Flick pass to Glenn Stevens

bankThe government’s obsession with achieving a surplus of one per cent of GDP seems to be the new medium term goal around which spending decisions have to conform. As the budget papers put it:

In current circumstances, fiscal policy should be concerned with restoring the budget to a position consistent with the Government’s objective of achieving budget surpluses on average over the medium-term.

On the face of it that means the government is avoiding responsibility for smoothing out economic fluctuations; traditionally one of the main functions of fiscal policy. The budget papers now put a new position to the effect that fiscal policy should concentrate on medium term budget magnitudes and monetary policy should be responsible for short term fluctuations:

By returning to surplus at this time, the budget recognises that in normal circumstances, with fiscal policy focussed on the medium‑term, monetary policy should play the primary role in managing demand to keep the economy stable.

The problem of short term macroeconomic stability now appears to be the job of the Reserve Bank and the Commonwealth is to avoid any responsibility.

This division of responsibilities is new. Former Treasurer Peter Costello had a pact with the Reserve Bank which effectively made the latter responsible for achieving inflation in the range of two to three per cent. That formalised long standing arrangements whereby the Reserve Bank was to concentrate on inflation control and fiscal policy was assigned to the real economy; especially fluctuations in output and unemployment.  

Traditionally the Reserve Bank has not seen its role as being the major player involved in managing economic fluctuations. The Reserve Bank describes itself as ‘an independent central bank with responsibility for monetary, financial system and payments system policies’.  And of course the Reserve Bank is an unelected body that is not accountable to the Australian Parliament or the people of Australia.

If the budget papers are to be believed then one of the traditional goals of government, controlling economic fluctuations, has fallen through the cracks.

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