Craig Thomson (Dobell, Australian Labor Party) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics, I present the committee’s report entitled Review of the Reserve Bank of Australia annual report 2008 (first report), together with the minutes of proceedings.

Ordered that the report be made a parliamentary paper.

On behalf of the Standing Committee on Economics, I have pleasure in presenting the committee’s report entitled Review of the Reserve Bank of Australia annual report 2008 (first report). Mr Deputy Speaker, when it became apparent that the global economic outlook was worsening in September of last year, the Reserve Bank of Australia board took its first steps to reduce the cash rate. Between September 2008 and April 2009 the official cash rate was reduced to six times, a total decrease of 425 basis points since 3 September 2008.

It is clear now that the global economy is in a severe recession. In April 2009 World Economic Outlook, the International Monetary Fund projected that global activity would contract by 1.3 per cent in 2009. The IMF noted that this was the ‘deepest post-World War II recession by far’. Australia’s economy has been impacted by the deterioration in international economic conditions which have substantially slowed growth. The Governor of the RBA in his statement announcing the 5 May rate decision noted that the ‘Australian economy contracted in the latter part of 2008, and this has continued in 2009 to date, with both domestic and international demand weaker’. The governor also noted that monetary policy has eased significantly and that the ‘stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead’.

During the hearing, the committee asked how important it had been for governments, both in the Australian context and globally, to implement various fiscal responses to the global credit crisis and for central banks to loosen the ties on monetary policy. The RBA governor answered that tremendous turmoil and instability in the global financial market and a large contraction of G7 GDP required ‘a response by policy makers to the turmoil itself in order to stabilise the financial system and stop that spiralling down any further’. When asked about the consequences for the Australian economy if the government had not implemented a fiscal stimulus package, the governor stated:

I do not think we would be seeing too many consequences of that right now. They would be coming later. The policy expansion cannot really head off whatever is happening in the economy today; it does not work that fast. But later in the year we are going to be seeing more and more effects of those measures. That is when we would have seen the impact of a different course of action. The economy, I think, would have been considerably weaker than it will be had that course of action been followed.

Clearly, the governor was endorsing in very broad terms the approach that this government took in terms of the fiscal stimulus packages at the end of last year and earlier this year.

The IMF has projected that output in Australia will decline moderately in 2009 before picking up in 2010. While Australia’s economy has slowed, it is the RBA’s view that, comparatively, the economic downturn has not been as severe as in other advanced economies. However, these are the worst global economic conditions seen for over half a century and there is still considerable uncertainty about the economic outlook. It is therefore more critical than ever for the committee to scrutinise the RBA on its key forecasts for economic growth, inflation and employment.

On behalf of the committee, I would like to thank the Governor of the Reserve Bank, Mr Glenn Stevens, and the other representatives of the RBA, for appearing at the hearing on 20 February. They provided thoughtful and very open responses to the questions that were put to them by the committee. The next hearing will be on 14 August 2009 in Sydney. I commend the report to the House.

Kevin Andrews (Menzies, Liberal Party) Share this | Link to this | Hansard source

I join with the chairman in making some comments about this report, Review of the Reserve Bank of Australia annual report 2008 (first report). The Reserve Bank plays an important role in the management of the Australian economy. Along with the Treasury it is one of the major sources of official advice to the people of Australia and to the government about the state of the economy and its future prospects. Unlike the Treasury, it is an independent body. As the Secretary of the Treasury, Ken Henry, conceded in his post-budget address:

The Treasury Department is a department of state. It is part of the executive government. It works to the government of the day, whatever the political persuasion of the government of the day. And so in that sense of course the Treasury is not independent from government and it can never behave as if it is independent from government.

Mr Henry added:

… the Treasury conducts its analysis without government interference.

But the reality is that the department serves the Treasurer and the government of the day.

This is important in the current discussion concerning the future forecasts about the Australian economy and, importantly, prospective growth. In the budget the Treasurer has projected real GDP to be minus half of one per cent in 2009-10, rising to 2¼ per cent in 2010-11 and then 4½ per cent in the following years. Indeed, Treasury predicts six successive years of four per cent plus growth—and I will return to this forecast shortly.

By contrast the Reserve Bank is more cautious. It forecasts growth, for example, at 1¼ per cent in June 2010, 2½ per cent in December 2010, and 3¼ per cent in June 2011. The CPI predictions also vary significantly with the RBA forecasting higher levels than the Treasury. The International Monetary Fund also thinks the Treasury forecasts are too optimistic.

Why is this important? The government wants the Australian people to believe there is a road to recovery from the massive deficits and debt to which they have committed the Commonwealth. Let me remind the House of them: a $58 billion deficit next year, leading to a $300 billion debt. How this vast borrowing is to be repaid is of vital interest to Australians, who are concerned that they, and their children, will be repaying it for a generation or more. The government’s projections of growth are therefore significant. But are they believable?

The government wants us to believe that Australia will enjoy six successive years of more than four per cent growth. Let me put this in context. Albert Einstein once said:

The future is an unknown, but a somewhat predictable unknown. To look to the future we must first look backwards to the past. That is where the seeds of the future were planted.

The past is revealing. Six years of more than four per cent growth is unprecedented. Even through the boom years, Australia did not achieve this outcome. Indeed the Treasury secretary has to go back to the 1960s to justify his assessment.

Huge restraint will be required in the future, given the massive global stimulus that governments have promoted. Then there are other significant cost burdens on Australia, not the least of which is the proposed carbon trading scheme. The Minister for Finance and Deregulation has conceded that forecasting is difficult and there is a margin for error. This underestimates the situation. The Governor of the Reserve Bank said:

… it is actually the case now that, if we are honest, there is tremendous uncertainty around any point number. That means that in thinking about policy you should be thinking about not just the central forecast but what the risks are either side and how to respond to them.

Moreover, the Treasury’s past projections have also been shown to be wrong. In these circumstances, what store can we place on them today? What is happening today is the history upon which tomorrow’s forecasts are constructed.

Further projections out to 2020 are, almost by definition, unreliable. As a number of former Treasury officials have said in the past week, there is considerable uncertainty about such figures. The Treasury secretary once shared this view. In February, he told a Senate committee that net debt projections are ‘no better than crude assumptions about macroeconomic aggregates’.

The Reserve Bank thus serves an important function as an alternative source of advice to the Treasury. This, however, is not the Reserve Bank’s primary role. The primary role of the Reserve Bank is directed to monetary policy. Nonetheless, it serves an important function by providing a counterpoint to Treasury, as the events of the last few weeks underscore.

At the present time we do not know what the future is, but we should not be wishing for it. Wishing for the future will not create it. If the Reserve Bank is correct, then the future will be much more uncertain than the government wants us to believe. That will be a worry for us all. (Time expired)

Kelvin Thomson (Wills, Australian Labor Party) Share this | Link to this | Hansard source

Order! The time allotted for statements on this report has expired. Does the member for Dobell wish to move a motion in connection with the report to enable it to be debated on a later occasion?

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

I move:

That the House take note of the report.

In accordance with standing order 39, the debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting.