Last week the government announced a review into the Reserve Bank of Australia. It's good timing. The RBA has had to manage the global financial crisis, the sluggish economy of the late 2010s, the COVID-19 pandemic and now a wave of inflation. Exciting times to be a central banker.
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Recent research finds that the RBA has played a vital role in stabilising the Australian economy and preventing recessions. Unemployment would have risen to above 7 per cent had the RBA not acted in 2008, according to new research from Issac Gross and Andrew Leigh. It's not an easy job, either. A mechanical data-led rule would have acted too slowly and cost thousands of jobs. The RBA's careful judgement paid dividends.
But the RBA hasn't always got it right. Those same researchers find that the RBA kept interest rates too high for too long from 2016 to 2021 despite many calls at the time for them to be lower. The impact on the economy was significant. The equivalent of 270,000 people were out of work as a consequence.
Early research suggests some of the policies implemented by the RBA during COVID-19, such as its yield curve target, were not as effective as first thought. The RBA was caught off-guard by the post-lockdown surge in inflation, to say nothing of the RBA's inaccurate guidance that interest rates wouldn't rise for years to come.
Commentators have raised concerns about the lack of transparency over RBA decision-making compared to what we see in other countries. They've noted the RBA's tendency to make in-house appointments and worry that the lack of monetary policy expertise on its governing board reduces scrutiny over policy decisions. Central banks are also being asked to think about a lot more than they used to: from financial stability and inequality to climate change and the environment.
A review into the RBA is an opportunity to explore these issues, learn lessons from the past and make a vital Australian institution even stronger. But it also begs an awkward question. If we recognise the importance of reviewing one arm of Australia's macroeconomic policy, why are we ignoring the other? After all, fiscal policy has had plenty more challenges than monetary policy.
We've had budget deficits for more than a decade, with many more to come. These are structural, not cyclical. They are the product of a broken tax system that can't deliver the revenue required to meet the growing spending commitments that come with an ageing population and new programs like the NDIS. We can't run deficits forever.
The budget is also riddled with downside risks. If Australian banks get into trouble, the bank guarantee will transfer their debts onto the government's balance sheet. There are similar risks with government equity investments like that with NBN Co. and the potential need to recapitalise the RBA as interest rates rise. The budget could deteriorate quickly if things go bad.
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Nor is our fiscal policy as "countercyclical" as it should be. Fiscal policy should ideally expand when the economy is weak (providing fiscal stimulus) and contract when the economy is strong (fiscal consolidation).
Some of this is automatic. When the economy is weak, the government pays out more in unemployment benefits and social welfare and receives less tax revenue as household and business incomes fall. Some of it is not automatic. This is where the government actively increases spending or cuts taxes when the economy is weak (such as during the COVID-19 pandemic) and then dials it back when the economy is strong.
We are struggling on both counts. We admitted that our automatic payments were inadequate the second we doubled JobSeeker for unemployed people when COVID hit. The tax system isn't helping much, either. Research from the ANU's Bob Breunig and Tristram Sainsbury shows that our tax system is so broken that it won't automatically repair the budget as the economy recovers from COVID.
Our success on non-automatic fiscal policy is also mixed. We're good at spending lots during a crisis, but are much less effective at managing the budget outside of a crisis. We spent big during the mining boom when we should have been saving much more than we did. We obsessed over debt and deficits during the 2010s when the economy needed a fiscal boost. Neither party promised any budget repair at the last election despite a high-inflation, overheating economy.
There are also challenges in the data, information and systems available for fiscal policymakers to make decisions and implement policy. There were parts of the federal government during COVID-19 that couldn't access data held by other parts of the federal government, let alone the innovative, real-time datasets in the private sector.
These limitations make it difficult to identify the specific individuals and businesses in need of support, while insufficient financial infrastructure makes it hard to get money to the people who need it. It's no surprise we accidentally paid tens of billions of dollars to firms and individuals that didn't need it.
There are plenty more challenges with fiscal policy in Australia, including the politicisation of the key assumptions that underpin the budget. If a review is a good idea for monetary policy, then isn't it a good idea for fiscal policy, too? .
- Adam Triggs is a non-resident fellow at the Brookings Institution, a visiting fellow at the Crawford School at the Australian National University and a fellow at the e61 Institute.
Adam Triggs
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
