Confusion over fiscal policy game

WHEN Reserve Bank governor Ian Macfarlane accused Peter Costello of playing a word-game on tax cuts, he made a small mistake. Mr Macfarlane probably meant to take a dig at John Howard, not the Treasurer.

"I see that even now my words are being used by the Treasurer to say, 'But I was urged to do it (cut tax) by the governor of the Reserve Bank'," Mr Macfarlane said last month. "It is a very funny game we play on fiscal policy, and it is a game."

On Wednesday, Mr Costello rejected Mr Macfarlane's critique. "I have never used his remarks to say I was urged to do anything."

A search of the public record shows it was the Prime Minister, not Mr Costello, who cited Mr Macfarlane as a tax cuts referee.

Let's rewind to February 17, when Mr Macfarlane made his second-last appearance before the parliamentary economics committee. Asked by Labor MP Craig Emerson if Australia "could afford tax reform", Mr Macfarlane answered: "It is a question of how much. Yes, clearly we can afford some changes to taxes or to expenditure or some mix of the two. It is simply a matter of what is the right amount."

Yesterday, The Australian Financial Review reported that Mr Macfarlane had met Treasury secretary Ken Henry before that February 17 committee hearing to discuss the clamour for tax cuts.

"I sat down with Ken beforehand. I said, you know, this is crazy," Mr Macfarlane was quoted as saying. "All these people who desire huge tax cuts."

What then irked Mr Macfarlane was that his comments were read as an endorsement. "I was trying to pour a bit of cold water on the idea of having really big tax cuts and a big fiscal expansion," he told the committee at his farewell appearance last month.

"But I could not say, 'You can't do anything', because I knew taxes were coming in so strongly there was room to give some of them back.

"Unfortunately my answer was completely misinterpreted. It was interpreted as saying, 'You should go out there and have ... really big tax cuts'."

The only person he named at that point was Mr Costello. It was only in a subsequent interview with The Australian Financial Review that he added The Australian to his hit list.

A search of the public records revealed, however, that The Australian reported Mr Macfarlane's February 17 comment no differently to The Financial Review.

The Australian said: "Peter Costello's argument that Australia cannot afford tax cuts has been demolished, with the guardian of the nation's interest rates declaring the Treasurer can afford to spend some of the large budget surplus."

The Financial Review made the same point: "Treasurer Peter Costello could afford to deliver both tax cuts and further government spending in the May budget without triggering an interest rate rise ... (Mr Macfarlane's) view apparently conflicts with Mr Costello, who told The Australian Financial Review last week the Government could not afford to risk higher interest rates by fuelling the economy with big spending measures and tax cuts in the May 9 budget."

Two days later, on February 20, Mr Howard chimed in with his take on Mr Macfarlane's advice: "Well, I thought what the governor of the Reserve Bank said is exactly the same as what Mr Costello has said, and that is that if there is a capacity for some tax relief ... it's a question of what the balance and the mix is."