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Keating misrepresents reserve bank independence issue



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Peter Reith

DEPUTY LEADER of the OPPOSITION PRESS RELEASE SHADOW TREASURER

KEATING MISREPRESENTS RESERVE BANK INDEPENDENCE ISSUE

Prime Minister Keating totally misrepresented the Coalition's views on Resen/e Bank independence in Parliamentary Question Time today.

Mr Keating tried to claim that the Coalition's policy for greater Reserve Bank Independence was against notions of Parliamentary democracy. This is incorrect. Fightback! specifically refers to retaining and enhancing the role for Parliament in the operation of the Reserve Bank.

In addition, Mr Keating sought to try and em barrass Dr Hewson by quoting from an article published in the "Economic Papers" in February 1980, and claimed Dr Hewson said one thing in 1980 and says something different in 1992 - 12 years later.

On the first point the fact is that Mr Keating only selectively read out the Fightback! policy (attached) in Parliament.

Yes, the Coalition is seeking greater independence for the Reserve Bank. However, note that the policy specifically says:

'Clearly, the Reserve Bank should not be left such a role by default. But it does have an important role to play in the conduct of monetary policy. Its role needs to be clearly specified and the Reserve Bank needs to be held publicly accountable for it. The aim should be to achieve a greater visibility in the setting of monetary policy so that those making the key saving and investment decisions in our economy can plan ahead with better knowledge and greater certainty. For that purpose, we plan to have the Governor testify regularly before a Parliamentary Committee and encourage

greater public discussion of the inter-relationship between monetary policy and other arms of policy.'

Obviously, there is no doubt that the Coalition is of the view that the Reserve Bank should be subject to Parliamentary scrutiny. In fact, it will be more accountable by virtue of the Coalition's policy commitment to more clearly define the role of the Bank to achieve price stability.

Mr Keating's selective quoting from the 1980 article just shows how much he loves to indulge in personality politics and character assassination on the flimsiest of evidence.

There is no doubt that a clear reading, in context, of fhe extract Mr Keating read out from page 76 of the 1980 article shows that Dr Hewson was referring to "fujj independence" (ie where there is no parliamentary scrutiny at all) being "inconsistent with our system of parliamentary democracy". The position taken in 1980, is entirely consistent with Dr Hewson's Fightback! position on the RBA.

In fact, at the end of the section of the article entitled ‘What do we mean by independence?", Dr Hewson cam e to the following conclusion:

‘However, bv not accepting the extreme position of total independence. I am not arouino for no independence of government. Clearly, there needs to be a certain amount of freedom in the day-to-day operations of monetary policy, if only because of its extremely technical nature. Without overstating it, Reserve Bank officers have greater continuity, they have also built up certain technical experience and expertise and are in daily contact with the market. In addition, they can offer perhaps a less political and more objective view of certain issues and events'

COMMONWEALTH PARLIAMENTARY LIBRARY MICAH

(Page 78)

2

In fact, the whole theme of the 1980 article was the importance of some degree of independence for the Reserve Bank.

While the subtlety of the argument is probably beyond the grasp of the Prime Minister, discussion of the notion of 'independence' in relation to the functioning of central banks is always tempered by an implicit understanding that the central bank is ultimately accountable to government.

By way of illustration the most fiercely independent central bank - the Bundesbank was described in these terms by the Economist on 18 May 1991:

"That is the lesson the Bundesbank has offered to the world: that an independent centra! bank, instructed bv parliament ‘to safeguard the currency will produce macroeconomic stability in a way no government controlled version ever does."

It is significant to note that while the Bundesbank is independent, it maintains its accountability and it has no brief to stray beyond the instruction of parliament to "safeguard the currency". Such would be the case under a Hewson Government.

Secondly, it is noteworthy that in the 1980 article Dr Hewson specifically argued that there was a case for removing undue Treasury influence from the Reserve Bank. This is exactly mirrored in the Coalition's intention to remove the Treasury Secretary from the Reserve Bank Board.

Thirdly, it is very quaint for the Prime Minister to be quoting from a 12 year old document.

It may have been in 1980 that Dr Hewson concluded that "on-balance" the Reserve Bank:

"...presently enjoys a reasonable and justifiable degree of independence of government both in law and practice."

(Page 87)

However, it is important to note the word “presently".

In the years following 1980, we have seen widespread concerns in the financial markets of a lack of independence for the Reserve Bank.

No-one should forget that it was the Prime Minister who said:

"They [the Reserve Bank] do what I say, I can assure you of that. That you can put your money on."

(Press conference, 16 February 1989)

7 have Treasury in m y pocket, the Reserve Bank in m y pocket, wages policy in m y pocket, the financial community both here and overseas in my pocket."

(National Press Club, 7 December 1990)

As we say in Fightback! there is a strong case for boosting the inflation fighting credentials of the Reserve Bank by making it more independent.

Lastly, let me just note that if Mr Keating is going to start quoting ancient texts then he better check on what his senior ministers have said in the past.

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Embarrassingly for the Prime Minister, we all know Treasurer Dawkins supports Australia's membership of the North American Free Trade Agreement and that he has in the past called for more government intervention in manipulating the exchange rate.

However, did you know the John Dawkins said in his maiden speech in 1974 that:

‘ The workings of this economy are irrelevant to the objectives of this Government and indeed the aspirations of the Australian people."

(Hansard, 1 August 1974, page 1002)

and

‘it is not surprising that Austraiia/s capitalist system has faltered because capitalism by its nature is ill-fitted to respond to the demands of a just and equitable society. This is because the modern capitalist system is not only hopelessly ramshackled, in that it no longer conforms with its own theories, but also on those occasions when it does work it contains no mechanism for ensuring social and economic justice.'

(Hansard. 1 August 1974, page 1002)

9 September 1992 Canberra

Contact: David Turnbull (06) 277 4277 D144/92

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There is no doubt that inflation is theft. It creates uncertainty and attacks stability. It encourages the "boom and bust" cycles of the Australian economy. It results in a fall in competitiveness and savings and therefore exacerbates

Australia’s enormous foreign debt problems.

8.3 ATTACKING INFLATION

The Coalition’s tax, tariff, and industrial relations and infrastructure policies are a co-ordinated approach to Australia’s economic problems of foreign debt and inflation.

There are six key elements of Coalition policy which together will effectively fight inflation.

8.3.1 A Commitment to Price Stability

The Coalition has formally committed itself to the medium term objective of price stability, universally conceded to be an inflation rate of 0-2 per cent.

The Coalition’s commitment is a reasonable and sensible objective for a government prepared to make the necessary policy changes, but it is an almost impossible task for a government ham strung by a Prices and Income Accord which continually produces abysmal productivity growth and nominal wages growth far in excess of that productivity growth. Any recent improvements in the rate of inflation must be seen in context of the worst recession in 60 years. The real test is what will happen to the inflation rate if the economy begins to move out of

recession and domestic demand rises along with the pressure on prices. Unless there have been fundamental, structural changes to the economy, as explained in this paper, any quick resurgence in demand could quite easily spark an exchange rate collapse th at would soon see the re-emergence of chronic inflation. The experience of 1985/86 ought to live long in the memory of all Australians!

8.3.2 Reserve Bank Independence

The Coalition will ensure the independence of the Reserve Bank including by way of amendments to the Reserve Bank Act.

The Reserve Bank-Hawke Government link has been a sorry saga of compromise and influence. Interest rates have been manipulated for short-term political ends (eg, prior to the 1984 Federal election, prior to the 1987 Federal election, prior to the 1988 New South Wales election and prior to the 1990 Federal election). The Reserve Bank has also been party to deals with the major banks on housing interest rates when the Government’s policies had failed to hold them down. The former Treasurer has boasted th at he had the Reserve Bank in his pocket and that it did what he told it to do!

Chapter 8 Chapter 8 129

Moreover, financial markets have often been confused about the monetary policy intentions of the authorities and the Reserve Bank has not been sufficiently publicly accountable for its actions.

To put this era behind us, the Reserve Bank must now be formally guaranteed its independence within the context of the Government’s overall economic management. Its role and responsibilities need to be clearly spelt out. This is not to say th at the Reserve Bank will be solely responsible for inflation control, or that

it will be left on its own to do what it can to control inflationary forces, as it has since the Hawke Government has failed to put other necessary policies in place.

Clearly, the Reserve Bank should not be left such a role by default. But it does have an important role to play in the conduct of monetary policy. Its role needs to be clearly specified and the Reserve Bank needs to be held publicly accountable for it. The aim should be to achieve a greater visibility in the setting of monetary policy so th a t those making the key saving and investment decisions in our economy can plan ahead with better knowledge and greater certainty. For that purpose, we plan to have the Governor testify regularly before a Parliamentary Committee and encourage greater public discussion of the inter-relationship between monetary policy and other arms of policy.

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8.3.4

Excessive reliance on monetary policy and interest rates of the kind we have seen in recent years can be avoided only if the Government does its p art to change other policies to reduce or eliminate cost disadvantages and free up markets. We therefore envisage two-way discipline as a result of the enhanced independence of the Reserve Bank. The Government would clearly specify the role and responsibilities of the Reserve Bank and the Bank would be held publicly

accountable for its performance. Equally, the Government would be under constant pressure to push ahead with labour market and structural reforms.

8.3.3 Fiscal and M onetary Policy

It is essential, if chronic inflationary expectations are to be squeezed out of the system, for fiscal and monetary policy to be kept firm while the other policy initiatives are undertaken.

T hat does not mean to say th at monetary policy should be kept so restrictive as to cause the disastrous recession-inducing high interest rates to which Labor has resorted. As mentioned above, while that does get inflation down, the pain is unnecessarily severe and it is not sustainable. As soon as interest rates are eased and the economy begins recovering from recession the chronic inflation problem returns.

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130 Chapter 8