Swan's snagged in a Reserve Bank beat-up

An indifferent market reaction and a look at the long-term political context reveal the Reserve Bank's 2011-12 government dividend payment is hardly problematic.

Some of the more startled members of the commentariat are suggesting that the Reserve Bank of Australia’s $500 million dividend payment to the federal government during 2011-12 threatens its credibility and, theoretically, its solvency.

Seriously, this was written in the weekend papers!

Some go as far as to assert, of course without any substantiation or logic, that Treasurer Wayne Swan’s insistence that the Reserve Bank pay the government what is a trifling dividend payment could undermine public confidence in the bank and its decision making capabilities.

What? Are these people serious? Do they mean monetary policy will no longer work because the Reserve Bank made a one-off $500 million payment to the government that it would have preferred not to make? Or do they mean the payments system will somehow falter, meaning EFTPOS payments, credit cards and ATMs will no longer function? Or do they mean the Reserve Bank will become insolvent and bring the whole banking system and corporate Australia to an end?

Talk about making a mountain out of a molehill, or worse – pig ignorance and deliberate mischief.

Don’t take my word for how ridiculous these claims are. Have a look at the reaction of financial markets when the bank's governor Glenn Stevens made the comments last Friday to the House of Representatives Economics Committee in Canberra that "my preference would be to keep all of it [the Reserve Bank profit] … but it is the Treasurer’s prerogative to decide”.

As these comments cascaded into dealing rooms around the world, the Australian dollar did, well, nothing other than holding on to earlier gains. Stock prices were unchanged, building on a rebound from a strong positive lead from offshore the previous night. Furthermore, bond yields were all but unchanged, rounding out a trifecta of market reaction that highlights the absurdity of the misunderstanding that was passed off as news or comment. You can rest assured that if there was a genuine problem with the solvency or credibility to the Reserve Bank for any reason, let alone from the government insisting it pay a $500 million dividend, the market would have reacted savagely.

In September last year, I wrote about the bank's $500 million dividend payment here. It was written before the final budget outcome for 2011-12 was known and it assumed the Reserve Bank dividend would hit the government accounts in 2012-13. This was not correct, as the accounting practices dictated that the revenue feed into the 2011-12 budget. Aside from that, the end point is not all that different. This important fact was also overlooked from the excitable ones who suggested the payment was designed to shore up the budget surplus, even though the budget balance for 2011-12 was an underlying cash deficit of $43.7 billion. As was clear when the government released the final budget outcome in late September 2012, "a $500 million dividend [from the Reserve Bank] has been recognised in 2011-12 instead of 2012-13, based on advice from the Australian National Audit Office”.

How about some background checking from the conspiracy theorists and mischief makers?

For 2011-12, the $500 million dividend amounted to 0.15 per cent of total federal government revenue and followed zero payment in 2010-11 and a payment of 0.25 per cent of total revenue in 2009-10. This means that the average Reserve Bank dividend to the government over the last three years has been a tiny 0.13 per cent of total revenue. Helpful for sure, but not big bikkies.

The dividend from the bank was not always so trivial. It was former RBA Governor Ian Macfarlane, who was closely associated with the Howard government, who made a habit of paying what were quite massive dividends every year.

Indeed, the average Reserve Bank dividend paid during the Howard government years was 1 per cent of total government revenue, some eight times the average dividend of the last three years. In 2012-13 dollar terms, that would be a payment of $3.67 billion to the government and more than $16 billion over the four years of the forward estimates. In two years during the Howard government, the Reserve Bank dividend was a thumping 1.8 per cent of total revenue or $6.6 billion in today’s dollar terms.

Treasurer Swan can only dream of such fiscal favours from the bank. Instead he has to put up will what is frankly scandalous commentary concerning a payment that is frankly small change.

Macfarlane’s degree of independence from the government of the day is also notable in the fact that under his watch, and after Prime Minister Howard campaigned strong on interest rates during the 2004 election campaign, inappropriately easy monetary policy saw underlying inflation explode to a peak of 5 per cent and was at or above 3 per cent, the top end of the Reserve Bank target range, for all but two quarters of the period from June 2006 to March 2010.

While it is possible to quibble with monthly interest rate decisions under Glenn Stevens, the end point is that there is clearly no fear or favour in how he runs the bank. To be sure, he may now wish to boost its reserve fund balance, but as markets are recovering, as they are now, it should be relatively easy to do. At the same time, chipping in a few dollars to the budget bottom line is neither here nor there in the scheme of rebuilding those reserves.

Oh for some decent debate on economics, central banking and public policy in Australia! The debate is poorly served by beat-ups, ignorance and make-believe fantasies that hold no place anywhere, let alone in the columns of financial newspapers.