The Treasurer and the governor of the Reserve Bank owe taxpayers a detailed explanation of exactly why the bank is getting a cheque for nearly $9 billion, a decision that will blow out this year’s budget deficit to $40 billion. Serious question remains unanswered about the government’s decision to give the RBA such a massive amount, in one hit, to top up its Reserve Fund.
Treasurer Joe Hockey yesterday tried to blame former treasurer Wayne Swan, referring in his “background notes” on the decision given to the media to “the determination of the previous government to take extraordinary dividends from the Reserve Bank”.
But as Hockey had to admit, the key reason why the RBA’s Reserve Fund, which provides its capital buffer, is now such a low proportion of its overall assets is because its holdings of foreign currencies have diminished significantly as a result of the strength of the Australian dollar, which has decreased their market value. Low interest rates have also curbed the bank’s own earnings; according to the bank’s annual report, released this morning, “underlying earnings, which are essentially driven by the running yield on the portfolio of foreign and domestic assets, were $0.7 billion, about the same as the previous year and very low by historical standards. This mainly reflects the very low level of interest rates, especially those in the major advanced countries where the Bank holds its foreign assets.”
As the RBA said in today’s annual report, the greatest damage to its Reserve Fund was done when the Australian dollar surged in 2010 and 2011. That’s when its Reserve Fund:assets at risk ratio fell to just 2.1%, nearly half of its current 3.8%, and the world economy was beset by crises. It was so low the RBA didn’t pay a dividend to Swan in 2011. So the first question is why RBA governor Glenn Stevens didn’t ask for a capital injection three years ago. Swan has said that he was never asked to make such an injection, and he would have agreed if he had.
Now, it’s true, Hockey flagged the Bank’s Reserve Fund requirements early this year. And today in his release of the Statement on the Conduct of Monetary Policy, Hockey has added the following line:
“The Government also recognises the importance of the Reserve Bank having a strong balance sheet and the Treasurer will pay due regard to that when deciding each year on the distribution of the Reserve Bank’s earnings under the Act.”
But that doesn’t address the question of timing, especially not for the bank itself.
The second question is the timing of the payment. According to the annual report, the bank wishes to use all of its earnings to build up the Reserve Fund, saying “further such transfers will be required in future years”.
This implies the rebuilding of the Reserve Fund can be done over a period of years. But Hockey has decided to do it in one hit. Why? The $8.8 billion could have been paid over a longer period, say three or four years, with the proviso that if needed, the unpaid amounts would be accelerated. That way the impact on the size of the budget deficit would have been less dramatic, but the point that the bank’s fund was replenished would have been made to the market.
The only thing we’ve been told about timing by Hockey is that “our institutions must be at their absolute strongest to deal with the challenges in the days, weeks and months ahead… We need all the ammunition in the guns for what is before us.”
What does that melodramatic statement mean? What are these “challenges”? What is “before us” and why do we need “all the ammunition” if the Reserve Bank didn’t need it during the European crisis and the first debt ceiling crisis in the US in 2010 and 2011? Is something worse coming? Is the bank concerned that the Australian dollar is going to go back above parity, further eroding the value of its foreign currency holdings?
The third question is the amount. David Crowe in The Australian reports that cabinet originally considered $6 billion. Was that what Stevens asked for? If so, why was it increased? Why does the bank need its Reserve Fund to be 15% of assets at risk? Why not a level closer to that held by commercial banks, of 8%?
We’ve put all these questions to the Reserve Bank today, and the bank has refused to respond. So we’ve lodged a freedom-of-information request to find out.
At the moment, and in the absence of any contrary evidence, the $8.8 billion payments is a highly political move; Hockey has made it so by blaming it on the former ALP government. The accusation that Hockey is trying to worsen the deficit while he can blame it on Labor is a plausible one.
This is what the Coalition did in 1996. That “$10 billion Beazley black hole”, for those who remember, was a fiction, generated by the Department of Finance cobbling together every possible piece of spending that could be attributed to the Keating government, even spending that had never been agreed or even rejected by the Keating cabinet. Now it seems Hockey is doing the same thing, trying to blow out this year’s deficit on the back of Labor’s alleged failure to keep the RBA’s Reserve Fund topped up.
In the absence of a clear statement to the contrary, it seems the RBA has thus allowed Hockey to use the bank for partisan purposes. It might be a good outcome for the bank’s finances, but it’s a shocker for the RBA’s independence and credibility.