Jim Turnour (Leichhardt, Australian Labor Party) Share this | Hansard source

I rise to support the Reserve Bank Amendment (Enhanced Independence) Bill 2008, which continues a Labor tradition of economic reform that has modernised and strengthened the Australian economy. The Reserve Bank of Australia plays a crucial role in managing the economy through monetary policy. The Reserve Bank board’s obligations with respect to the formulation and implementation of monetary policy are laid out in the Reserve Bank Act.

In this bill we are making some changes to the operations of the Reserve Bank. But broadly speaking it is about managing the economy in the best interests of the Australian community and Australian working families. Over time, policymakers have come to conclude that the best way to achieve the bank’s charter is to target inflation within a given band. This objective was first outlined publicly in 1993 by the then governor, Mr Bernie Fraser, as being a rate of inflation that was held to an average of two to three per cent over a period of years.

This policy, which stands to this day, was developed by the RBA during the Hawke and Keating governments’ years of major economic reform. The reforms included the floating of the Australian dollar, deregulation of the financial system, decentralisation of the industrial relations system, major reductions in tariffs, privatisation of the Commonwealth Bank and other government enterprises, and national competition policy. Many of these reforms caused great divisions and arguments in the community and within political parties. They are, however, the major reasons we have experienced 17 years of sustained economic growth in this country.

It is a fact that the Howard government inherited an economy growing strongly in 1996; an economy built on 13 years of sustained economic reform under the stewardship of first the Hawke government and then the Keating government. Inflation was under control and productivity was on the rise.

The Rudd government continues that proud tradition of economic reform by delivering a responsible budget this week, and we see it also in this legislation, which delivers on an election commitment to increase the independence of the Reserve Bank of Australia and increase the transparency of monetary policy in Australia. The Treasurer worked with the RBA, following the election win by the Rudd government, to finalise a policy and, with the RBA governor, release a new statement on the conduct of monetary policy on 6 December 2007. This legislation enables that statement to be implemented.

It will strengthen the independence of the RBA and establish its governance as world’s best practice. It will raise the position of the governor and the deputy governor to the same level of statutory independence as the Commissioner of Taxation and the Australian Statistician.

The Rudd government is committed to an independent Reserve Bank. As part of this new policy the government is also moving to improve the transparency of future Reserve Bank board appointments and to remove political considerations in these appointments. Accordingly, the Secretary to the Treasury and the Governor of the Reserve Bank will maintain a register of eminent candidates from which the Treasurer will make appointments to the Reserve Bank board.

The statement on the conduct of monetary policy also incorporates transparency measures including the publication of board minutes and a statement of reasons for their decisions following each monthly meeting, irrespective of whether there is an adjustment in the cash rate. Increased transparency helps businesspeople and working families understand the reasons behind monetary policy decisions, which have such a real impact on their lives.

So these measures not only increase the independence of the Reserve Bank but also, through our changes to monetary policy, enable a more transparent and open board. Their deliberations will now be made public so that working families and business can understand better the decisions that they make.

These reforms, which the governor and the government agreed to last year, herald in a new era of independence and transparency in monetary policy in Australia. They will mean the RBA’s governance conforms to world’s best practice. Sadly the opposition’s failure to support this legislation demonstrates that they have lost any appetite they may have had for economic reform. They clearly do not want an independent Reserve Bank and do not understand the importance of its role in keeping inflation within the target band of two to three per cent over the economic cycle. This is demonstrated by the Howard government’s failure to act following more than 20 warnings by the RBA on interest rates.

Unlike the Howard government, which in 1996 inherited a growing economy with inflation under control and productivity on the increase, the Rudd government was left with difficult economic circumstances in which to craft its first budget. Inflation is now at a 16-year high and productivity, which has been in decline for a number of years, is now approaching one per cent after rising to three per cent following the reforms of the Hawke-Keating years. We are facing difficult international conditions, with the subprime mortgage crisis in the United States pushing that economy towards recession. Our terms of trade, built on the back of growing economies in India and China, continue at record levels but these too are putting upward pressure on inflation and interest rates.

It was therefore particularly irresponsible of the Howard government to embark on the spending spree that it did in its last term. I note the previous speaker and other members of the opposition have talked about looking at ‘what we do, not what we say’. Well, the Howard government talked a lot about responsible economic management, but you only have to look at their last term of government and see what they did to understand there was nothing responsible about the reckless spending spree that they went on. And it was a reckless spending spree.

The Howard government embarked on a huge wave of unsustainable spending following the 2004 election. Who can forget then Prime Minister Howard’s $6 billion spending spree in just 10 minutes at the 2004 Liberal Party election campaign launch? Six billion dollars in 10 minutes is very irresponsible. Sadly, families and businesses have had to experience eight interest rate rises in a row since Mr Howard cruelly claimed, during the election campaign, that he would keep interest rates at record lows. Look at what they were doing: they were claiming to be responsible economic managers while at the same time going on a reckless spending spree and loosening fiscal policy while the RBA was trying to tighten monetary policy. And what do we get? Eight interest rate rises in a row—eight interest rate rises in a row since Mr Howard promised to keep interest rates at record lows. No wonder working families were angry at the last election and sent the former government a message.

Economists know that governments, through fiscal policy, can aid the work of the Reserve Bank by reining in government spending to reduce demand and take action to ease capacity constraints on the supply side of the economy. Economic commentators understand that, when the government is going out there and spending recklessly while the Reserve Bank continues to put up interest rates, you are getting the government crowding out the private sector and putting upward pressure on inflation and interest rates, which hurts working families and businesspeople.

The Howard government failed to act on warning after warning by the Reserve Bank to rein in spending or to invest in the supply-side constraints in skills and infrastructure. In stark contrast, look at what the Rudd government is doing. We are committed to tackling the 16-year high in inflation left to the nation by the Howard government and doing all we can to support the Reserve Bank and end this succession of interest rate rises that the economy is currently experiencing.

From day one, we moved to tackle the inflation legacy left to us. Following the new statement on monetary policy, in January the Prime Minister announced a five-point plan to tackle inflation. The first point of the five-point plan is fiscal restraint, requiring spending cuts in the budget. The second is private demand and saving for the future, so we need to also encourage the private sector to save, and we announced and are delivering first home saver accounts as one of those measures. We recognise—and you only have to get out and talk to business to know—that there is a skills crisis in this country, so the third point in our five-point plan is to tackle the chronic skills shortages; and we are delivering on the education revolution that we announced during the election campaign. We know that we need national leadership in tackling infrastructure bottlenecks, which are also providing supply-side constraints on the Australian economy and putting upward pressure on inflation and interest rates.

Finally, as part of our five-point plan, we recognised that we needed to lift workforce participation, and that is what the tax cuts and the childcare rebate are about. They are about giving low-income earners in particular a tax cut to encourage them back into the workforce and changing the taxation system at the bottom end in particular to encourage people back into the workforce. Increasing the childcare rebate from 30 to 50 per cent and paying it quarterly puts some money into working families and ensures that working mothers can participate effectively in the workforce. The government is delivering against this five-point plan; you only have to look at the budget we announced this week.

The budget delivered a $21.7 billion surplus, including $7 billion in savings this coming financial year and $33 billion over the four-year forward estimates. That stands in stark contrast to the budget following the 2004 election, when spending by the former government was way out of control and fiscal policy was not reined in even though interest rates were on the rise and the former Prime Minister claimed he would keep them at record lows. Within this budget, growth in real spending will be at 1.1 per cent in this coming financial year, its lowest rate for nine years, and spending as a proportion of GDP has been cut to levels not seen in 20 years.

We recognise and understand that we cannot leave all the heavy lifting to the Reserve Bank when it comes to tackling inflation. That is why we have cut spending, tightening fiscal policy. Don’t take my word for it, though; here is what independent commentators Goldman Sachs had to say in their review of our budget, published this week:

After 2 years of notable conflict, finally we have fiscal policy that is pushing in the same direction as monetary policy.

So, finally, we have a government that is working, through fiscal policy, with the Reserve Bank’s monetary policy to drive down inflation and start the work to drive down interest rates. Unlike the former government, which received warning after warning from the Reserve Bank but refused to act to rein in government spending, the Rudd government has brought in a responsible budget that will support the efforts of the Reserve Bank to put downward pressure on inflation and interest rates.

We cut spending, while the former government let it grow to unsustainable levels, reaching five per cent in real terms in the financial year that is about to end. The Howard government’s reckless spending fed into consumption, putting upward pressure on inflation and interest rates. As I have said, there have been eight interest rate rises since the former Prime Minister, Mr Howard, promised to keep interest rates at record lows. The former government left all the heavy lifting to the Reserve Bank. It is critical that we maintain an independent Reserve Bank, and this legislation is all about supporting and strengthening that.

The member for Higgins and former Treasurer’s legacy to the Australian business community and working families struggling with mortgage repayments has been inflation at 16-year highs and rising interest rates. Sadly, the current opposition leader and the shadow Treasurer, the member for Wentworth, continue to deny that inflation is a problem, and this is a really sad point. Over the past few months they have made comment after comment denying that there is an inflation problem facing Australia. The opposition Treasurer and member for Wentworth has even suggested that inflation is a fairytale while he and the opposition leader have argued against spending cuts in the budget. So we see a continuation of the failed approach of the Howard government to rein in spending while we are seeing inflation on the increase and interest rates continuing to rise. How can the opposition leader or the shadow Treasurer claim to be credible on economic management while they continue to deny there is an inflation problem in Australia?

The facts are that inflation has risen to 4.2 per cent over the past year, well outside the Reserve Bank target of two to three per cent, yet the shadow Treasurer has continued to argue that inflation is not a problem in Australia. He continues to deny that the Howard government legacy to working families is 16-year-high inflation and rising interest rates. Sadly, the Howard government squandered years of strong economic growth, a result of a once-in-a-generation resources boom and the reforms of the Hawke-Keating years. They failed to invest in nation-building infrastructure and skills that would have eased capacity constraints within the Australia economy and eased inflationary pressures. Instead they were fiscally irresponsible, wasting billions on government advertising, consultants and pork-barrelling. Sadly, it is working families and small business that have been left to pay through rising inflation and interest rates. The Rudd government is determined to tackle inflation and invest in infrastructure and skills that drive productivity and put downward pressure on inflation.

I have already outlined some of the savings measures in the budget to reduce demand, but we are also working on the supply side to ease capacity constraints in the economy. Investments in trades training centres and new training places deliver on our election commitments, while the new $11 billion Education Investment Fund will ensure we have the resources to continue to invest in vocational education and universities into the future.

Similarly, the $20 billion Building Australia Fund sets aside moneys to tackle the infrastructure bottlenecks that have built up across the nation following years of neglect by the former government. Infrastructure Australia, established under the Rudd government, will ensure that this investment is particularly planned and coordinated. The exciting thing about this budget is that it not only tackles inflation that is currently gripping the economy but also sets itself for the long term by putting in place an education fund, an infrastructure fund and a health fund to ensure that we can make the serious investments that we need into the future to tackle these supply side constraints and make sure that the economy continues to prosper into the future and delivers for the community, for business and for working families.

The government’s budget has been framed in difficult economic times and is firmly focused on steering the nation through this period of high inflation and low productivity left to us by the Howard government. We recognise and understand that tackling inflation is the key to lowering interest rates. We agree with the Reserve Bank governor when it comes to the seriousness of the threat of inflation to the Australian economy. Listen to what the Reserve Bank governor had to say at the economics committee hearing on the 4 April when asked by the chair—and I see him in the House today—about ignoring inflation. The chair asked:

What would be the impact on the economy if we just ignored inflation? Would this lead to higher or lower interest rates in your view?

The governor replied:

That is a good question. I think it is quite clear from any study of history, either ours or any other country, that if you do not control inflation then ultimately you end up with higher interest rates.

So while we see the opposition talking about there being no inflation problem in this country, I do not know whether they are reading the Reserve Bank statements, but if they are hearing the Reserve Bank governor there is clearly an inflation problem. The Reserve Bank governor clearly stated in our last hearing that if we do not tackle inflation we are going to see a continuation of rising interest rates. If we do not tackle it over the longer term, we will end up with interest rates stuck at high levels. That is what the RBA governor said very clearly at our last hearing. If we do not control inflation, we ultimately end up with higher interest rates. It cannot be put any simpler than by the Reserve Bank, yet the opposition continues to deny that inflation is a problem in the Australian economy. They cling to the myth that John Winston Howard was some kind of economic conservative. You only have to look at what he did and what the current opposition is doing. History shows him to be no economic reformer or fiscal conservative but a Prime Minister focused solely on short-term political expediency.

The Rudd government is again embarking on a period of economic reform to tackle the inflation problem gripping Australia, and making the nation-building investments that will drive productivity and secure our long-term economic prosperity. We are determined to do what is right in the longer term interest of the nation. We are doing our bit by tightening fiscal policy and taking pressure off the Reserve Bank. That is why in these difficult economic times we have delivered a budget that gets the balance right on the demand side by reining in government spending while investing in supply side capacity constraints in infrastructure and skills.

Maintaining the independence of the Reserve Bank, that manages monetary policy, is also a critical part of this effort. When you have an opposition that does not understand and agree with the Reserve Bank, we can see why we need to strengthen its independence, why we need to ensure that the RBA can do the important work that they do in monetary policy. The stance of the current opposition, who are taking a completely different position from the Reserve Bank governor on interest rates, highlights again the need for strengthening this independence, and I cannot make that point any more strongly.

The Rudd Government recognises this and that is why we are committed to tackling inflation in the Australian economy in the short term and putting downward pressure on interest rates and the cost of living. We will also not shirk our responsibilities to longer term reform of the Australia economy and this bill is another example of our commitment to that reform. I strongly urge the House to support the bill.

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