Chapter 2Views on the bill
2.1This chapter examines stakeholder views on the provisions of the Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023 (the bill). It is informed by the bill’s explanatory materials, submissions received by the inquiry, evidence provided at a public hearing on 22 February 2024 and additional material submitted to the committee.
2.2This chapter provides an account of the key issues relating to the bill and concludes with the committee’s views and recommendations.
Views on the bill and the Reserve Bank review
2.3Views on the recommendations of the Reserve Bank Review (RB Review) and the bill were largely positive.
2.4Professor Steven Hamilton, appearing in a private capacity, commended the RB Review Panel and its support staff ‘for producing an outstanding report’, as well as the government for commissioning such a report and agreeing to implement the findings therein, noting that the reforms suggested in the review had been needed for some time.
2.5In their submission, Dr John Hawkins and Mr Selwyn Cornish (Hawkins and Cornish) took the view that the recommendations of the RB Review were ‘more an evolution than a revolution’, and that the inflation targets recommended within the review were appropriate.
2.6Professor Renee Fry-McKibbin, one of the panel members for the RB Review, stated that the Review had found that the RBA was a fit-for-purpose institution with a strong international reputation. The recommendations made in the Review sought to build on the existing strengths of the organisation.
2.7Giving evidence before the committee, Treasury noted the importance of passing the bill quickly in order to give certainty and stability to the Reserve Bank and the new boards proposed by the bill, which will require appointment processes.
Objectives of the Reserve Bank
2.8Stakeholders were generally supportive of the changes proposed in the bill relating to the objectives of the RBA.
2.9Hawkins and Cornish reflected in their submission that replacing the current objective of the RBA from ‘stability of the currency’ to ‘price stability’ is an improvement, as the previous term could be confused with a fixed exchange rate.
2.10At the public hearing, Dr Hawkins reaffirmed these points, and added that the movement of the objective ‘economic welfare and prosperity of the people of Australia’ to an overarching objective was also positive as its presence as one of the monetary policy objectives was somewhat vague.
2.11The Australian Council of Social Services (ACOSS) made the argument in their submission and at the public hearing that the legislative objectives of the RBA be changed to reflect the proposal ‘that equal consideration be given to full employment and price stability.’
2.12ACOSS went further in its submission to the inquiry, recommending that the new Monetary Policy Board give equal consideration to price stability and full employment in setting monetary policy, as well as be required to explain how these two objectives are being balanced.
Independence of the RBA
2.13The committee received significant interest from submitters and members of the broader community relating to the repeal of section 11 (s11) of the RB Act.
2.14As discussed in chapter one, this section of the RB Act allows for the Government to override the decisions of the RBA in situations where the Government and the RBA were unable to reach agreement.
2.15The independent reviewers of the RBA provided evidence to the committee detailing the evidence and deliberations which led them to recommending the repeal of s11 of the RB Act. They referenced that the repeal recommendation formed part of broader recommendations to affirm the independence of the RBA from the Government, and that comparable jurisdictions do not have such power set in their central banks’ legislation.
2.16Many members of the community expressed concerns that the removal of this section would remove a check on the powers of the Reserve Bank, noting that members of the Reserve Bank Boards were not elected officials.
2.17In its submission, the Australia Citizen’s Party highlighted that the supporting evidence cited in the RBA Review for the removal of s11 was a working paper called ‘Central Bank Independence Revisited: After the financial crisis, what should a model central bank look like?’ though it noted that the paper seemed to contradict the recommendations made in the RBA Review:
While the paper argued that the 2008 Global Financial Crisis showed that central banks needed to be “much more powerful and have broader mandates”, it cautioned that “as these unelected, technocratic, institutions become increasingly powerful, the pre-crisis academic consensus around central bank independence—put crudely, ‘the more, the better’—has become inadequate.” The authors argued that the operational independence of monetary policy should be protected, “while prioritising coordination and cooperation with the government where necessary over full central bank political independence”.
2.18At the public hearing, witnesses also raised concerns about this proposal in the bill. Dr John Hawkins, appearing in a personal capacity, stated that the current provisions of s11 of the RB Act were well designed and correctly balanced the need for an independent central bank while also respecting democratic principles. Dr Hawkins and the co-author of his submission, Mr Selwyn Cornish, recommended that the bill be passed without the provisions relating to s11 of the RB Act.
2.19Dr Steven Hamilton, also appearing in a private capacity, had similar views, saying that while central bank independence is a critical policy aim, he was not sure whether removing s11 would be necessary to improve the independence of the RBA.
2.20Dr Hamilton went on to say that s11 represented a check and balance within the RB Act, and noted that although this section has never been used this did not mean it was not important. Section 11 could still be utilised in situations of national crisis or in cases of significant disagreement between the RBA and the government. He went on to provide historical context for s11, noting that this situation had arisen in the 1930’s, when then Treasurer Ted Theodore had wanted to expand fiscal policy but the chair of the Commonwealth Bank (then the Australian central bank) had refused to lend the government money with there being no recourse for the Scullin Government.
2.21Dr Hamilton also pointed out that due to the five-yearly reviews recommended by the RBA Review, discussion of the necessity of s11 could be revisited in the future.
2.22Mr Matt Grudnoff, Senior Economist at The Australia Institute, had similar views:
This is as much a democratic question as it is an economic one. Who should prevail if there is a serious disagreement between an elected government and unelected board? Almost without exception, our Australian system believes that an elected government should prevail because it has ultimate responsibility to the people. When we talk about the importance of an independent central bank, we're not talking about an unaccountable central bank. A central bank can be independent even when the government has the power to override its decisions.
2.23Mr Richard Denniss, Executive Director at The Australia Institute made the point that the removal of s11 could possibly lead to less independence for the RBA. He pointed out that without the transparent process provided by s11, this could lead to senior members of the government pressuring members of the RBA boards to prevent undesirable interest rate outcomes.
2.24The Australia Institute expanded further on this in its submission:
Under the current provisions, if the government and the RBA Board are in dispute about policy, the government can override the RBA. But if it does so it must provide to both Houses of Parliament, a copy of the order determining the government’s policy, a statement about how the difference of opinion arose, and a statement from the RBA Board about how they think the difference arose. This makes any dispute between the government and RBA Board very transparent. It also means the government must take effective responsibility for any policy that the government forces on the RBA Board. Which means the electorate knows who is to blame (or praise) for the consequences of that policy.
Importantly this process allows the RBA Board to make independent decisions and provide arguments for them. But at the same time, it is the elected government that has final say on policy.
2.25Former Reserve Bank Governor, Mr Ian Macfarlane AC, giving evidence in a private capacity, echoed these points, noting that s11 of the RB Act was a ‘politically demanding process that governments would only be willing to use in the most extreme and rare circumstances.’
2.26Mr Macfarlane also cautioned that if s11 was repealed, in the case of a crisis where the government felt they had to override a decision of the Reserve Bank, the result would be the introduction of ‘hastily put together legislation’. He said one of the advantages of s11 was it provided a procedure that was already in place.
2.27Mr Peter Costello, former Treasurer (appearing in a private capacity), expressed similar concerns, stating the central question of this debate was whether parliament should maintain sovereignty in this area.
2.28Responding to these points, Dr Gordon de Brouwer, a member of the RBA Review panel, explained why the RB Review had recommended the removal of s11:
The power in s11 had never been used;
Similar jurisdictions do not have comparable powers in relation to their own central banks;
The removal of s11 can be seen as part of broader changes recommended in the RB Review that strengthen transparency within the RBA, as well as accountability for decision making; and
Section 11, as it currently exists, is primarily a power of the executive, which raises concerns about parliamentary sovereignty.
2.29Dr de Brouwer went on to say:
Most decisions by central banks on interest rates are right, but almost all of them are very hard. You've got a highly contested political environment, and that just makes it harder for the central bank—and for executive government. We're not removing the right and power of parliament to override. We're not recommending that. We can't anyway, but that would be something that we would vehemently object to. But always putting it directly to a confrontation between executive government and the central bank is not healthy.
2.30These views were echoed by the Department of the Treasury (Treasury). Mr Luke Yeaman, Deputy Secretary for the Macroeconomic Group of Treasury, informed the committee that Japan, New Zealand, Sweden, the United States of America and the European Union do not have override powers for the executive over their respective central banks and this kind of power is generally not seen as best practice for central banking internationally. Mr Yeaman also informed the committee that the powers in s11 have never been used.
2.31When asked what would happen should there be a dispute between the Reserve Bank and the government of the day after the repeal of s11, Mr Yeaman commented that such a dispute would be discussed in the first instance between the Treasurer and the Governor. If there was no resolution coming from that discussion, the parliament would have the power to address the issue as appropriate.
2.32Mr Yeaman also rejected the idea that removing the powers contained in s11 could lead to the undermining of the RBA’s independence as the parliament still has the ability to legislate in relation to the Reserve Bank.
2.33The current Governor of the Reserve Bank, Ms Michele Bullock, considered that the decision to remove s11 was a matter for government and parliament.
New Boards of the RBA
2.34As discussed in Chapter 1, the bill proposes that the board structure of the RBA be changed from two boards (the Reserve Bank Board and the Payments System Board) to the following three boards:
(a)The Monetary Policy Board which will determine the monetary policy of the RBA;
(b)The Governance Board which will oversee the RBA’s governance, as well as any matters which do not fall within the remit of the Monetary Policy Board or the Payments System Board; and
(c)The Payments Systems Board which determines all policy in relation to payments systems and remains largely unchanged.
2.35Stakeholders made several points about these changes.
2.36In their submission, Hawkins and Cornish, reflected that there had been commentary from former RBA Governors and board members that there was a lack of evidence to support the recommendation to split off the monetary policy functions of the RB Board into the proposed Monetary Policy Board. This submission took the view this could be an attempt to replicate the patterns of the Bank of England or other western central banks, despite the fact that the RBA had out-performed many of its contemporaries in recent years.
2.37Former Treasurer, Mr Peter Costello AC, stated that he believed the creation of two boards was ‘a very bureaucratic solution’ and remarked that there wasn’t any explanation as to how the change to board structure was going to improve the RBA’s functions. He went further, noting the current RBA is a focused institution and ‘if you take the responsibility to manage administrative affairs out of it, I don’t really know what the board would be doing most of the time.’ He also cautioned that both boards would have to have carefully defined powers in place in order to prevent disagreements between them, such as disagreements regarding the RBA’s balance sheet.
2.38These comments were echoed by Mr Ian Macfarlane, former Governor of the RBA. He contended that the creation of the Governance Board, an external board created to direct the internal management of the RBA, was unnecessary. He reasoned that the RBA was a small organisation and that similar government economic authorities, such as the APRA, the Australian Securities and Investment Commission or the Productivity Commission, did not require these kinds of externally staffed boards to operate.
2.39Dr Gorden De Brouwer of the RBA Review Panel, responded to Mr Costello’s comments, explaining that in the case of disagreement between boards around the RBA’s balance sheet, the Monetary Policy Board would have primacy over the Governance Board and that this kind of matter was examined within the RBA Review report.
2.40These views were reinforced by Mr Shane Johnson, First Assistant Secretary of the Macroeconomic Analysis and Policy Division at Treasury. He stated that the new board structure will lead to less confusion and conflict due to each board having clearly delineated responsibilities, as well as there being mechanisms within the legislation to facilitate consultation should conflicts arise between the boards.
2.41Mr Luke Yeaman of Treasury also made the point that the Governor of the RBA has the ability to resolve disagreements between the boards due to their position as chair on both boards.
2.42The RBA was supportive of the provisions in the bill which established the Monetary Policy Board, noting that these proposed amendments appropriately reflect the recommendations made in the RBA Review. In particular, the bill improves clarity around the new boards’ objectives and the responsibilities for governing the Reserve Bank itself.
2.43In answer to questions asked on notice, the RBA stated:
The existing arrangements have largely worked effectively over many decades. However the RBA believes that better governance and higher quality monetary policy decision-making can both be delivered by separate boards with the mandates provided for in the Bill. These separate boards would allow the Treasurer, over time, to appoint members to each board who have more specialist expertise than has historically been true of members of the Reserve Bank Board, for which generalist skills have been valued. It will also allow members of each board to focus on using their experience and skills in one domain, rather than requiring them to master a broad range of topics. Facilitating a more focused approach by members of the relevant board could better equip them to probe, challenge and direct the staff’s policy analysis (in the case of the Monetary Policy Board) and the RBA’s operations (in the case of the Governance Board).
Board membership
2.44A particular focus of submissions and evidence at the public hearing was the membership of the new boards of the RBA, in particular the membership of the Monetary Policy Board.
2.45ACOSS emphasized the need for external members of the Monetary Policy Board to be selected with a diversity of perspectives and backgrounds, as well as economic knowledge, in mind. They specifically made the point that there should be gender diversity as well as diversity of experience, ‘including from business, employees and people unable to secure paid work.’
2.46At the public hearing, Dr Peter Davidson, Principal Advisor at ACOSS, tied the need for diversity of opinions on the Monetary Policy Board to the functions of the board, in particular its function to maintain full employment.
So, in addition to technical expertise, it's important that the bank weigh up a range of perspectives from different parts of the community. I'm not talking about representation of interest but perspectives. One that we think should be heard is that of people on the margins of the labour market, both as labour market participants and as consumers. If we take full employment seriously as the core objective of monetary policy, those voices should be heard in the room.
2.47Dr Davidson finished by stating that it was important to include voices that were most affected by monetary policy decisions, such as those on the margins of the labour market.
2.48This view was echoed by Mr Richard Denniss of The Australia Institute, who supported the idea of diversity of experience on the Monetary Policy Board. He noted that labour market experience would be important to have on the Board.
2.49Mr Matt Grudnoff, also of The Australia Institute made the point that having a monetary policy board dominated by academic economists would possibly lead to more disputes rather than less, stating ‘[t]here is no-one more stubborn than an academic economist who thinks they're right even when they're wrong.’
2.50Former Governor of the Reserve Bank, Mr Bernie Fraser, also expressed concerns about the makeup of the Monetary Policy Board, stating concentration of monetary policy and theory within the Monetary Policy Board, could lead to ‘a committee of supernerds on monetary theory and monetary policy making decisions on interest rates.’ He emphasized the need for a variety of experience of members on the new Board.
2.51Professor Fry-McKibbin of the RBA Review Panel addressed these concerns by noting that the RBA Review had recommended that recruitment for Board positions be done through an expression of interest process, rather than relying on recommendations from the Treasurer or the Governor of the RBA, in order to improve the diversity of Board memberships. The RBA Review Panel had also suggested that the selection panel for Board positions be made of three people, the Treasurer, the Governor and a third party. The Review Panel had also proposed a draft skills matrix for Board recruitment processes.
2.52The skills matrix mentioned above was expanded on further by evidence provided by Treasury. Mr Shane Johnson of Treasury stated that the skills matrix ‘included practical economic expertise and qualifications in things like open-economy macroeconomics, the financial system, labour economics and the supply side of the economy’. The RBA Review also proposed a skills matrix for the Governance Board which included skills like finance, human resources, leadership, technology, risk management and strategic perspectives.
2.53As at the time of writing, the skills matrices for the new Boards had not been finalised. However, Treasury confirmed at the public hearing that they will be finalised before recruitment for Board members takes place.
2.54The formalisation of the presence of the Secretary of the Treasury on the Monetary Policy Board was also explored in evidence before the committee. Mr Yeaman of Treasury said the reason for this is the ability of the Secretary to bring Treasury-level analysis of the Australian economy to Monetary Policy Board meetings.
2.55There was also a discussion of the transition from the current Reserve Bank Board members to the Monetary Policy Board membership. Ms Catherine Parr, General Counsel of the RBA, confirmed that the transitional arrangements will allow current RB Board members to serve out their current term on the new board. There is also a two year extension period in the new regime to allow for continuity and a smooth transition for the new board.
2.56Ms Parr explained further that these provisions had been included to ensure there was some overlap between memberships, rather than there being a completely new board every five years.
2.57Mr Yeaman of Treasury confirmed that the views of existing members of the RB Board will be sought in order to determine their preferences for which of the two new boards they would prefer to serve on, noting that there are some additional responsibilities for board members in the new provisions. He also affirmed that while the Treasurer and the Governor have both stated that continuity of the RB Board to the new boards was important, ultimately decisions around the board appointment process is a matter for the Treasurer.
Committee view
2.58The committee would again like to thank all submitters and witnesses who gave evidence before the committee and notes the work of stakeholders to provide feedback on such important matters.
2.59The committee notes that the RBA Review is the first comprehensive review of the RBA’s operations and role in over 30 years and that the bill reflects the important legislative changes that have arisen out of the review.
2.60The committee would also like to commend the RBA Panel for completing such a wide-ranging review into the RBA and the government for committing to implementing the recommendations of the review. This was a process that will ensure that the RBA remains a fit for purpose and high performing independent central bank.
2.61The committee was pleased to see the positive feedback from submitters about the review and the bill itself, and notes in particular the support for the changes to the RBA’s overarching objectives and the goals of the new boards of the RBA. This is an important change which clarifies the goals of the RBA and its valuable role in formulating monetary policy for the Australian economy.
2.62The committee notes the evidence provided by witnesses about the creation of new boards of the RBA. Although there were some questions about the necessity of the split of the RB Board into the Monetary Policy Board and the Governance Board, the committee is of the view that this is an important change which will continue the high performance of the Reserve Bank.
2.63The committee also welcomes evidence that the provisions in the bill clearly delineate the objectives and responsibilities of the new boards, and that the bill specifies that decisions of the Monetary Policy Board have precedence.
2.64The committee is encouraged by the calls from submitters to ensure that the membership of the new boards, in particular the Monetary Policy Board, be made up of members who have a diversity of backgrounds, perspectives and experiences, which was a key finding of the RBA Review.
2.65The committee is encouraged by the provisions of the bill which impose new expression of interest and skills matrices processes in the appointment of new board members which will support an appropriate mix of skills and experiences on the boards.
2.66The committee notes commitments to transition existing board members across to the two new boards in consultation with board members, and evidence from Treasury that transition provisions in the bill will support this. This is an appropriate recognition of the changes in commitments the new boards create and transition provisions in the bill will support this.
2.67The committee is cognisant of the views put forward by submitters and witnesses at the public hearing about the removal of s11 of the RB Act.
2.68Submitters and witnesses at the public hearing valued and supported the ongoing independence of the central bank and acknowledged that the executive government override powers have never been used.
2.69Some submitters were concerned that removing the executive’s override powers could remove an important and effective structural check on RBA monetary decisions and endorsed the executive government continuing to hold such powers.
2.70The RBA Reviewers and Treasury, however, provided assurance that removing s11 would reinforce the independence of the RBA, align with the legislative settings of central banks of comparable jurisdictions, and give important pre-eminence to the Parliament in providing the check on RBA monetary decisions.
2.71The committee recommends that the bill be passed.
Senator Jess Walsh
Chair
Labor Senator for Victoria