Paul Keating accuses Reserve Bank of not doing enough for Australia's economy in Covid recession

Paul Keating has slammed the Reserve Bank for “indolence”, accusing it of failing to do enough to support employment in Australia and calling on it to provide “mountainous sums” of money needed to finance government economic stimulus.

The former prime minister, who was in government during Australia’s last recession in the early 1990s, suggested the RBA could break with economic orthodoxy by directly buying government bonds from Treasury to fund spending needed to dig the country out of the current coronavirus-induced recession.

Directly financing government spending in this way has been ruled out by the RBA governor, Philip Lowe, who said in July it was “not an option under consideration in Australia”.

Keating mocked the RBA’s refusal to countenance the idea, saying RBA staff were too concerned about what other central bankers would say about them at an annual meeting in Switzerland.

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He said the bank’s governing legislation gave it two objectives, price stability and full employment, and the first had been achieved because “one would need a microscope to find any serious impetus to inflation”.

Inflation has been in decline since the global financial crisis in 2008. As a result of the economic shock caused by the pandemic, Australia is currently experiencing falling prices, or deflation, of 0.3%.

“In other words, the bank should be explicitly supporting the government so the country does not experience a massive fall in employment – impacting particularly on younger workers – those who have already been obliged to wipe out their superannuation savings to support themselves,” Keating said.

He attacked the RBA deputy governor Guy Debelle, saying he “strolled out with debating points about what further RBA action might be contemplated” when giving a speech to employer body AI Group on Tuesday.

Keating said the RBA should be “funding a level of government outlays by buying appropriate levels of government debt and locking it away on its balance sheet, thereby making the government’s funding task much easier and support for the country better”.

Instead, “the deputy governor conducts a guessing competition on what incremental step the bank might take to help”, he said.

“It has to be remembered, these are the high priests of the incremental. Making absolutely certain that not a bank toe will be put across the line of central bank orthodoxy.”

He said the RBA had shown some “unlikely form” by pursuing a low target of 0.25% for government bonds and by setting up a low-interest facility to help banks fund businesses, but was now reverting to its usual way of thinking.

“As history has shown, when a real crisis is upon us the RBA is invariably late to the party,” he said. “And so it is again.”

He said the RBA crushed inflation by jacking up interest rates in the mid-1990s, when he was prime minister, “at great political cost to me”.

With that goal achieved, the RBA’s “job is to help the government meet the task of full employment”, he said.

“So, the Reserve Bank might do as it was set up to do – help the government. Be a utility. Shoulder the load. And in a super-low inflationary world, that load is funding fiscal policy. Mountainous sums of it.

“In an economic emergency of the current dimension that means putting the orthodoxy into perspective and doing what is sensibly required.”

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He said the RBA had become “a sort of deity, where lesser mortals might inquire, however respectfully, what the exalted priests might be thinking or have in mind for their prosperity or the country at large”.

The only difference between RBA staff and the priesthood was that the “governor and his deputies do not wear clerical collars and black suits”, he said.

“The ‘Reverse Bank’ has to quickly rediscover the gear stick and make the shift back to forward,” he said.

Keating has become increasingly active in recent months, especially on the future of the superannuation system, which he was instrumental in setting up.

Last week, he slammed Lowe for arguing that increasing employer contributions to super would cut wages growth, saying the RBA governor failed to understand there had been no wages growth since 2012.

He has also described a group of government backbenchers who have been agitating against the increase, which is currently the law, as “little bitchy Liberals” intent on undermining the entire super system.