Section 11 keeps the Reserve Bank’s economic wizardry in check

Article published 27 February 2024

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A recent review of the Reserve Bank has recommended removing the Australian Government’s veto power over the RBA. But what is Section 11 and why should we keep it?

The Reserve Bank of Australia (RBA) is Australia’s central bank. It is responsible for issuing currency, bankrolling the Government, and setting interest rates to control inflation (what’s known as ‘monetary policy’).

In 1945, Labor Prime Minister Ben Chifley gave the Government the power to overrule the central bank (what we now know as the RBA) if there was a major disagreement between the Government and the bank over its policy. In 1959, Liberal Prime Minister Robert Menzies retained that veto power when his government formed the RBA as we know it today.

In its current form, known as Section 11 of the Reserve Bank Act 1959, the legislation allows the Treasurer to order the RBA to adopt a specific policy (after jumping through several hurdles).

Since then, Government oversight of the RBA has remained a bipartisan consensus. No Government of either party has used the veto power, but nor have they gotten rid of it.

But the Treasurer Jim Chalmers is thinking about removing the Government’s power to overrule the RBA after a review from last year recommended the power be axed.

Why does the Treasurer want less power?

The review of the RBA made its recommendation on the basis that “monetary policy decision making must be insulated from short-run political considerations”. This reflects a particularly stubborn ideology among politicians and economists: that certain economic decisions are far too complex to be trusted to us lay-folk and our political whims. Instead, we should leave the arcane practice of economics to the economics wizards.

For the Treasurer, the reason for giving away his authority seems to be about ‘reinforcing the RBA’s independence’: a priority that exists in many other countries. Of course, it’s also possible that giving the RBA total independence will distance the Government from the Bank’s unpopular decisions.

In the past few weeks though, numerous public figures including former heads of the RBA and former treasurers have argued that Section 11 should stay. Both the Greens and the Coalition are poised to oppose the Treasurer’s plan, which would prevent it from getting through the Senate and being legislated.

Even the current RBA Governor isn’t pushing for the change. When asked about the review’s recommendation during a senate hearing earlier this month, RBA Governor Michele Bullock said that she was “reasonably agnostic about it”.

Why shouldn’t we get rid of Section 11?

Ms Bullock’s rationale for her position was that Section 11 has never been used. In other words, if it ain’t broke, don’t fix it. But there are more compelling reasons for why we shouldn’t scrap the Government’s veto power.

First, the RBA doesn’t always get it right. As far back as 2022, some economists were saying that the Reserve Bank’s plan to raise interest rates would do little to control inflation, and would cause a great deal of pain to households. If the Government had used its Section 11 powers (as some Senators called for), they might have granted some relief to households without meaningfully impacting inflation.

Second, there’s precedent for needing to overrule the bank. In the 1930s during the Great Depression, the Government of the day tried to use public works to employ people who had lost their jobs. But the central bank of the day would not issue the money to finance these projects, and the impact of the Depression was more severe as a result.

Third, there’s no other area of public policy that is ‘protected’ from democracy. It may be true that the majority of us are not experts in monetary policy, but nor are most people policy experts in housing, healthcare, transport or foreign affairs.

These areas are subject to our collective democratic will nonetheless, because it is the responsibility of politicians to seek expert advice, propose and justify certain policies, and then trust us as voters to choose what we think is best.

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