The Reserve Bank is paying a $500 million dividend to the government this year after paying nothing last year. At face value, the $500 million is a decent contribution towards the government's efforts to lock in a surplus for 2012-13, but the truth is that the dividend is peanuts compared to the payments the RBA used to pay to the government. It is yet another unfortunate revenue shortfall that the Gillard government has to confront as it works hard to move the budget towards surplus.
At a time when tax revenue is vulnerable to the downside as the terms of trade fall away, the government would have been delighted to have the bank paying a lot more. But it was not to be.
This year’s Reserve Bank $500 million dividend is about 0.14 per cent of the budget-time estimate of total revenue for 2012-13. After nothing last year and a payment that was 0.25 per cent of revenue in 2010-11, the average RBA dividend over the past three years has averaged just 0.13 per cent of total government revenue.
When Peter Costello was Treasurer in the Howard government, the average annual RBA dividend to the government coffers was 0.97 per cent of total government revenue. In 2012-13 dollar terms, that equates to a dividend of around $3.6 billion, more than seven times the dividend being paid this year. In 1998-99 and 1999-2000, the RBA dividend was 1.8 per cent of total revenue which in 2012-13 dollars is a stonking $6.7 billion.
The RBA notes that the reasons for the current run of very low dividends are the current phase of extremely low interest rates and the sustained strength of the Australian dollar.
In its annual report, where the $500 million dividend payment was announced, the RBA said "an appreciation of the Australian dollar exchange rate or a rise in interest rates reduces the value of the Bank’s securities, resulting in valuation losses. Conversely, a depreciation of the Australian dollar or a decline in market yields has the opposite effect and results in valuation gains.”
Clearly, as far as dividends are concerns, the mix is perfectly in favour of low dividends.
Alas for the government now, as it deals with possible budget pressures, it doesn’t have the dumb luck of Costello and the Howard government, who year after year collected substantial RBA dividend payments. Indeed, the RBA noted that "underlying earnings [of the RBA] are at their lowest level since before the float of the Australian dollar, reflecting the extremely low level of interest rates around the world”.
With QE at play in the US, eurozone and Japan, it is likely that interest rates will stay extremely low for some. The government, therefore, is unlikely to get more than a few bread crumb dividends from the RBA in the next few years. The only chance of a dividend being paid in the years ahead would be linked to a falling Australian dollar.
Right now, the government is framing the Mid Year Economic and Fiscal Outlook, which is due for release around late November. It is looking for some substantial savings or adjustments to tax breaks to cover the extra cost of reforms including for education, dental care, the national disability insurance scheme, offshore processing and changes to the carbon pricing arrangements.
Together, these will have a significant impact on the budget bottom line, meaning that the government will need to work hard to find savings to lock in the surplus.
Compounding the challenge for the government will be any deviation in the budget outlook from economic parameter changes.
It is now clear that the terms of trade will be weaker than forecast at budget time which will eat away and national income via slower growth in company profits. That downside is likely to partly offset by lower public debt interest costs, and perhaps a marginally stronger labour market. Indeed, it is unlikely that the general economic view is all that different to the one framed by Treasury in May.
There seems little doubt that the MYEFO will continue to forecast a budget surplus for 2012-13 and beyond and the government’s promises will be funding via a rescheduling of spending – that is, cuts.
This will be good news as will help lock in the triple-A credit rating and will leave the RBA plenty of room to cut interest rates in the months ahead. Perversely, with interest rates low and the triple-A credit rating maintaining support for the Australian dollar, the hope for larger RBA dividends in the years ahead is low.