It’s hard to know what to be more alarmed about in the important story TheAustralian Financial Review’s Laura Tingle broke today about Treasurer Joe Hockey pressuring the Reserve Bank: the government’s casual contempt for the RBA’s independence or the sooking of Hockey and Co. about the effect of the dollar on the economy.
In October last year, Hockey declared that his payment of $8.8 billion to the Reserve Bank would “enhance the independence of the bank in conducting its operations”. Now, according to Tingle’s article, the RBA is being too independent in its conduct of monetary policy because Hockey wants the bank’s “easing bias” back and the dollar lower for fiscal reasons. Hockey has, we’re told, conveyed that directly to the bank in an effort to influence its decision-making.
What did Hockey think he would get when he handed an unasked-for $8.8 billion to the bank — apart from the chance to make “Labor’s” (in fact, his) deficit worse while establishing a fund for future dividend payments back to him? Did he expect he’d get a compliant central bank that would do his bidding to help his budget strategy in other ways as well? Perhaps Joe’s still smarting from the systematic way the bank destroyed the Coalition’s “interest rates will always be lower under us” line over the last few years. And this is, by the way, the same government that said it was sacking Treasury secretary Martin Parkinson and has held him on short-term extensions, first to the budget, then to the G20, ever since. “Is there a convention of economic governance this mob won’t wreck?” former treasurer Wayne Swan said this morning.
Like all commentators, the RBA has been puzzled by the Aussie dollar’s rise this year from a low of just over US$0.86 to around US$0.93 this morning. That will help press down on inflation, which may rise in tomorrow’s March quarter Consumer Price Index figures. But the high dollar is constraining the growth in corporate profits and tax revenues and the GST, which flows to state coffers. At the same time, the bank has shifted to a “wait and see” approach on interest rates, with the prospect of a rate rise down the track, perhaps late this year or in early 2015. The board minutes and governor Glenn Stevens’ post-meeting statement from the February meeting say:
“In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
That was repeated after the March and April meetings. What the bank is watching is the surge in house prices and home building activity, especially in Sydney, the rise in retail sales, hints of a steadying in the weak jobs market and continuing strong expert growth. With the cash rate at a record low of 2.5% and home lending rates also at very low levels, there’s a growing belief that the central bank might be forced into raising rates if the property boom accelerates.
What the RBA isn’t particularly concerned about is the impact of its policies on the Commonwealth budget, or those of the states and territories. It takes the overall level of government spending into consideration in its policy-making — it has been noting for an extended period that government spending cuts will affect the economy — but it is not the bank’s job to frame monetary policy with an eye to boosting tax revenue.
If Hockey wants some real help on coping with the impact of a strong dollar on the economy and government finances, he should ring Swan, who had to deal with the impact of a rampant dollar from 2011 to 2013-14 and watched it smash his forecast return to surplus. Swan would have been happy to frame a budget based on US$0.94 — it hit US$1.10 in May 2011, was US$1.04 in May 2012, had a brief dip below parity and then bounced back over for the rest of the year and through beyond the 2013 budget.
At the time, though, Hockey rejected the impact of the strong dollar on the budget as merely an excuse for Labor’s fiscal incompetence. “Labor has a spending problem, not a revenue problem,” he and Tony Abbott liked to say, pointing out the revenue had grown year-on-year, ignoring that the issue was that revenue had grown far more slowly than Treasury had forecast, and more slowly than under the Howard government, which was sucking 24% and more of GDP out in tax, compared to 21% under Swan. “They are $70 billion ahead in revenue than in the last year of the Howard government,” Hockey told Alan Jones early last year, back when he was promising to deliver a budget surplus in his first year.
Now Hockey’s whingeing about having to manage an economy and a budget with the dollar at US$0.94. That’s at the same time he himself has cut his own revenue by more than $15 billion by dumping the carbon tax, the tax on high superannuation earners, the extension of the fringe benefits tax on cars, and the mining tax. It’s your revenue problem, Treasurer. Compromising the independence of the Reserve Bank to help you lift tax revenue isn’t the solution.