The role of the Reserve Bank in helping frame a debate about the economy — beyond what it can do itself — is a crucial one, particularly if the political debate is stuck in a very narrow set of cliches like 'debt and deficit', writes Laura Tingle.
An incident from over 30 years ago highlights this. The world was a very different place in 1990, however, just like the present, interest rates were at eye-bleedingly high levels, yet other indicators of the economy continued to show strength — which policymakers couldn't quite understand.
This was a natural flow-on from the sudden focus on the value of our dollar, and our trade relationship with the rest of the world, which had arisen after the currency was floated in 1983. But getting the balance of payments under control — lest we become a "banana republic" because of our high borrowing, high debt ways — was the only game in town. It was at the centre of then treasurer Paul Keating's absolute grip on the political and economic debates.Government spending was cut savagely with the aim of stopping the budget deficit adding to the national demand for debt.
The treasurer argued that: "… unfortunately what has now begun to become interwoven with the erroneous notion that the current account does not matter is that monetary policy is not an effective weapon for correcting the balance of payments."
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