Former Reserve Bank governor Ian Macfarlane, whose term (1996-2006) corresponded perfectly with the reign of the Howard government, signed an agreement with then-treasurer Peter Costello mandating the Reserve Bank with over-riding responsibility for ensuring low inflation.

They did not try to change the relevant act which does not mention inflation, although it does refer to stability of the currency as well as the pursuit of full employment.

The government held this up to be a hallmark of financial discipline, whereas in fact it was a flagrant act of buck-passing which has now become a ‘hospital handpass’ for the Reserve Bank.

The fact is that until that time the federal government was unequivocally held responsible for striking the balance between inflation and unemployment, primarily through use of fiscal tools such as tax and spending policies, while the Reserve Bank had interest rate and other monetary policy levers at its disposal to independently pursue the objects of its act.

In these circumstances it is a bit rich for media, business or politicians to effectively put the Reserve Bank governor on public trial when clearly the major factors affecting firstly the dramatic economic slowdown, and now a burst of inflation, were the direct product of external factors (pandemic, war, trade bans) and massive government spending packages in response.

Dr Lowe’s earlier forecast of keeping interest rates down was undoubtedly unwise in retrospect, but was made at a time of widespread concern about potential economic collapse rather than any inflation worries.

More to the point

My criticism goes more to the point that he may induce recession rather than step outside his brief to explain the true nature of the problem we face.

In March 2019, Australian government gross debt was $534 billion.

By October 2022, it had grown to $895 billion.

Government debt is forecast to be 63 per cent of GDP in 2026. This compares to 10 per cent before the Global Financial Crisis of 2008.

The 50-year average for government spending as a proportion of GDP is 24.5 per cent. In 2021 it was 31.6 per cent.

Dr Lowe has pointed out that housing rent rises are a significant component of inflation – the result of years of inadequate supply of new housing combined with a resumption of immigration post-pandemic.

Despite the usual moaning from the lowest common denominator segments of the business community and media, minimum wage adjustments do not affect a sufficient proportion of the workforce to drive inflation.

The economic and social pain of poor housing affordability, again largely the product of successive government actions (and inaction in the case of social housing) makes much of the criticism of Dr Lowe look even more disingenuous.

If interest rate policy alone is obliged to bring inflation down to the 2 per cent range then the RBA has no option but to inflict pain on debtors and deter new corporate investment.

But it is difficult to see how productivity can improve in line with the Reserve’s expressed hopes if new business investment is deterred.

Alternative actions

In all of these circumstances I think a little bit of inflation combined with progressive tax scales, which will eventually dampen demand, may be preferable to the alternative of crushing mortgaged households and potentially throwing people out of work.

If Australia is to maintain and enhance its place in an increasingly interconnected global economy we clearly need to move on from the incessant blame shifting and blindly adversarial politics and bring about rationally co-ordinated co-operation between fiscal, monetary and direct government actions rather than constantly tugging in opposing directions.

If that cannot be achieved by goodwill and common sense, then perhaps we need a completely new body with a high degree of independence to administer both monetary and fiscal policy or at least to have a strong advisory voice, leaving the Parliament to set the broad parameters and objectives in much the same way that corporate boards set the business plans of companies.

Garry Weaven is founder and former chair of IFM Investors. He is currently senior advisor at Tanarra Capital