The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

7 October 2012

Treasurer's economic note

Competition is important for more than just a good footy match. It's one of the central forces that shapes our modern economy. Competition for customers drives businesses to be more efficient, innovative and resilient. This in turn delivers consumers greater choice, better value and higher quality goods and services. Put simply, businesses that offer superior products gain more customers. But things don't always work as well as they should. When a small number of companies dominate a particular market, competition may be limited. Of course, these markets are policed by the competition watchdog , the ACCC. But the Government also has an important role in promoting a fair and competitive marketplace for the benefit of consumers, businesses and the entire community.

A more competitive banking system

One sector where the Government has been particularly focused on promoting competition in recent years is banking. I wrote last week about how our swift action helped secure Australia's financial system during the dark days of the global financial crisis. Unlike the experience in many advanced economies, no Australian bank had to be bailed out by taxpayers, no Australian depositor had their savings put at risk, and no investor in a rated Australian mortgage-backed security ever lost a cent of principal. But despite these successes, our banking sector didn't emerge from the GFC entirely unscathed. The profound dislocation in global credit markets meant many smaller Australian mortgage providers found it much harder to raise funds to compete with the big banks on home loans and small business loans.

That's why when the GFC struck, the Government acted quickly to support competition in the banking sector. We introduced government guarantees to support deposit funding and enable non-major banks to secure over $65 billion of wholesale funding when they needed it most. We also invested in residential mortgage-backed securities that helped smaller lenders continue to provide tens of thousands of mortgages and small business loans. We built on these measures with a package of competition reforms  announced in December 2010. These included:

  • Banning mortgage exit fees on new home loans;
  • Introducing covered bonds to allow greater access to cheaper, longer-term funding for the entire banking system;
  • Making the Financial Claims Scheme  a permanent feature of our financial system to protect deposit funding that smaller lenders rely on to make home loans and small business loans;
  • Introducing mandatory one-page fact sheets for home loans to make it easier for consumers to shop around and figure out who's offering the best deal;
  • Passing important credit card reforms to crack down on unfair treatment and save Australians money on repayments; and
  • Bringing in a new 'tick and flick' service to give consumers the freedom to switch deposit accounts with the stroke of a pen.

It's pleasing to see measures like these have helped turn up the heat on competition in the banking sector in recent years. Since the reforms were announced, smaller banks have taken $18.6 billion in home lending business from the big banks. And the non-major banks have increased their home lending at more than three times the rate of the major banks in the year to July. With the ban on exit fees on new home loans, the big banks can no longer assume that once a customer signs on the dotted line, they've got them for life. Around 810,000 mortgages are now free of exit fees and this number will increase to nearly 2 million by the end of next year. This means banks increasingly have to earn the loyalty of their customers. Mortgage refinancing has increased nearly 27 per cent since December 2010, with almost $50 billion of home loans refinanced in the year to July. This shows Australians are increasingly looking around to get the best deal on their home loan.

Now is a really good time to review your current mortgage after the Reserve Bank  decided on Tuesday to cut the cash rate target. The official interest rate today of 3.25 per cent is less than half the level it was when Labor came to office (6.75 per cent), and is lower than at any time under the previous government. A family with a $300,000 mortgage is now paying around $4,500 a year less in repayments than when we first came to office - that's based on standard variable rates that consumers actually pay, not the cash rate. The saving over the last year alone is around $2,500 - real relief to help households make ends meet. And while some parts of our economy are under pressure from global headwinds, a high dollar and changing consumer behaviour, it's encouraging that these much lower interest rates come at the same time as unemployment is low and economic growth is healthy. The cut in the cash rate last week was of course only possible because inflation is contained, and the Government has contributed to this by maintaining a very disciplined budget and returning the budget to surplus.

While government policies play an important role in fostering a competitive market, consumers also play an important role. The choices you make - about where to get your home loan, where to keep your savings and which credit card to use -all have an impact. When a bank decides to pocket some of an interest rate cut on a home loan, it's betting you'll put up with it. But you don't have to cop it quietly on the chin. If your bank doesn't do the right thing by you, tell them and if they don't lift their game, look around for a better deal. The Government's banking reforms are all about supporting competition by putting power back in the hands of consumers. Making banks compete for your business ultimately promotes greater choice, better service and better value.

Competing in the global market

Competition doesn't just deliver dividends for consumers. The entire economy benefits from greater competitiveness. Despite what some partisan commentators may claim, we're already a highly competitive and productive nation - in fact our productivity levels put us among the top dozen performers in the world. But we do need to do more to lift productivity growth going forward. That's why we have a broad-based productivity agenda. Since the Government came to office, we've been increasing investment in education and skills, building better infrastructure including the National Broadband Network , and reforming our tax system to spur investment, workforce participation and innovation. Increasing our nation's productivity and competitiveness are more important than ever given the ongoing challenges facing the global economy.

This week I'll have the opportunity to assess those challenges first hand when I meet with my international counterparts at the IMF and World Bank Annual Meetings  in Tokyo. The IMF has indicated it's likely to cut its forecast for world growth this week because of the deterioration in global conditions in recent months. While weaker global demand inevitably impacts on our economy and government tax revenues, it's important to remember Australia's fundamentals remain strong. We've got contained inflation, solid growth, low unemployment, healthy consumption, an enormous pipeline of investment that's delivering greater export volumes, and now even lower interest rates.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia