Swan scooped up RBA’s $500m to shore up budget

TREASURER Wayne Swan defied objections from the Reserve Bank governor and siphoned half the central bank’s profits into the Budget bottom line to fulfil his political commitment to achieve a surplus.
Nanjing Night Net

The Reserve Bank governor, Glenn Stevens, told a parliamentary inquiry that he wrote to Mr Swan, asking him to direct all of the bank’s $1 billion 2011-12 profit to its critically short reserve fund, needed to absorb changes in the value of the bank’s foreign currency holdings. Normally worth around $6 billion, the fund had dwindled to $2 billion.

”It’s a key part of our capital. It has been depleted considerably by the effects of the rising exchange rate,” Mr Stevens told the inquiry. ”I believe the prudent course is to rebuild it as quickly as we can but I am not subject to the other pressures that the government is.”

Mr Swan denied the request, and insisted on taking half the profit as a dividend to help achieve his promise of a budget surplus this financial year.

That promise has since been dumped, leading to the opposition mounting a sustained attack on the government’s fiscal credibility.

”In the end it was his prerogative,” Mr Stevens said. ”He made a judgment, and I had to accept that judgment.”

The federal government has come under fire for its management of the budget amid revelations the mining tax has so far raised only a fraction of the predicted $2 billion in revenue this year.

As revealed by Fairfax Media, the government was also warned by the Industry Department and the Tax Office that its $1 billion predicted saving from slashing the research and development concession for large corporations was also dubious.

Even so, the governor backed Mr Swan’s decision to walk away from the commitment on the budget surplus, saying if the Treasurer had persisted he could have damaged the economy.

”I think the surplus was always going to be hard to achieve this year,” he said.

”You could imagine a world where the intention to achieve a surplus led to further cuts in spending and increases in taxes in the next few months. That would have hurt the economy. There would have been nothing we could do with interest rates to offset that in the short term.

”We would have ended up with a weaker economy.”

Mr Stevens doubted that the Prime Minister’s decision to call the election early had done any economic damage, saying such claims were rarely backed by evidence. If needed, he would move interest rates during the campaign without regard for the consequences, as in 2007.

Mr Stevens told the inquiry the next move in interest rates was far more likely to be down than up, but said he wasn’t in a hurry. ”There is a good deal of interest rate stimulus in the pipeline. It is having an effect. Housing prices have been rising since last May. Share prices have also risen quite significantly, and if anything by a little more than in comparable markets overseas.”

This story Administrator ready to work first appeared on Nanjing Night Net.

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