Has common sense prevailed?

In case you missed it, Treasurer Jim Chalmers says he will no longer push ahead with the idea of abolishing the federal government's power to overrule a decision by the Reserve Bank Board.

He says he'll keep the power in place, and he'll now just try to restrict the circumstances in which it can be used.

"We are prepared to limit the parliament's override powers to emergency situations, to rare instances," he announced on Friday.

"That has come about in the discussions between myself and the opposition."

So, on its face, it looks like a win for everyone who's been warning the treasurer to keep that important power in place.

But there was something strange about his announcement too.

The government's power to overrule an RBA board decision has existed for decades, but it's never been used. 

Doesn't that suggest that the conditions in which it can be used are already highly restrictive and rare, since no federal treasurer has bothered to go through the tedious process of using it?

The world has seen multiple wars, recessions, oil crises, outbreaks of inflation, financial crises, and pandemics, and it's never been touched.

But now, it's like we're being asked to look at one of those "break glass in emergency" boxes, and to accept the argument that even though no-one's needed to break the glass before, it's had the potential to be broken for an emergency, so we ought to make the glass thicker.

What's that about?

What's an 'emergency circumstance'?

In a press conference on Friday, Dr Chalmers explained his thinking this way:

JOURNALIST: Treasurer, you refer to these, I think you said, rare emergency circumstances where the government may be able to override the RBA's decisions.

CHALMERS: Yeah.

JOURNALIST: Can you give us an example of what those circumstances might be?

CHALMERS: What we've seen around the world is that where these powers exist, these powers are limited. As it stands right now, the parliament can override decisions of the independent Reserve Bank. The Reserve Bank review proposed that we get rid of those powers to enhance the independence of the Reserve Bank. 

Some of the Coalition members of a parliamentary committee indicated their opposition to that change, and so what we've tried to find is a way that accommodates all of these views. And we think the best way to do that is to maintain the override power that the parliament has but to limit it to emergency circumstances and not just differences of opinion. And so we have drafted some amendments that would give effect to that.

JOURNALIST: Thank you for that, but can you give an example, I guess, of when these situations might come into play?

CHALMERS: I think you can imagine a situation where there has been some substantial structural or institutional failure, or some kind of other emergency around perhaps the personnel of the Reserve Bank and its board, or something like that, some total breakdown in the usual kind of decision-making capacity of the Reserve Bank. 

But we're very deliberately not stipulating the exact circumstances. We're trying to limit the circumstances.

You know, every time there's an interest rate decision, for example, the Greens in their usual way will say that the parliament should override the decision. That's a difference of opinion. What we want to do is to limit this override [power] to genuine emergency circumstances. 

That's the proposal we've put to the shadow treasurer. 

In fairness to him, he needs to have discussions now with his colleagues, but I'm pretty confident that all of the issues he's raised, about this issue and the other five issues, that we've accommodated in a really serious way in the proposals that we've put forward.

Dr Chalmers says he hopes his amended rules for the overrule power will pass parliament before the next election.

"I've certainly done everything I can to make it possible for this to be legislated this year and to come in, ideally, in January next year," he said on Friday.

Shadow Treasurer Angus Taylor says he's received correspondence from Dr Chalmers detailing the new plan to keep the overrule power in place.

He released a statement on Friday saying he'll now consider it.

"A Senate inquiry into the reforms … heard from former RBA governors including Ian Macfarlane and Bernie Fraser, as well as Peter Costello and Paul Keating, who raised concerns about the removal of [the overrule power]," Mr Taylor said in his statement.

"Despite long delays, it is promising to see movement, but we will take the time to ensure issues are resolved with due diligence."

It's an interesting situation to witness.

During this debate, economic historians have said the Albanese Labor government would be ignoring lessons from history if it thought central bankers had never abused their power in Australia.

Alex Millmow, president of the History of Economic Thought Society of Australia, reminded people that the overrule power was put into the legislation by a Labor government in the 1940s because the Commonwealth Bank (the predecessor to the Reserve Bank) had refused to help James Scullin's Labor government, during the 1930s Depression, to fund public works to boost employment and provide relief to farmers.

He said that obstinacy by the central bank exacerbated the Great Depression and contributed to the downfall of Mr Scullin's government.

Why would the modern Labor Party forget that history?

It's been strange watching Coalition and Greens MPs, and former RBA governors and treasurers, trying to remind Labor that it would be unwise to relinquish democratic control over a central bank.

Don't fight the power

It's also been interesting watching those same people criticise the reasoning of the three economists on the RBA Review Panel who made the controversial recommendation to abolish the overrule power in the first place.

"You'll always find economists who will say parliament should give up its power, because they're economists; they believe that they should have the power," said former Coalition treasurer Peter Costello in February.

Ian Macfarlane, former Reserve Bank governor (from 1996 to 2006), said the claim from the RBA Review Panel that the Reserve Bank's independence would be enhanced by abolishing the overrule power was wrong.

He said the existence of the overrule power actually protected the RBA's independence. 

Why? Because the overrule power requires such a politically demanding process to use that governments would only be willing to use it in "the most extreme and rare circumstances." And in the event of a serious disagreement between the RBA and government, RBA officials can still point to it and say if the government wants to meddle with an RBA decision it's free to pull the trigger and suffer the political consequences.

So, on one hand, governments can't complain that they don't have the power to overturn an RBA Board decision, but on the other hand, the mechanism is so difficult to use that no government has bothered using it.

Therefore, the fact that it's so difficult to use is the very thing that protects the RBA's independence.

Mr Macfarlane also argued that that's why we shouldn't abolish the current overrule power; because if we did, in the event of a crisis, a future government may try to implement a new overrule power that proved to be inferior, or easier to use, or had broader powers. Why risk it?

At any rate, it will be interesting to see what wording Dr Chalmers comes up with, in his draft amendment, to try to further limit the circumstances in which the overrule power can be used.

On Saturday, former RBA governor Bernie Fraser (from 1989 to 1996) told the ABC he was glad to hear Treasurer Jim Chalmers had decided to keep the overrule power in place.

"It's good that he's backed away on that one," Mr Fraser said.

"It's stood the test of time. There needs to be something there for the politicians to have a crack [at the bank] if they feel they've got a good case, and if the Reserve Bank has done something silly, which it has done in the past," he said.