New South Wales Premier Nick Greiner has a great saying: ‘Labor are great at politics but lousy at government.’ They are a government that understand the political tactic of seeking to create or exaggerate an enemy in order to better create a perception about their own position. They are experts at creating public alarm and talking up the issue regardless of the impact such reckless actions may have. The goal is never to solve the problem but rather to own the problem and to define themselves in the process. This may be very clever politics but it is very bad government. If you need any convincing, take a look at my home state of New South Wales, where such an approach has dragged the state to its knees. The political masterminds who have kept Labor in power for so long in that state are now here in Canberra running the same operation.

The Prime Minister is the Bob Carr of national politics, and the people of Australia can expect the same results. One problem the government have, which they do not want to talk about, is that they lack economic credibility—and they know it. The public may have accepted many claims from the now government at the last election, but one puppy they never bought was that Labor were better economic managers. While they would never admit it, Labor understand that the public simply does not trust them with their money, and that they never have. Labor also know that they are so conflicted in their ability to run an economically responsible agenda that instead of actually doing it they will fake it—fake it till you make it. This is what this bill is designed to achieve. This is a bill that the government claims is needed to improve the independence of the Reserve Bank to place downward pressure on interest rates. My question to those opposite is: where is the evidence to suggest there is a problem with a lack of independence in the Reserve Bank, and that this in some way has placed upward pressure on interest rates?

Remember that this is a Reserve Bank which, under the previous government, put interest rates up during the last election. What greater test of independence could there be than that? To answer this question, rather than those opposite having to rely on my advice I thought I would quote someone whom they may listen to—the former Governor of the Reserve Bank, Bernie Fraser. Mr Fraser had quite a lot to say about the topic of independence of the Reserve Bank. In a speech to a central banking conference in Karachi in November 2004 Mr Fraser gave an address titled ‘Central bank independence: what does it mean?’ In the speech Mr Fraser argued that price stability was the core purpose of a central bank and, more specifically, its purpose was to counter two potential threats that require their independence—firstly, the tendency for policymakers to push the economy to run faster and further than its capacity limits and, secondly, the temptation for governments to incur deficits and fund those from central bank borrowings.

The second threat is clearly not a problem for this government, having inherited the strongest set of books in our history. There was no need to pay down $96 billion when they came to office. There is no real effort required to generate the surplus in their budget which they boast of now in this place. How different was the situation that confronted this government from the situation that confronted the member for Higgins, our greatest ever Treasurer, back in 1996. However, on the first threat, it is true that the Australian economy has been strong—and thankfully so—and it is true that in recent times the Reserve Bank has taken the decision to raise interest rates. However, is the government suggesting that this has been in some way a result of a failure of the independence of the Reserve Bank in taking this action?

On this matter of rate rises it is also good to get some perspective, especially as we know of the government’s use of clever language to exaggerate problems. Twelve rate rises and 20 warnings all sound very dramatic, but let us look at the facts as I remind the House of some comparisons I made earlier in this place. Let us look at the quantum of these rate rises and the period of time over which the rates rose. Looking at the standard variable rate, under the coalition in April 2002 interest rates were 6.05 per cent. In November 2007, at the time of the election, they had risen to 8.5 per cent. That is a 2½ per cent increase over five years and seven months—67 months. This was the only period of rate increases over the 11½ years of the coalition government.

Contrast that with Labor. Firstly, in March of 1985 interest rates were 11.5 per cent and in just 13 months they went up to 15.5 per cent—that is a four percentage point increase. Secondly, in June 1988 they were at 13.5 per cent and in just 12 months they rose 3.5 percentage points to 17 per cent—and we all remember that. Thirdly,in August 1994 interest rates were at 8.75 per cent, and by December 1994—just four months later—they had gone up 1.2 percentage points. So we can see that when Labor put the pedal down on interest rate rises they went up on average 0.3 per cent per month. By comparison, under the coalition when interest rates rose they went up by just 0.04 per cent per month. So under Labor we had an interest rate accelerator that was 7½ times greater than under the coalition, and not once but three times did rates rise; and not once did the starting point for interest rates under Labor ever get lower than the finishing point under the coalition. So it is rich for those opposite to come into this place and deliver lectures on interest rates when Labor have written the book on how to increase interest rates in this country and have presided over an interest rate accelerator that exceeds all others. But why have Labor been so poor on this front? Again Mr Fraser helps us out. He states:

Increased central bank independence does not necessarily lead to lower inflation. This is because monetary policies, on their own, cannot guarantee to deliver lower inflation without unacceptable costs in terms of lost output and jobs. Fiscal and wages policies have an important bearing on inflation outcomes, and these need to be compatible with an anti-inflation monetary policy.

And this is where we have a problem. The government’s much promoted five-point plan on inflation—another example of the triumph of language and politics over policy by the government—falls well short of the mark. Not only does the plan have a five-star blind spot by failing to address wage pressures, with no mention at all in the government’s five-point plan about containing wage pressures, and we read headlines in the Australian last week of 18 per cent pay rise demands by unions, but also we had the government’s effort on fiscal policy with the government’s budget delivered here on Tuesday night. Point 1 of the five-point plan is fiscal restraint, yet we had the highest-taxing and highest-spending budget in Australia’s history. The Treasurer paraded himself around this country as the ‘commando’ of fiscal restraint to fight inflation, but on Tuesday night it was not the commando who showed up but Captain Feathersword. The government has taken to budget spending with all the force of a soggy, wet newspaper. If those opposite do not believe me on that point, Peter Hartcher in the Sydney Morning Herald this week wrote:

... in truth, the budget is stimulatory. It will add to inflation, not fight it. That leaves the Reserve Bank to do the tightening instead.

Ross Gittins wrote:

We were told the budget would “exert maximum downward pressure on inflation and interest rates”. It doesn’t.

Furthermore, the government was silent on state debt—an $80-plus billion debt binge on the part of the states—and it was silent on tax reform at a state level. The Prime Minister says that this is about ending the blame game when it comes to the states. But I caution every Australian that every time you hear the clever phrase ‘ending the blame game’ from the Prime Minister and those opposite what it really means is letting his Labor mates in the states get away with it by washing away their accountability in a sea of federal government money so that taxpayers in states pay twice for their infrastructure, twice for their hospitals, twice for schools—first for the incompetence of the states, and second for the bailout by the federal government. It is there to wash away their accountability for their own important responsibilities for which they should be held to account.

I return to the role of the Reserve Bank in addressing inflation. I draw attention also to Mr Fraser’s comments that, in order to address the first threat of forcing an economy to grow beyond its constraints, it is important to give central banks a charter, including a strong commitment to price stability and the freedom to pursue it. Mr Fraser says:

They should not have goal independence, but they should have instrument independence.

He talks of a number of ways that goals should be set, but concludes that the approach provided for the Reserve Bank of Australia, under their act, is the one he was most comfortable with as it gives a high priority to price stability while also having regard to other objectives such as growth and employment. He then specifically stated:

Central banks with multiple goals—

which is what our central bank has—

have more independence.

And, frankly, that is exactly what we have in this country. The Reserve Bank Act requires the bank to conduct monetary policy in a way that, in the board’s opinion, will best contribute to the objectives of the stability of the currency of Australia, the maintenance of full employment, and the economic prosperity and welfare of the people of Australia. These are the goals the Reserve Bank has to manage.

Our bank has always had this arrangement. In fact, back in 1996, the Financial Services Union in a submission to an inquiry said quite clearly that it believes:

... that the present powers and obligations of the Reserve Bank … provided for in the … Act, ensure a sensible balance between  independence and ultimate democratic accountabilities …

It goes on to say:

This is unlikely to be improved by any further changes to the Act.

In 1996, the former Treasurer, the member for Higgins, built on the foundations set out in the Reserve Bank Act with his statement of monetary policy that further enhanced and clarified the independence of the bank—not by legislative stunts, as we see in this bill, but by providing the bank with even clearer direction as to monetary goals. On 14 August 1996, the former Treasurer issued the coalition government’s statement on the conduct of monetary policy. The statement recorded the common understanding of the Governor-designate of the Reserve Bank and the government on key aspects of Australia’s monetary policy framework. It was designed to clarify respective roles and responsibilities. The statement contributed to a better understanding, both in Australia and overseas, of the nature of the relationship between the Reserve Bank and the government, the objectives of monetary policy, the mechanisms for ensuring transparency and accountability in the way policy is conducted and the independence of the bank.

The statement formally recognised that the Reserve Bank Act gave the board the power to determine the bank’s monetary policy and to take the action necessary to implement policy changes; that the government recognised the independence of the bank and its responsibility for monetary policy matters and intended to respect the bank’s independence as provided by the statute; and that Section 11 of the Reserve Bank Act prescribed procedures for the resolution of policy differences between the bank and the government, allowing the government to determine policy in the event of a material difference, but that the procedures were politically demanding and that their nature reinforces the bank’s independence. The former Treasurer stated that safeguards like this ensured that monetary policy was subject to the checks and balances inherent and necessary in a democratic system.

The former Treasurer’s statement also ended the practice of the Keating government of parallel announcements of monetary policy adjustments, which enhanced both the perception as well as the reality of the independence of the Reserve Bank’s decision making. The statement acknowledged that the bank and the government agree on the importance of low inflation and low inflation expectations, as such actions assisted businesses in making sound investment decisions, underpinned the creation of new and secure jobs, protected the savings of Australians and preserved the value of the currency.

If only the new Treasurer understood the significance of this point—particularly about inflationary expectations. The first figures on inflationary expectations, revealed earlier this year, demonstrate that since this government has come to power inflationary expectations have risen. Is there any wonder why that would have occurred, when the Treasurer, speaking on the eve of Reserve Bank board meetings, was talking about inflation genies coming out of bottles. If it was not bad enough for the Treasurer to utter those words on the eve of a Reserve Bank board meeting, we have heard the Prime Minister in this very place repeat those phrases about genies and bottles. These are reckless statements which do nothing to support people and families across Australia—not just working families but people and families. There are people and families all across this country, not just those that the government would exclusively define as working families.

The former Treasurer went further with his plan by setting a goal for medium-term price stability of keeping inflation between two and three per cent, on average, over the cycle. Average inflation on the former Treasurer’s watch was 2.5 per cent. The policy worked. Apparently Mr Fraser, the former Governor of the Reserve Bank, agreed with his position, because in a speech to the National Press Club in August 1996 he said:

Targets can be flexible in providing an anchor for inflation expectations, and a discipline on monetary policy. But they should be flexible enough to serve those purposes and to avoid any proclivity to press the alarm button every time inflation threatens to go above the target.

Pressing the alarm button is what we are seeing from this government and this Treasurer—hitting the alarm button on every issue, making intemperate comments about inflation and talking up the issue to seek political advantage while leaving the policy tools in the drawer. The substance of the government’s real opinion of the previous government’s economic management is the fact that they copy it, like the tax cuts on Tuesday night or the new Treasurer recommitting the government to the monetary policy target developed and issued by the former Treasurer. The best this government can do on economic management is to seek to mimic the former government. The problem is that they do not believe it and they do not get it. There is nothing to suggest that the independence of the Reserve Bank has been compromised. So in relation to this bill my question is: where is the mischief? The only mischief here is from the Treasurer: he is desperately looking for some type of symbol to support the con this government is trying to perpetuate on the Australian people about its economic credentials.

See this speech in context