Joe Hockey and the Reserve Bank: no such thing as a free $8.8 billion

by | Jan 9, 2018 | Finance & Tax, Government

Remember that $8.8 billion which former treasurer Joe Hockey gifted the Reserve Bank, that $8.8 which the Reserve Bank neither needed nor asked for?

It has paid handsome dividends. A quick run though the RBA financial statements shows the dividends back to government have been rising sharply and there appear to be some other lucky beneficiaries, investment banks which are now picking up trading fees.

You will find the $8.8 billion recorded as a grant in the 2014 financial statements. Before that – in 2012 and 2013 when Labor was in office – there were no “fees received for banking services”. In the ensuing years however, “fees for banking services rose from $67 million in 2014 to $76 million in 2015, thence $81 million in 2016 and $89 million in 2017.

As for government dividends, there was no distribution to the Commonwealth in the year the Hockey gift was recorded (Labor had pulled out $500 million in 2013 as an apparent one-off, and a one-off which was met with a lot of noise from the Opposition at the time). In 2015 however, the Commonwealth distribution was $618 million. It jumped sharply to $2.5 billion the following year and rose again to $3.2 billion last year.

So, since the $8.8 billion RBA oblation was conferred, the Commonwealth has received $6.3 billion in return and investment banks have raked in $326 million in trading fees.

Two things about the $8.8 billion gratuity: one, it seems to have been a successful political ploy and, two, it was a successful gamble on a fall in the Australian dollar.

Joe Hockey announced the deal after the LNP came to power in 2013. It had the effect of blowing out the deficit, a first-year in office deficit which which the government was vigorously blaming on Labor (Australia’s gross debt has doubled since then to $520 billion).

The government could of course, pull dividends out any year it wished, in order to tart up its finances, which brings us to the second point.

The Reserve Bank is the perfect punting machine. It has no profit mandate but can wade in and sell the $A when it is too high, thereby relieving pressure on exporters and delivering a filip to the economy. Conversely, it can soak up the $A when it falls too low, into the US50c range and sell again when the currency has rallied.

Arguably, thanks to its market power, it should be making surpluses for government. When the LNP came to office in 2013, the $A was too high. As Fairfax commentator Michael Pascoe put it at the time, Hockey was punting on a fall in the $A.

“There also was the $8.8 billion gift to the Reserve Bank – something the bank didn’t ask for and Treasury didn’t advise, wrote Pascoe. “It went down in the books as a cost for the “Labor” 2013-14 budget, blowing out the deficit and debt a bit more. It was a foreign exchange bet on the Aussie falling. The central bank would benefit from the appreciation in the value of its large foreign currency reserves.

“It was a good bet – paying off handsomely for subsequent budgets with rich RBA dividends as its foreign exchange reserves are revalued,” said Pascoe. “Dressing up that forex bet as a necessary expense to protect the RBA was pure spin.”

As deputy governor of the RBA, Philip Lowe, drily remarked to a Melbourne conference at the time: “The lack of capital had not been keeping me up at night.”

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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