I have always been skeptical of allowing Government institutions to be excessively independent. In a democracy, the Parliament should be supreme. Too much independence can lead to organisations becoming fiefdoms with the management of those organisations acting in their own interests rather than in the public interest. We saw a little of that last night when Ken Henry said that Prime Ministers shouldn’t sack Treasury Secretaries.
But the Reserve Bank is probably the most egregious example. While there is a good literature arguing for independent monetary policy, this does not mean that the organisation should be unaccountable.
Unlike the High Court, the RBA is not on budget. It is not subject to normal budgetary discipline and simply remits to the Government a dividend after its costs are subtracted from the revenue (such as seigniorage revenue). It has been given the monopoly right to print Australian currency and effectively is able to use that right to cost pad. I don’t think the Australian taxpayer is getting good value for money from the RBA.
In 2002 the RBA decided unilaterally to increase the indexation of the Reserve Bank Officers’ Superannuation Fund from CPI to Male Total Average Weekly Earnings (MTAWE). This gave an immediate and ongoing benefit to RBA employees, including the many who had already retired.
This was a decision of the RBA – the Government was not consulted nor was there a debate about the merits of the change. It simply happened.
The principal job of the Reserve Bank is to keep inflation low and stable. Its target is set by an agreement between the Governor and the Treasurer
The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.
The Reserve Bank consistently uses the CPI as the principal measure of inflation (it even has an inflation calculator on its website.)
So if any organisation understands inflation, and the measurement of inflation using the CPI, it is the RBA.
Therefore the RBA deliberately and in full knowledge decided to increase the real income of both extant employees and retired employees by increasing the indexation of the RBA superannuation fund to MTAWE.
This decision created an immediate and ongoing cost to the taxpayer, as illustrated in the chart below where I have indexed CPI and MTAWE to 100 from the time when the RBA took the decision to change the indexation of its superannuation scheme. An RBA officer who retired with $100,000 of superannuation salary in 2002 would now have $160,000 per annum due to that decision rather than $133,000 – and the gap continues to widen.
(I will post separately about indexation in general – an interesting topic in its own right.)
Unlike most statutory offices, the remuneration of the Governor and Deputy Governor is set by the Reserve Bank Board (under section 24A of the Reserve Bank Act 1959) rather than the Remuneration Tribunal.
The Reserve Bank should be put on Budget, just like the High Court of Australia. Monetary policy will still be independently determined, but at least the operating expenses of the Reserve Bank would be subject to normal budgetary control. The RBA Act should also be changed so that the packages for the Governor and Deputy Governor are set by the Remuneration Tribunal in line with other statutory offices.