9 June 2009 - 14 September 2010
Australian Retail Deposits Conference
19 May 2010
I'd like to thank Retail Financial Intelligence, and in particular the conference Chairs, Alan Shields and Josh Frith, for inviting me to address the Australian Retail Deposits Conference.
This conference comes at a critical moment for the retail banking sector. Tightened credit conditions, a changing regulatory environment, and shifts in consumer behaviour and attitudes make this the right time to discuss how to overcome these challenges. And how to take advantage of new opportunities.
I notice that the theme for your conference is "A vision for the future". That is very apt, both for your sector and for the Government. Through the 2010 Budget, which was handed down last week, and the Government's tax reform package, Stronger, Fairer, Simpler: A Tax Plan for Our Future, we are developing strategic, long-term reforms - our "vision for the future" of this nation.
The Treasurer, Wayne Swan, the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen and I have all been working hard at developing the various parts of this long-term plan, and as you know, it involves many important elements that benefit the banking and financial services sectors.
But in addition, it lays the ground work for an economy of strength and resilience into the future and it includes very important steps to simplify our tax system.
That is, an approach that is stronger, that is fairer and that is simpler.
Australia's economic position
But first, it's useful to step back and look at the condition of the broader Australian economy - and let me say, it is in very good health.
We have recorded solid growth and rising employment against the backdrop of improving, yet still patchy, global conditions.
The Australian economy grew by 0.9 per cent in the December quarter 2009 and 2.7 per cent through the year to the December quarter.
This solid performance is due to three factors.
First, the success of the Rudd Government's economic stimulus package.
Second, concerted and coordinated global action.
And third, the strength of our financial sector - of which you are all an important part.
The withdrawal of the Government's fiscal stimulus has already begun. Treasury estimates that the effect of the stimulus on GDP growth peaked in the June quarter 2009 and has since been winding down.
In another reflection of our sound economic recovery, the stimulus is being withdrawn faster in Australia than in most other advanced economies and ahead of the timetable set by the OECD for developed economies.
The withdrawal of the fiscal stimulus is expected to detract around one percentage point from Australian GDP growth over 2010.
The private sector is in the early stages of a self-sustaining recovery, as both consumer spending and new business investment are gaining momentum.
The Australian labour market has proved remarkably resilient in the face of the global economic downturn. The unemployment rate peaked at 5.8 per cent in July 2009.
March's unemployment rate of 5.3 per cent is the lowest unemployment rate of any of the major advanced economies, with the exception of Japan.
I should also point out that almost 225,000 jobs have been created in the past 12 months.
Hours worked have also increased, with trend aggregate hours rising for nine consecutive months.
Looking ahead, Australia is set to benefit greatly from the global economic recovery. Ongoing strong demand for bulk commodities from emerging Asia and recovering demand from advanced economies is expected to deliver higher export volumes and prices for Australia, contributing to growth and boosting the terms of trade.
So, it is the right economic time for a Federal Budget that is strong on consolidation, that banks these comparative strengths and moves our fiscal ledger into the black faster than previously forecast.
But it's also time for a set of Budget measures that are based on real action, real structural measures and policies, not generalities and lofty but non-specific objectives.
And I believe that Treasurer Swan's third Budget delivered just that.
Australia has stronger growth, lower debt and lower deficits than any of the major advanced economies.
As outlined last Tuesday, the Australian economy is expected to rebound powerfully with forecast real GDP growth of 3¼ per cent in 2010-11 and 4 per cent in 2011-12.
And our unemployment rate is heading down to 4¾ per cent by mid-2012, effectively full employment.
The budget deficit in 2010-11 is expected to be 2.9 per cent of GDP, compared to an average of 9.5 per cent of GDP for the major advanced economies.
Through a new benchmark of strict fiscal discipline, Australia's budget is projected to return to surplus in three years in 2012-13, which is three years early and markedly ahead of every major advanced economy.
The Budget also delivers the fastest fiscal consolidation since the 1960s and it projects a fiscal consolidation much more rapid than we saw coming out of the 1980s and the 1990s recessions.
So, before I move onto several of the key individual measures, especially those that will boost savings, support a vibrant financial services sector and see our tax system dramatically simplified, I wanted to again stress that at the higher macro-level, the settings in this Budget deliver the goods.
A much quicker return to surplus, an extended spending growth rule that sets us on the path to a minimum one per cent surplus and lower debt, deficit and unemployment.
Importance of long-term savings to Australia's economic wellbeing
Now, as I have mentioned, this year's Budget tackles, in several important ways, an area critical to Australia's economic wellbeing - long-term savings.
First, as you would all know, we have included a nation building decision see the level of Superannuation Guarantee payment rise from the current nine up to 12 per cent.
This increase will occur gradually over coming years and it will increase the retirement incomes of about 8.4 million Australians, including 3.5 million lower-paid Australians who, for the first time, will receive a tax concession on their Superannuation Guarantee contributions.
People aged over 50 with lower super balances will be given more generous contribution caps to allow them to make "catch up" contributions.
And the higher Superannuation Guarantee age - 75 from 1 July 2013 - will benefit around 33,000 employees.
Over the next 10 years, the Rudd Government's superannuation changes will add $85 billion to Australia's pool of superannuation savings. Some of these savings will be channelled back into the Australian economy to fund jobs and nation-building infrastructure, ensuring that our reliance on foreign funds is lower than it otherwise would be.
The Superannuation Guarantee, introduced by the Keating Labor Government in 1992, has been instrumental in recent rises in national savings.
In fact, Treasury estimates suggest that, since the guarantee began, it may have boosted national savings by 2.75 per cent of GDP.
But, as outlined in the Budget, we are taking action on savings outside of super too.
Australians' record of personal savings in this non-super area is certainly not as impressive as what we've achieved within the super system.
It is heartening that the long-term fall in the saving rate has begun to reverse in recent years.
Since 2004-05, the average level of gross national saving as a share of GDP has been two percentage points higher, compared with the preceding 10-year period.
And as you in this room would know, as part of the impact of the global financial crisis, there has been a significant upsurge in savings deposits in the last few years.
Now that is of course, very good news to you here today!
The Government's Budget will also help boost this trend, as it will provide a substantial new tax incentive to promote personal saving.
Around 5.7 million Australian depositors are expected to benefit in 2011-12 from this major reform.
It will also help close the gap between the tax paid on interest income and other non-interest earning investments.
From 1 July 2011, the Government will provide individuals with a tax discount equal to 50 per cent on up to $1,000 of interest earned, including on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products.
This means that for a person earning an average pre-tax interest rate of 6 per cent, the discount would apply up to a savings balance of just over $16,500.
This measure will help promote deposits as a tax-effective savings vehicle and encourage Australians to consider diversifying their investments.
Under the current system for taxing savings, there is a large variation in the taxation treatment of alternative savings vehicles. Most interest income is taxed at the individual's marginal rate, while capital gains can receive a 50 per cent discount.
Introducing this significant new discount for interest income will remove this distortion and deliver a better taxation regime for savings.
All banks, building societies and credit unions will benefit from a greater supply of stable deposit funding, which will reduce their requirement to borrow in international capital markets from overseas investors.
Since deposits typically represent a high proportion of funding for smaller lenders, this reform should help put downward pressure on their funding costs. This is expected to support them in lending at competitive interest rates to Australian households and small businesses.
This measure responds to an important recommendation of the independent Australia's Future Tax System review, to provide a tax discount on interest income from savings.
The Government will consult on details concerning the operation of the discount, including on the final scope of eligible savings products.
This initiative will help Australians bolster their financial security as well as boost our national savings.
The new major tax incentive to save is part of the Rudd Government's plan to strengthen our economy so Australia can face the future with confidence.
Healthy savings rates are important to our economy.
They make an important contribution to long-term household wealth, especially as we look forward to the major challenges of a growing and ageing population.
The recent Intergenerational Report highlighted the challenges of Australia's ageing population.
For example, age‑related pension payments are projected to rise from 2.7 per cent of GDP this financial year to 3.9 per cent of GDP in 40 years time. An ageing population will also put more pressure on our healthcare system.
While these challenges are substantial, they are not insurmountable, particularly if the Government continues to pursue a broad-ranging policy approach that builds on previous reforms.
The measures recently announced in the Government's tax reform package, Stronger, Fairer, Simpler: A Tax Plan for Our Future, and in the Budget a week later go a long way to address the challenges of an ageing population.
Together they are another example of how this Government is not just planning for the next 12 months but the decades beyond.
I'd like to finish this morning by highlighting two final reforms - one that goes directly to your sector, and one that goes to our economy and our national future as a whole.
They are, first, interest withholding tax reform and, secondly, the Resource Super Profits Tax.
Interest withholding tax
The Rudd Government is phasing down the IWT to provide an extra boost to banking competition by allowing non-major banks to access cheaper funding so they can offer cheaper loans to Australian households and businesses.
This significant reform will help support smaller lenders further in putting more competitive pressure on the big banks over time, particularly in the mortgage market.
This reform also extends to Australian-owned financial institutions borrowing from related parties overseas and any financial institution borrowing offshore retail deposits which they on-lend in Australia.
For local subsidiaries of overseas parents, the IWT rate will be reduced on such borrowings from 10 per cent to 7.5 per cent in 2013-14 and to 5 per cent in 2014-15.
Additionally, the IWT rate applying to borrowings by any bank branch from its overseas head office will be reduced from 5 per cent to 2.5 percent in 2013-14 and to zero in 2014-15.
This measure will remove existing distortions to how financial institutions borrow from overseas - so that funding choices are based on commercial considerations rather than taxation.
The Government is determined to make the banking system work for families and businesses, not against them, and this announcement is another key step towards that goal.
It comes on top of the Government's $16 billion investment in residential mortgage-backed securities (RMBS) to further boost competition in the mortgage market and put competitive pressure on the major banks.
Resource Super Profits Tax
Now as you would also well know, as part of Stronger, Fairer Simpler: A Tax Plan for our Future, our response to the independent tax review, we have announced a Resource Super Profits Tax.
This measure will directly capitalise on the opportunities presented by the current resources boom, and address the challenges that it presents.
The Resource Super Profits Tax will apply to the extraordinarily high profits from resources that all Australians own, and then uses the revenue to:
- generate more superannuation savings for working families
- lower tax for all companies, especially small businesses
- invest in our future infrastructure needs, particularly for the mining states
- dramatically simply our tax system through a $500, and then $1,000 standard default work expenses deduction, and
- pay for the cut to taxes on savings as already outlined this morning.
The Resource Super Profits Tax will ensure that we capture the benefits of the resource boom for the benefit of all Australians.
And it does so with minimal distortions to investment and product decisions.
The two unique design features of the Resource Super Profits Tax - the risk free rate of return uplift for expenditure and the refunds for failed projects - ensures that a company's risk premium - the normal return on its investment - is not subject to tax.
And the Resource Super Profits Tax generously recognises the large investments made in resource projects.
The revenues will be used to deliver a stronger economy for Australian families. Around a third of the package will directly assist the resources sector.
A Resource State Infrastructure Fund will make infrastructure spending a permanent feature of Commonwealth and State budgets. As well, a Resource Exploration Rebate will encourage further exploration.
Another third of the package will ensure we save rather than squander the benefits of the current boom, and translate the higher economic growth and wages we are currently enjoying into long-term benefits and more secure retirements.
The remaining third of the package will promote growth across the economy, addressing the risk of a "two-speed economy" by taking the brakes off the slower lane.
A phased cut in the company tax rate to 28 per cent will boost the competitiveness of all Australian industries. The Government will also seek to cut the company tax rate further, as fiscal circumstances allow.
Small businesses will get a head start on the company tax cut, with the 28 per cent rate applying from 2012‑13.
Taken together, the Resource Super Profits Tax and the cuts in the company tax rate will increase Australian GDP by 0.7 per cent and increase real wages by 1.1 per cent in the long run.
The Stronger, Fairer, Simpler package depends on successfully implementing the Resource Super Profits Tax. This tax generates the revenue needed to fund the other parts of the package and a large part of the economic gains from the package.
We know that any tax reform will meet opposition, but we also know the gains can be very substantial.
Higher super balances, high deposit account balances, lower company taxes, substantial tax depreciation benefits for small business, simple tax affairs - this is tax reform for all Australians.
Ladies and gentlemen, the Rudd Government has intentionally developed a big picture strategy for our economic future.
It is a plan based on banking for the future the wealth of today - whether that be through bigger superannuation accounts or by lower taxes on family savings and investments.
The banking and financial services sector is critical to that goal.
Through our measures and reforms, and your commitment to competition, your own reforms and an open dialogue of what the bank-using community need, we can achieve major and irreversible reforms.
A key part of that agenda relies, on the one hand, on increase private and national savings and, on the other, on helping to ensure that the wealth from our resources is invested over a long period of time - rather than being consumed immediately - providing an enduring benefit for all Australians.
I look forward to working with each of you as we move forward and make that agenda a reality.
Once again, thank you for inviting me to speak with you today.