Julian McGauran (Victoria, National Party) Share this | Link to this | Hansard source

Today in the Senate the Reserve Bank of Australia’s annual report was handed down. It is worth while noting that this report is the last report of the governor, Mr Ian Macfarlane, who is to retire on 17 September, having become governor when this government was elected some 10 years ago. Prior to that, he spent some 20 years in various positions in the Reserve Bank, including as the deputy governor. The report pays a fitting tribute to the Reserve Bank governor:

As Governor of the Reserve Bank in a period in which Australia has enjoyed remarkable economic stability and prosperity in the face of considerable challenges, his record is unsurpassed by any of his international peers.

Under this government, the Reserve Bank received unprecedented independence in monetary decision making. This was a product of the Reserve Bank’s independence being compromised under the previous Labor government. Its decisions were perceived to be under the direction of Treasury. After all, the Treasurer of this country at the time, Mr Paul Keating, boasted that he had the governor of the Reserve Bank in his pocket, so naturally the markets took it that the governor’s decisions were not independent but rather politically tainted at times. This reflected poorly on our economic credibility and our rating suffered accordingly.

The government’s determination to create an independent Reserve Bank was further propelled in our first term by the fiscal mess we inherited. The government’s finances were a mess. In 1996 we were left with a record $96 billion debt and a $10 billion budget deficit which was covered up at the time—that is, the markets and the Australian people were led to believe that the budget was in surplus. Therefore, one of this government’s Treasurer’s first acts was to introduce a Charter of Budget Honesty to restore the integrity of the government’s reporting. In short, the Australian people would not be misled as to the state of the accounts again. The charter spells out the state of the government’s finances in the most transparent of fashions and requires regular reporting of government finances, not just on a government’s whim. To ensure the independence of the Reserve Bank in 1996 the Treasurer and the governor jointly signed the statement on the conduct of monetary policy which confirmed the Reserve Bank’s independence in making monetary policy and endorsed the bank’s inflation target. Twice a year the Reserve Bank publishes a separate financial stability review which contains its assessment of the state of the financial system.

With these foundation stones in financial responsibility laid in the first term of this government, we were able to set about, at a hectic pace, fixing the present and reforming for the future. In our first term a debt reduction regime was put in place by disciplined surplus budgets and with the sale of government assets. Moreover, we locked in structural reform badly needed to modernise our economy—reforms like the 1996 industrial relations reforms, which were the catalyst to the waterfront reforms. Equally significant were the tax reforms of 1998—in particular the introduction of the GST, a revenue flow that today finances every state budget. We have not stopped reforming from our first term to our fourth term and we have been fortunate to have had Ian Macfarlane throughout this period as our Reserve Bank governor.

It is worthy to note that, in our first term, it was not long before the economy faced its very first test, with the Asian financial crisis. Had we not implemented those early reforms in a hurry, we could not have ridden out that crisis as well as we did, whilst our neighbours fell into recession. It was no accident but good financial management that led the OECD recently to refer to Australia as the ‘wonder economy’.

However, in the words of the Prime Minister, economic reform and management are an ever-receding horizon, and we must keep running towards that horizon. That is something I wish the state governments around Australia would take into account in the management of their own economies. Even with the bucket loads of GST they receive from the federal government, firstly, they have not reduced their major state taxes; secondly, they have run their budgets into deficit; and, thirdly, they have increased state debt. This concern was pointed out by the outgoing Governor of the Reserve Bank when he signalled to the states the danger of their lax fiscal policy—in particular, their growing move towards deficit budgets—and said that it would create upward pressure on interest rates. I quote what the governor said in the Australian:

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

So the movement in the government account has not been big enough to be important in the consideration of monetary policy.

It might become an issue because the states are now part of the equation.

What he was referring to is that, collectively, the states and territories are forecasting fiscal deficits of almost $5 billion in 2006-07, compared to a surplus of $1.2 billion in 2005-06 and a $4 billion surplus in 2004-05. So it is quite obvious. You can see, typically, the trend of Labor governments cascading into deficit budgets. In addition, the states—in particular, my state of Victoria—are budgeting for a significant increase in borrowings. The state governments’ net debt is forecast to rise by about $43 billion between 2005-06 and 2009-10. Again, you can see the typical form of Labor governments falling into deficit budgets and high borrowings.

In fact, the greatest danger to the Australian economy today with regard to rising inflation and interest rates is the poor management of the state budgets. Again, I quote from an extensive interview with the outgoing Governor Ian Macfarlane which appeared in the Weekend Australian on Saturday, 12 August. It said:

The Reserve Bank expressed concern in its statement on monetary policy last week that the burst of state government spending on infrastructure was stimulating inflation.

Mr Macfarlane said yesterday that the return of states to deficit spending was an issue that could affect monetary policy in future, with the bank using interest rate rises to contain inflation.

He said the Government’s fiscal policy had not been an issue for the bank in his time as governor, which ends next month when he hands over to deputy Glenn Stevens. “The movement in the government account has not been big enough to be important in the consideration of monetary policy,” he said. But he warned that “it might become an issue because the states are now part of the equation”.

In contrast, through good and strong economic management and by setting a direction from our very first term and our very first budget in 1996, the government has been able to return the dividends to the Australian people by way of tax cuts every year since 2000. While I am focusing on the Governor of the Reserve Bank Ian Macfarlane, who still has a few days to go, I will set the record straight on how the media grossly misquoted him on the government’s last set of tax cuts, which, in the judgement of this government, were reasonable and affordable. He was reported as saying that those tax cuts somehow put pressure on monetary policy. It was grabbed by the media with both hands, and by the opposition, as having some input to current interest rate rises, to which Ian Macfarlane responded, ‘I have been shamelessly misquoted.’ That is no surprise. He was referring to the more extreme attempts at greater tax cuts, which he called crazy ideas; rather, the government’s tax cuts in the last budget were reasonable, balanced and, most of all, affordable.

The state governments’ poorly managed budgets and high tax regimes to feed their wasteful spending are having a direct cost effect on businesses, land values and housing affordability. The Reserve Bank Governor this week had something to say about housing affordability. He made it clear that costs other than interest rates have more to do with housing affordability. In an ongoing conversation, he said:

That is caused more than 100 per cent by the fact that house prices have gone up, not because of interest rates going up. Interest rates are lower than they were 10 years ago and are obviously lower than they were 15 years ago.

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The story is all about house prices. The story is not about interest rates.

Of course, he would be referring to the litany of state taxes, or part thereof—land taxes and stamp duty—particularly in my state of Victoria, where the land tax take has increased by more than 100 per cent and the stamp duty take has increased by more than 145 per cent.  It was not easy for the government to make the hard decisions that were necessary in our first term and are necessary now. Sometimes, initially they are not popular. They require leadership at the top and conviction right through the whole government. But they are decisions that have to be made, and the economic rewards come and, ultimately, so do the political rewards.

Today, after 10 years in government, we can point to the good management of this government in tandem with the Reserve Bank governor and his board and their independent decisions and judgements on the economy. However, if the Australian economy is to maintain its strong growth, it is incumbent upon state governments to pull their weight and not be the weak links in the economy.