Tuesday, 8 November 2016
Economics Committee; Report
I would like to make a few comments on the Reserve Bank or Australia's annual report and the committee's review of that report. I note, Mr Deputy Speaker Buchholz, you are also a member of that committee, and I believe that we do good work on that committee. I think there are a couple of things that need noting. Firstly, the RBA provided a handout of a graph, which the RBA are very good at. It was graph 6, and it showed the variable interest rates over time for small business, housing and the standard variable loan rate. If we go from the year 2001 on the graph back to what looks like 1994, there was a very small gap between the rate that the banks were loaning for small business and the rate that they were loaning for housing. That would be self-evident because my understanding of most of those loans is that they were residentially guaranteed by the small business owner. For the bank, whether the loan is for housing or for a small business, as long as it is residentially guaranteed the bank has security and there should be very little difference.
But since 2001 something very strange has been happening. We have seen that gap in the margin between small business rates and housing rates increase substantially. In fact, at the moment, the rate being charged to a small business is over 200 basis points higher than that being charged for housing loans, even though the loan is residentially secured. We put the question to the Reserve Bank: what was the cause of this? The Reserve Bank replied:
The spread between the average interest rate paid by small businesses and the cash rate has increased by more than the spread on housing rates, reflecting a repricing of credit risk.
What the banks were effectively saying was 'we did not have our pricing right before'. I am not aware of many markets in the country that would say 'we did not price our goods properly before'. Surely the price of something is the price. It reflects the supply, the demand and the competition in the marketplace. Certainly a banana farmer would not say 'my bananas were under priced before'. Maybe he would think they were but that would depend on the competition, the demand and the supply. The real question is: is this increasing amount that small business are paying funding the banks, giving more profit to the banks? Has it actually come about by an increased credit risk or has it come about simply because of the decline in the competition in lending to small business?
We saw during that period, coincidentally when the margin was tending to increase, St George Bank taken out of the marketplace. St George Bank was actively in the marketplace putting pressure on the other banks looking for loans for small business then it was taken by Westpac. We then saw the gap of what small business were paying increase. We asked the banks in the banking inquiry to provide some evidence that the problem actually was a repricing of credit risk. We asked them in questions on notice to show us where the actual risk has increased and what empirical evidence they have to show that. This is a very important issue.
If we are going to continue to grow our economy and if we going to create the wealth that we need to help our schools, our hospitals, our kids with disabilities, our aged care and everything else we need to pay for then we need people in small business out there having a go, taking risks, trying to come up with new products, new ideas, new ways of distributing goods. But we have the banks slugging them for several percentage points in interest rates because of lack of competition. It may be very well for short-term profits for the banks but long term the concern is the example of the parasite eating its host. It should be the banks that survive off the growth of those businesses not the other way around. That is the concern that we really should have. So we are waiting with great interest to see what the banks' responses are to those questions to truly establish whether that is correct.
The other points that came up were measurements of GDP and also measurements of inflation. We may have to look at how our GDP is measured. The questions about how GDP is measured are of the utmost importance. If we do not grow the economy, if we do not grow the wealth and if we do not make the pie bigger, we simply will not have the money to pay for everything we need. Thankfully we have seen growth in Australia of over three per cent, one of the highest in the developed world and the highest amongst all the OECD and G7 nations. It is something that we should be proud of. But there is an argument that GDP growth is not being measured correctly because there are many things today that we get for free that we previously paid a price for. And because they are for free—so inherently have no value that can be recorded—then they cannot be recorded in the GDP figures.
One example is photography. We have seen the technological developments of photography. We remember years ago when we would buy a separate camera, we would buy the film, we would take photos, we would take that role of film back to somewhere to be developed, and they would print those photographs on paper, which all had costs along the way which would show up in expenditure and in GDP. Now we are able to take the photos on a phone and store them. We do not print them but we email them to each other. Those photographs have no cost. I could take a photo effectively for free. In the measurement of GDP, that would show as a reduction in GDP, when, in fact, the value that I get from that is far, far greater than previously when I was taking photographs and had to pay for all the costs of the film, printing and developing.
The other issue raised in the RBA's report was how the official Reserve Bank of Australia's interest rates are not something that our Reserve Bank can set in isolation from other central banks around the world. The real concern is that we have now seen other central banks pushing their interest rates to zero and below. We have something that many economists thought was impossible: negative interest rates. The RBA deputy chairman said that it has now come to a stage where it is cheaper to hide your money under the mattress for 10 years—and get no interest rate—than to buy a bond in many countries in Europe, where you actually get back less than what you put in.
The point we need to look at is that these economies have continued to lower interest rates time after time in an attempt to stimulate their economies, and it does not appear to be working. It should be clear that trying to grow the economy from the demand side fails time after time. History has shown that what actually works is growing the economy from the supply side. That is why we have to have policies in this country that encourage entrepreneurs to get out there, start new business and create new wealth. That is what will drive the growth in the economy.
That is why we need to look at our taxation rates in this country. In this country, we now have a corporate rate of tax that is internationally uncompetitive. We are at 30 per cent. We see places like Hong Kong and Singapore at 15 per cent and 17 per cent, and we see the UK are lowering their corporate tax rate to 20 per cent. If we keep that rate at 30 per cent, we risk becoming internationally uncompetitive again. We should not be overly concerned about reducing our corporate tax rate. When we go to some of the official figures, they show that every time over the last 30 years when we have reduced the corporate tax rate—we have reduced it from close to 50 per cent down to the current rate of 30 per cent—almost without exception, we have not actually lost revenue; we have actually gained revenue, and, as a measurement, we have actually gained GDP.
There is a lot in the RBA report. I believe our committee has done good work during this report and we look forward to the rest of the work of the committee through the year.