Former Reserve Bank of Australia (RBA) governor Bernie Fraser believes an independent authority should administer fiscal policy just as monetary policy is managed by the central bank.
Fraser said fiscal policy was increasingly captive to "an ideology that is based on a fetish for budget surpluses" and was no longer being made with a national objective in mind.
He made the comments at a recent ACTU Investment Forum in Sydney - a forum that brought together representatives of industry superannuation funds.
The former RBA chief himself was once a trustee of industry fund AustralianSuper
"What can one do about the perversion of fiscal policy apart from venting frustration at a conference like this?" he said.
Fraser re-entered the national debate a few months ago, when he criticised the government's commitment to a budget surplus.
He said he thought the government's approach to tightening fiscal policy in order to return the budget to surplus was at odds with the RBA's decision to reduce interest rates.
The policy stance was irrational given patchy economic growth and worked against the central bank's approach to stimulate the economy via interest rate cuts, he said.
At the forum, Fraser proposed a model that was similar to the way the RBA administered monetary policy.
He said monetary policy was successful in Australia because of its independence and flexibility.
Just as the RBA was responsible for setting and administering monetary policy, he said he now believed an independent authority should also administer fiscal policy.
He said monetary policy could not be managed in isolation to other policies, otherwise you were "fighting challenges with one arm tied behind your back."
"Today we have a situation where fiscal policy is pulling against monetary policy. Given that the current economic challenges are so complex, you expect major policy instruments to pull in the same direction," he said.
An independent authority would ensure fiscal policy complemented the objectives of monetary policy.
Fraser said a statutory body based on the RBA would at least be responsible for the major spending revenue strands of the budget.
The idea of a fiscal policy-styled authority was flagged by the Business Council of Australia a few years ago. It has also been picked up by academics.
Fraser was originally against the idea.
"It seemed to me that fiscal policy wasn't like monetary policy. Fiscal policy is very important in the distribution [of wealth]. At the time, I thought the appropriate place to make these decisions was by the elected government of the day," he said.
He said his views had changed over the years "partly because of the failure of governments to use fiscal policy for desired distribution changes. This failure in itself is because of the ideologically-based fetish for budget surpluses".
"The very fact that the Labor government's conviction for a surplus has been driven by political reasons only strengthens the argument for a more independent fiscal policy," he said.
Fraser also took aim at the Howard government for implementing big income tax cuts in an economy of full employment. This meant the RBA had to raise interest rates.
He also noted the recent competition between the two major political parties and their bid to outdo each other when it came to budget surpluses.
"In the budget speech the Treasurer proudly announced that the surplus years are here. Not be outdone, the shadow treasurer said the coalition's surplus would be even bigger than Labor's," he said.
"The Treasurer will one day find it hard to get the surplus monkey off his back, while the shadow treasurer is looking for an even bigger surplus monkey, perhaps even a gorilla."
Fraser has spent all his working life in the civil service. He was Treasury secretary before moving to the RBA in 1989.
He said he had always believed the "ultimate goal of economic policy should be about improving the lives of people" and policy settings should "contribute to a more confident, fairer and more compassionate society".
"Wisely designed and properly implemented, monetary policy and fiscal policy can contribute to a fair society," he said.
"There needs to be more public debate about policies that focus on the stability and growth of an economy. An RBA-type model might just be needed to manage fiscal policy."
