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Has common sense prevailed?
In case you missed it, Finance Minister Jim Chalmers said he would no longer push the idea of abolishing the federal government’s power to overturn Reserve Bank board decisions.
He said he would continue to retain that power and would now simply try to limit the circumstances in which it would be exercised.
“We are prepared to limit parliament’s overthrow powers to emergency situations and very rare circumstances,” he announced on Friday.
“This came out of discussions between me and the opposition.”
So on the surface this looks like a win for all those who warned the treasurer to retain this important power.
But there is something odd about his statement.
The government’s power to overturn Reserve Bank of Australia board decisions has existed for decades but has never been used.
Since no federal finance minister has bothered to go through the rigmarole of using it, doesn’t that suggest that the conditions for using it are already very restrictive and rare?
The world has seen many wars, recessions, oil shocks, inflation, financial crises and pandemics, but it has never been affected.
But now, it’s like someone is asking us to look at a “break glass in case of emergency” box and accept the argument that even though no one has ever needed to break the glass before, it has the potential to break in an emergency, so we should make the glass thicker.
What is that about?
What is an ’emergency’?
In a press conference on Friday, Dr. Chalmers explained his thinking this way:
reporter: Treasurer, you mentioned this and I think you said that in rare emergency situations the government might override the decision of the Reserve Bank of Australia.
Chalmers: Yes.
reporter: Can you give us some examples of what these situations might look like?
Chalmers: What we see around the world is that where these powers exist, they are limited. As it stands, Parliament can overturn decisions of an independent Reserve Bank. The Reserve Bank Review recommends that we remove these powers to strengthen the independence of the Reserve Bank.
Some Coalition members of the parliamentary committee expressed opposition to the change, so we tried to find a way to accommodate all of those views. We decided the best approach was to retain the parliamentary override power but limit it to emergency situations, not just differences of opinion. So we drafted some amendments to implement that.
reporter: Thanks, but can you give an example of when these situations might occur?
Chalmers: I guess you could imagine a situation where there were major structural or institutional failures in the staff and board of the Reserve Bank, or some other emergency, or something like that, and there was a complete breakdown in the normal decision-making capacity of the Reserve Bank.
But we intentionally don’t prescribe specifics. We try to limit specifics.
You know, for example, every time a rate decision is made, the Greens, in their usual way, say that Parliament should overturn that decision. That’s a difference of opinion. What we want to do is limit that overturn (power) to real emergencies.
This is the advice we are giving to the Shadow Treasurer.
In fairness, he now needs to have discussions with his colleagues, but I am very confident that we have taken very careful account of all the issues he has raised, including this and the other five, in the proposal that we have put forward.
Dr Chalmers said he hoped the revised rules on override powers would be passed by parliament before the next election.
“I have done everything I can to ensure that this bill is passed into law this year and ideally by January,” he said Friday.
Shadow Treasurer Angus Taylor said he had received a letter from Dr Chalmers detailing new plans to keep the overrule power.
He issued a statement on Friday saying he would now consider the matter.
“The Senate inquiry into reforms… heard Former Governor of the Reserve Bank of Australia including Ian Macfarlane and Bernie Fraser, as well as Peter Costello and Paul Keating, who have expressed concerns about the removal (of the overrule power),” Taylor said in the statement.
“It is clear from the correspondence received yesterday that the treasurer has realised that his previous position was untenable.
“Despite the long delays, it is pleasing to see progress, but we will take our time to ensure the issues are properly addressed.”
This is an interesting phenomenon.
The Albanese Labor government is ignoring the lessons of history if it believes central bank governors have never abused their power in Australia, economic historians say during the debate.
Alex Milmore, President of the Australian Society for the History of Economic Thought Remind people This override power was legislated by a Labor government in the 1940s after the Commonwealth Bank (the predecessor of the Reserve Bank) refused to help James Scullin’s Labor government fund public works to boost employment and provide relief to farmers during the Great Depression of the 1930s.
He said the central bank’s intransigence exacerbated the Great Depression and led to the downfall of the Scullin government.
Why has the modern Labour Party forgotten that history?
It was odd to see Coalition and Greens MPs, as well as a former Reserve Bank of Australia governor and treasurer, trying to remind Labor that it would be unwise to give up democratic control of the central bank.
Don’t fight the power
Seeing these people criticize Three economists The controversial recommendation to abolish the override power was first made by a Reserve Bank of Australia review panel.
“You’ll always find economists who say Parliament should give up power because they’re economists; they think they should have power,” said former Coalition finance minister Peter Costello February.
Former Reserve Bank of Australia Governor (1996-2006) Ian Macfarlane said the RBA review panel’s claim that abolishing the override power would enhance the RBA’s independence was wrong.
He said the existence of the override power actually protected the RBA’s independence.
Why? Because overthrowing power requires a politically demanding process, so the government is only willing to do so in “The most extreme and rare cases“If there is a serious disagreement between the RBA and the government, RBA officials can still point out that if the government wants to interfere with the RBA’s decisions, then it is perfectly capable of doing so and suffer the political consequences.
So, on the one hand, governments cannot complain that they do not have the power to overturn the decisions of the RBA Board, but on the other hand, the mechanism is so difficult to use that no government is willing to use it.
Therefore, the difficulty of using this mechanism protects the independence of the Reserve Bank of Australia.
Mr. McFarlane also argues that this is why we should not abolish the current veto; because if we do, in the event of a crisis, a future government might try to impose a new veto that turns out to be less powerful, or easier to use, or more powerful. Why take that risk?
In any case, it will be interesting to see what kind of wording Dr. Chalmers proposes in his draft amendment to further restrict the circumstances in which the override power can be used.
On Saturday, former Reserve Bank of Australia governor Bernie Fraser (1989-1996) told the ABC he was pleased to hear Treasurer Jim Chalmers had decided to retain the override power.
“It’s good that he backed down on this,” Frazier said.
“It has stood the test of time. If politicians feel they have a good case and if the Reserve Bank does something stupid, as it has done in the past, they need something to crack down on (the Reserve Bank),” he said.
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