The politically explosive decision helped derail the Howard government’s bid for re-election, which was built around the message that ‘interest rates will always be lower under the Coalition’, and shattered the conventional wisdom that the RBA would never touch monetary policy during an election campaign for fear of being seen as partisan.
It also highlighted the risk that governments run when they devolve functions to arms-length organisations like the RBA. But this has not stopped them from increasingly turning to the use of statutory bodies, expert groups, reviews and commissions of inquiry to advise on, and in some instances, make and implement decisions.
The more, the merrier
Since the early 1990s, an alphabet soup of organisations, committees, boards and ad hoc groups has emerged to join the RBA, the Commonwealth Grants Commission and the Foreign Investment Review Board in advising government or acting on its behalf. Bodies include Infrastructure Australia, the Parliamentary Budget Office, and the Productivity Commission, as well as inquiries like the Henry tax review and the National Commission of Audit.
While their responsibilities and powers vary, their common purpose has been to improve the way government works and the decisions it makes. And their influence has often been profound. For instance, under the agreement struck between the RBA and Treasurer Peter Costello in 1996 to formalise its independence, the central bank was given the task of engendering confidence among consumers, business and investors that inflation will be held at a moderate level (its current target range is 2 to 3 per cent). In doing this, it has proved to have been a signal success.
During the 1970s and 1980s, the consumer price index (CPI) regularly spiked into double figures and averaged between 8 and 10 per cent. But since the RBA was given its mandate, mean CPI has been a touch under 2.5 per cent.
By assuming responsibility for the day-to-day conduct of monetary policy, the central bank has not only proved itself to be more adept than politicians at moderating fluctuations in consumer prices and anchoring inflation expectations, it has also created some distance between the management of official interest rates and the hurly-burly of the political contest.
Honest and transparent
Arguably, the Productivity Commission and its antecedents – the Tariff Board, the Industries Assistance Commission and then the Industry Commission – have been even more influential. During the 1960s and 1970s, the Tariff Board and the Industries Assistance Commission, under the leadership of Alf Rattigan and Bill Carmichael respectively, became powerful champions of the anti-protectionist cause.
By using open public inquiries to highlight the costs to the economy of industry protection, Rattigan and Carmichael paved the way for the decisions taken by prime ministers Bob Hawke and Paul Keating, with bipartisan support, to cut Australia’s tariff barriers.
Carmichael says the process of transparency, subsequently embodied in the formation of the Productivity Commission in 1998, was “crucial for maintaining the distance between government decision-making and the influence of domestic interest groups seeking special treatment at the expense of the rest of the community”.
In a joint 2007 paper1 with then-Productivity Commission chair Gary Banks, Carmichael wrote that, “Australia’s experience demonstrates that institutionalised transparency can help governments undertake beneficial reform and make better policies”. Not only that, but well-researched and public independent advice can also, according to Banks, help governments implement reform by building public confidence that the change is well-founded and likely to be beneficial.
With this reformist zeal embedded in its heritage, the Productivity Commission has had some notable recent successes, not least the establishment of the National Disability Insurance Scheme, which was a key recommendation of its 2011 inquiry into disability care and support.
But the commission, like Infrastructure Australia, has no power to compel governments to act on its recommendations, and finds its ideas and critiques not infrequently ignored or put in the too-hard basket.
The Abbott government, for instance, last year dismissed a commission recommendation that money tagged for the prime minister’s paid parental leave scheme (since abandoned) should instead be directed toward helping parents pay for child care.
Even the best informed and most compelling of advice can be for naught if a government can safely ignore it without consequence.
A fiscal safety net
What to do when you are trying to save a government from itself? At the extreme, technocrats can seize the levers of government, as happened in Italy in late 2011 when, facing the threat of default, the country turned to a cabinet led by economist Mario Monti to take charge of economic reform and reassure jittery investors.
But it is not just in heavily indebted eurozone countries where the economic management of elected governments is being called into question. In Australia, successive governments appear increasingly incapable of restoring public finances to health. On current estimates, cumulative budget deficit for the period 2013–17 will reach $140 billion, up from pre-election estimates of around $58 billion.
Collectively, politicians have behaved like startled rabbits in the face of plunging revenues, alternately unwilling or incapable of implementing the spending cuts and tax reforms needed to put the budget on a sustainable path to surplus.
One attempt to make governments more accountable for the consequences of their fiscal policy choices has been to establish the Parliamentary Budget Office (see breakout below). But economist Nicholas Gruen thinks there needs to be more potent medicine to ensure fiscal policy is no longer held hostage to political fortune.
Gruen has proposed that there be an independent statutory body, the Central Fiscal Authority (CFA), to manage fiscal policy by manipulating taxation rates. The authority would set effective tax rates by changing the parameter applying to rates for company, income and sales taxes enshrined in legislation, essentially distancing government from day-to-day control over the flow of revenue.
He argues that such an arrangement would not only mean fiscal policy was insulated from short-term political pressures, but it could be adjusted more closely, rapidly and credibly to changes in economic circumstances, taking some of the load off monetary policy and boosting investor confidence. The economist said it could curb the sort of ruinous tax cut auctions that have been a feature of recent elections.
“An independent body setting the stance of fiscal policy would make it harder for politicians to promise a tax cut without explaining how it will be funded,” says Gruen. “The existence of the CFA would shift the focus of attention to the capacity of a party’s policies to deliver economic circumstances capable of allowing the desired tax cut.”
The devil you know
But even if it is technically feasible to put an independent body in charge of fiscal policy, is it necessarily desirable? There is unease about the idea of letting an unelected body manipulate tax rates.
According to public administration expert Professor John Wanna, the Sir John Bunting chair of public administration at the Australia and New Zealand School of Government, “most Australians would say that they did not elect a government to set up a body to shift the GST to 12 per cent”.
Professor Wanna says public approval of independent bodies is conditional on whether or not they like their decisions – something the RBA is only too well aware of whenever it changes interest rates.
And governments themselves are reluctant to cede power to those over which they exert little control, he says, noting the lengths they go to, to make sure even the commissions of inquiry they appoint deliver the findings they want.
“When a government calls an independent review, they shape its findings by setting tight terms of reference or being very careful about who they put on it, or they keep its findings under wraps,” says Professor Wanna.
While the idea of using independent bodies and advisers to improve the quality of government decision-making is attractive, even proponents such as Gruen think there are limits.
He points to the “fairly extreme” technocratic approach taken in Europe, where external bodies like the European Commission and the International Monetary Fund have dictated fiscal policy to heavily indebted governments like those in Greece and Spain. This, he says, “does not work”.
There is no doubting the power and influence of independent statutory organisations like the RBA and the Productivity Commission. And, if Banks and Carmichael are right, the system of open inquiries and public reports that forms the basis for Australia’s transparency arrangements has led to governments making better-informed and more beneficial decisions.
But fears that technocrats are in danger of supplanting democratically elected politicians appear overstated. Governments can, and do, ignore the recommendations of advisers like the Productivity Commission, and the RBA board that sets monetary policy is composed of government appointees and includes its top economic adviser, the Treasury secretary.
Governments, as ever, are able to make poor decisions all on their own.
