Treasurer Wayne Swan ignored advice from the Reserve Bank board when he decided the bank would pay a $500 million dividend to the government in the same year Labor pledged to deliver a wafer-thin budget surplus, documents show.
Letters released on Thursday under freedom of information laws show Reserve Bank governor Glenn Stevens told Mr Swan the bank's board had wanted to put all of its $1.1 billion in 2011-12 earnings into a fund to rebuild its capital reserves. Even if all the profits were put into the fund, Mr Stevens said the bank's permanent capital would still be "significantly below a level appropriate for the risks held on the bank's balance sheet in the medium term".
"The board seeks your approval to transfer all of the bank's distributable earnings in 2011-12 to the Reserve Bank Reserve Fund," Mr Stevens wrote to Mr Swan in July last year. "This would be consistent with your earlier agreement to this approach to begin the process of restoring the balance of this reserve, which has been largely depleted by the losses of the previous two years."
Despite this advice, Mr Swan asked the bank to pay the government a $500 million dividend, which was paid to the Commonwealth in September. The remaining $596 million in profits was put into the bank's reserve fund, which acts as a buffer against financial shocks.
In a letter to Mr Stevens in August, Mr Swan said: "The government believes it is appropriate that taxpayers receive a dividend from the Reserve Bank, where circumstances permit. I am writing to inform you of my decision, as we have discussed, to have a sum of $500 million made available to the Commonwealth as a dividend, to be paid in the 2012-13 financial year."
The decision to extract a $500 million dividend from the Reserve was made before Mr Swan had conceded his pledge to deliver a budget surplus in 2012-13 was in deep trouble.
Shadow treasurer Joe Hockey seized on the correspondence as proof the government was trying to use the dividend to meet its political pledge on the surplus.
"In raiding one of Australia's most important and trusted institutions, Wayne Swan has compromised both the integrity and the functioning of the Reserve Bank," Mr Hockey said.
Mr Stevens told a parliamentary committee in February he would have preferred all the profits had stayed in the bank, but it was Mr Swan's decision to make.
A spokeswoman for Mr Swan defended his decision and said the government was not planning to take a divided this year.
"We ensured the RBA retained more than half the earnings the RBA had available for distribution in that year," she said.
The Coalition says it will tip fresh capital into the bank's reserve fund in government, but Mr Swan said Treasury had advised such a move would risk politicising the central bank.
The Reserve's buffer fund is a pool of capital used to protect the bank against market shocks, such as plunges in the value of the financial assets it holds.
Even if all of the bank's earnings had been paid into the buffer fund, Mr Stevens said this would have only taken the fund's balance to $2.4 billion - well shy of the $6.9 billion it reached in 2009.
The central bank makes its money from interest earned on assets and valuation changes - but the high currency and record low government bond yields have dented profits in recent years.