John Watson (Tasmania, Liberal Party) Share this | Link to this | Hansard source

My question is to the Minister for Finance and Administration, Senator Minchin, the Minister representing the Treasurer. Is the minister aware of the recent statement by outgoing Reserve Bank Governor Ian Macfarlane in relation to the impact of state government on fiscal policy on interest rates? Is the minister aware of any reaction to those comments?

Nick Minchin (SA, Liberal Party, Minister for Finance and Administration) Share this | Link to this | Hansard source

I thank Senator Watson for his question and note that today, 14 August, marks the 10th anniversary of the independence of the Reserve Bank of Australia. I suppose I should note in passing that it also marks the birthday of the Treasurer, and I am sure all senators would wish him many happy returns.

It was on this day in 1996 that Governor Ian Macfarlane and the Treasurer released the statement on the conduct of monetary policy which included the target of maintaining underlying inflation at between two and three per cent over the course of the economic cycle. Of course, the independence of the Reserve Bank outlined in that statement has been fundamental to the very good macro-economic environment we have had since then and stands in absolute stark contrast to the situation under former Labor Treasurer Keating, who boasted about having the Reserve Bank governor in his pocket. There was no independence for the Reserve Bank then. By his own admission, Mr Macfarlane’s job has been made much easier by the fact that the federal government have run a very sound fiscal policy since we got elected. Indeed, I remind the Senate that since we have been in office we have run eight budget surpluses and wiped out $96 billion of debt left to us. Mr Macfarlane himself said, in an interview widely reported this weekend:

I have been lucky—for most of my time, fiscal policy has consisted of small surpluses.

It should be added that, more recently, fiscal policy has consisted of somewhat larger surpluses. Last year’s surplus is estimated at around 1½ per cent of GDP. But Mr Macfarlane, in his weekend remarks, did sound a cautionary note by indicating that state fiscal policies could start to have an impact on interest rates, given the substantial deterioration in state budget positions over the last two years. In 2004-05, when we were running a fiscal surplus of 1.2 per cent of GDP, the states were actually adding to national savings by running a combined surplus of 0.4 per cent.

In contrast, in this financial year we will again be running a surplus of one per cent of GDP and the states have had a complete turnaround in their fiscal position; they will be running a combined deficit of over half a per cent of GDP, despite the strength of the national economy. In just two years the states have turned their budget positions around by fully one per cent of GDP and are now detracting from national savings. The worst offender has been the Iemma government in New South Wales, but most states now are predicting substantial new borrowings and a move into fiscal deficits in this financial year. So I think it is entirely appropriate that the Reserve Bank governor has pointed to the financial performance of the states as a real factor in monetary policy into the future.

I was asked about the reaction to Mr Macfarlane’s comments over the weekend. We all watched in amazement the spectacle of Mr Beazley having no idea who he was talking about, and I am sure all of the Labor Party frontbench were blushing in embarrassment when Mr Beazley launched an attack on the wrong Mr Macfarlane—

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

Senator Sherry interjecting—

Paul Calvert (President) Share this | Link to this | Hansard source

Senator Sherry!

Nick Minchin (SA, Liberal Party, Minister for Finance and Administration) Share this | Link to this | Hansard source

which was a circus but par for the course with the current Leader of the Opposition.

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

Senator Sherry interjecting—

Paul Calvert (President) Share this | Link to this | Hansard source

Senator Sherry, you are warned! I warn you.

Nick Minchin (SA, Liberal Party, Minister for Finance and Administration) Share this | Link to this | Hansard source

In any event, after 10 years of independence of the Reserve Bank we have enjoyed a prolonged period of low and stable interest rates, presided over by one of the best central bankers in the world. I pay tribute to Mr Ian Macfarlane, the Reserve Bank Governor, for what he has done and I congratulate his successor, Mr Glenn Stevens.