RBA and Canberra are not going to war

Canberra is not in a battle with the RBA. The federal government has no plans to bring down a tax-hiking/spend-slashing budget.

Australian Treasurer Josh Frydenberg. NCA NewsWire / Gary Ramage

Are the Reserve Bank and Treasurer/Treasury – the politician and his policy advisors in Canberra – about to go to war?

Is the RBA going to keep stimulating the economy like we have never seen before, while political and policy government embarks on progressively tightening the fiscal screws, starting with the end of JobKeeper at the weekend?

While the answer to both those two sub-questions might be broadly ‘yes’, the answer to the overall question is a definitive ‘no’.

The RBA is going to keep money all-but free – the word doesn’t even need qualifying quotation marks – for a promised three years yet, great news for borrowers, dreadful news for savers, and keep buying government bonds. The government is embarking on “budget repair”; two words we have heard time and again in the past decade or so and which generally mean the cutting of spending or the raising taxes.

The combination is not irrational. It does not add up even to Sydney and Canberra necessarily acting at cross-purposes. It certainly does not constitute them ‘going to war’. We’ll leave that to China; let’s hope not literally.

The RBA’s policy stance – and promise – is based on its core policy obligation and its broader mandate.

Australian Treasurer Josh Frydenberg. Picture: NCA NewsWire / Gary Ramage

The obligation is to get inflation between 2-3 per cent; it had (mostly, just) failed before the crisis events of 2020; it’s now become an even greater challenge after them.

If the government was proposing to bring down a tax-hiking/spend-slashing budget, it would be embarking on a course directly counter to the RBA. We really would be headed for confusion and chaos.

Very simply, it’s not.

First off, it’s just letting the fiscal assistance to businesses and jobs that was critically necessary to offset the mandatory lockdown and the continuing government-ordered disruptions to the economy to expire, as programed, and as the reasons for them expire as well.

That’s one aspect of the ‘budget repair’. The other is just letting the ‘automatic stabilisers’ operate.

As the economy picks up pace – we have now recovered all the broad economic ground lost through the first half of 2020 - that recovery boosts tax revenues and cuts spending, importantly, without any decisions to boost taxes or cut spending.

Indeed, there certainly won’t be any tax increases between now and the May budget; and indeed pretty much after it either’; there could well be some new spending, both before and very certainly in and after the budget, on the way to the election in 2022.

What’s happened with JobKeeper exactly projects these two dynamics – of automatic stabilisers repairing the budget and the precise need and obligation for having it in the first place self-expiring.

At its peak, JobKeeper was supporting 3.6m jobs and costing $5.4bn a fortnight. At last report it was down to 1.1m jobs and around $1bn a fortnight.

Further, while the overall program ends at the weekend, the government will continue to provide a much more tightly targeted and smaller JobKeeper payment, pretty much for “as long as it takes”.

By that, I mean for as long as the government is ordering a business not to operate, hurting both the business and its employees; like with the international border closure.

There’s a broader, more subtle but equally important point why JobKeeper – and indeed other handout stimulus – has to be wound back and so is not at odds with continued RBA monetary stimulus.

Unless and until the government actually allows the economy to work and to work without a fiscal crutch, we will never get back to a really healthy economy.

This sort of budget repair, far from being at odds with the RBA, will actually underpin what the RBA is doing; and have a cascading beneficial impact on the budget bottom-line.

Originally published as RBA and Canberra are not going to war