Chalmers has every right to comment on what the Reserve Bank is doing to the economy

In the collective memory of the Australian political and economic classes, one of the most golden of golden periods of days gone by were the years of the Hawke government. It’s regarded as a storied period of great reforms that modernised the Australian economy, during which government finally started to get out of the way of the private sector, lifting controls and encouraging greater competition.

There’s a fair bit of mythologising and deliberate amnesia in some of the recollections. The union movement’s co-operation and its moderate behaviour in return for regular workforce-wide pay rises and social wage boosts doesn’t always get a look in. However, the acquiescent role of the Coalition, led by Andrew Peacock and John Howard in a revolving-door arrangement, gets more of a gallop in the retelling.

The Reserve Bank should be open to criticism.Credit: Illustration: Dionne Gain

It is the case that, for the most part, Peacock and Howard chose not to fight many of the reforms that were overseen by Bob Hawke and Paul Keating. For a start, the Liberals back then respected Labor’s electoral mandate. But they also couldn’t see the point in politically weaponising quite dramatic changes that were, in the long run, going to be good for the country.

In light of the way Australian politics is performed in 2024, does that seem quaint to you? It does to me. Hardly anything is left uncontested these days. This week shadow treasurer Angus Taylor, after a long period of stop-start negotiations with his opposite number, Jim Chalmers, killed the possibility of bipartisan reforms to the structure and practice of the Reserve Bank of Australia.

If any major national institution is ripe for reform, it’s the RBA, whose decisions affect the economic wellbeing of every Australian.

Almost 30 years ago, the freshly elected Howard government bolstered the RBA’s independence. Essentially, the RBA board was freed from any suggestion that it could or should be influenced by the government of the day when it came to setting the cash rate. It was a good idea at the time.

But there was always going to be a point when a disconnect would become stark. The RBA looked after monetary policy, thus determining interest rates. Meanwhile, the government, accountable to voters via the electoral system and viewed by them as being vested with the responsibility for looking after their economic interests, looked after fiscal policy and spending.

Ever since the then RBA chief Philip Lowe in 2021 provided guidance that the inflation rate would not be likely to prompt a rise in interest rates until 2024, this disconnect has been a problem. Since May 2022, which coincided with the election of the Albanese government, the RBA has lifted the cash rate 13 times. The purpose has been to quash economic activity by lowering levels of demand in the economy. Low-income homebuyers who swallowed Lowe’s guidance whole and borrowed on the strength of it are just some of the Australians who are really hurting now.

Lowe’s successor, Michele Bullock, is resolute in defending the RBA’s actions. Last week she acknowledged how much pain was being inflicted on many people on low incomes. Some, she said, “may ultimately make the difficult decision to sell their homes”.

The angry reaction to Chalmers’ comment that the successive rate hikes were “smashing the economy” early last week highlighted the privileged position the RBA enjoys. Chalmers breached the orthodox view that the path to ruin lies in any government questioning the RBA’s omniscience. His language was loose, but his observation got somewhere near the mark, surely, even if the government shares the responsibility for the tough economic conditions.

The RBA has a job to do, but let’s never forget it’s a bunch of unelected people wielding what amount to extraordinary powers. They’re doing their best by their lights but in the end they are government appointees who are not infallible and are flawed like the rest of us. It should not be verboten for an elected parliamentarian who has been sworn in by a governor-general to oversee the nation’s economy to note the effects of the RBA’s choices. In response to the pile-on, Chalmers pushed back: “I think it would be a bit strange, frankly, if the treasurer of Australia couldn’t point to the sorts of things which are slowing our economy.”

What we need is for the RBA to be given the best chance to do what it does in the most accountable way and with the best information and expertise available. That’s what Chalmers’ proposal for the body to contain two boards – a monetary policy board entirely focused on setting interest rates, and a separate governance board – was designed to achieve.

Now that the opposition has pulled out of negotiations, there’s some chance that Chalmers’ reforms might get up with the support of the Greens and other Senate crossbenchers. That’s a second-best outcome.

Taylor said Chalmers’ “smashing the economy” comment was enough to convince him that the government simply wanted to stack the monetary policy board with Labor stooges. That seems an unconvincing reason given Taylor has spent months negotiating the changes with Chalmers. More likely, Taylor pulled out because, with the polls inexorably moving in the Coalition’s favour, politics matters more than policy and it’s in his interests to make it harder for Labor to score any wins. He might get what he wants and become treasurer next year. Then the RBA and its power to run monetary policy will be his challenge to deal with.

Shaun Carney is a regular columnist.

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