Tag: The Treasury

Crowd-sourced equity funding regulations for proprietary companies

The Government has released exposure draft regulations providing further detail on the extension of the crowd-sourced funding (CSF) framework to proprietary companies. This is the next step in enabling proprietary companies to access equity crowdfunding, and follows the legislation introduced to the Parliament on 14 September 2017.

The draft regulations also make refinements to the existing CSF regime for public companies, to add flexibility to the structure and contents of CSF offer documents in addition to requiring disclosure relevant to the proprietary companies, and make other minor changes to clarify the operation of the existing rules.

In relation to proprietary companies, the draft regulations provide that the exemption from the takeover rules for CSF proprietary companies will be limited to companies that are still eligible to make a CSF offer, as it would be inappropriate for proprietary companies that out-grow the CSF framework to continue to be exempt from the takeover rules in perpetuity. The draft regulations also modify the unsolicited offer provisions in the Corporations Act, which apply to all companies, to make these more flexible for proprietary companies with CSF shareholders.

All interested parties are invited to lodge a submission by Friday 2 February 2018. More information on the existing CSEF regime for public companies is available on the Australian Securities & Investments Commission website.

Wages Growth, Under The Skin, Is Concerning

The Treasury published a 66-page report late on Friday – “Analysis of Wage Growth“.

It paints a gloomy story, wage growth is low, across all regions and sectors of the economy, subdued wage growth has been experienced by the majority of employees, regardless of income or occupation, and this mirrors similar developments in other developed western economies. Whilst the underlying causes are far from clear, it looks like a set of structural issues are driving this outcome, which means we probably cannot expect a return to “more normal” conditions anytime some. This despite Treasury forecasts of higher wage growth later (in line with many other countries).

We think this has profound implications for economic growth, tax take, household finances and even mortgage underwriting standards, which all need to be adjusted to this low income growth world.

Here are some of the salient points from the report:

On a variety of measures, wage growth is low. Regional mining areas have experienced faster wage growth, but wage growth has slowed in both mining and non-mining regions. Wage growth has been fairly similar across capital cities and regional areas, although the level of wages is higher in the capital cities.

The key driver of wage growth over the long-term is productivity and inflation expectations. This means that real wage growth – wage growth relative to the increase in prices in the economy – reflects labour productivity growth. However, fluctuations across the business cycle can result in real wage growth diverging from productivity growth. There are two ways of measuring real wages. One is from the producer perspective and the other is from the consumer perspective. Producers are concerned with how their labour costs compare to the price of their outputs.

Consumers are concerned with how their wages compare with the cost of goods and services they purchase.

Generally, consumer and producer prices would be expected to grow together in the long-term, so the real producer wage and real consumer wage would also grow together. Consumer and producer prices diverged during the mining investment boom due to strong rises in commodity export prices. The unwinding of the mining investment boom and spare capacity in the labour market are important cyclical factors that are currently weighing on wage growth.

It is unclear whether these cyclical factors can explain all of the weakness in wage growth. Many advanced economies are also experiencing subdued wage growth. In particular, labour productivity growth has slowed in many economies. However, weaker labour productivity growth seems unlikely to be a cause of the current period of slow wage growth in Australia. Over the past five years, labour productivity in Australia has grown at around its 30-year average annual growth rate.

Wage growth is weaker than the unemployment rate implies. There may be more spare capacity than implied by the employment rate. [Is The Phillips curve broken?]. Labour market flexibility is a possible explanation for the change in the relationship between wage growth and unemployment, and the rise in the underemployment rate. Employers may be increasingly able to reduce hours of work, rather than reducing the number of employees when faced with adverse conditions. This may be reflected in elevated underemployment.

It is difficult to draw firm conclusions on the effect of structural factors on wage growth, given they have been occurring over a long timeframe and global low-wage growth is a more recent phenomenon. Three key trends are the increasing rates of part-time employment, growth in employment in the services industries, and a gradual decline in the share of routine jobs, both manual and cognitive, and a corresponding rise in non-routine jobs.
Both cyclical and structural factors can affect growth in real producer wages and labour productivity, so such factors can also affect the labour share of income. Changes in the labour share of income occur as a result of relative growth in the real producer wage and labour productivity. Since the early 1990s, the labour share of income has remained fairly stable. Nonetheless, different factors have placed both upward and downward pressure on the labour share of income.

An examination of wage growth by employee characteristics using the Household Income and Labour Dynamics in Australia (HILDA) survey and administrative taxation data suggests that recent subdued wage growth has been experienced by the majority of employees, regardless of income or occupation. Workers with a university education had higher wage growth than those with no post-school education over the period 2005-2010, but have since experienced lower wage growth than individuals with no post-school education.

An examination of wage growth by business characteristics using the Business Longitudinal Analysis Data Environment (BLADE) suggests that higher-productivity businesses pay higher real wages and employees at these businesses have also experienced higher real wage growth. Larger businesses (measured by turnover) tend to be more productive, pay higher real wages and have higher real wage growth. Capital per worker appears to be a key in differences in labour productivity and hence real wages between businesses, with more productive businesses having higher capital per worker.

Wage growth is low across all methods of pay setting. In recent years, increases in award wages have generally been larger than the overall increase in the Wage Price Index. At the same time, award reliance has increased in some industries while the coverage of collective agreements has fallen. There are a range of reasons for the decline in bargaining including the reclassification of some professions, the technical nature of bargaining, natural maturation of the system and award modernisation which has made compliance with the award system easier than before.

Royal Commission, Draft Terms Of Reference

The draft terms of reference are out for the Royal Commission into the Banking, Superannuation and Financial Services Industry.

The scope has been carved out to avoid issues already being looked at elsewhere, such as the Productivity Commission looking at vertical integration, or ACCC on product pricing, and so is focussed on alleged misconduct.  The BEAR regime is also separately designed to deal with executive behaviour.  The bad behaviour is broadly defined across financial services (so we assume mortgage brokers, and financial advisors would be in scope).  And it is relative to community standards, so plenty of wriggle room there. Also, the scope is much narrow than that being hawked about on the back benches, one reason why both the Bank Leaders and Polys both fell in behind the current narrower scope.

The scope does not touch in broader policy or regulatory issues (such as macroprudential) but could conceivably cover lending standards and “liar loans”. One potential outcome could be to lift the lid on “not unsuitable” lending.  It does not consider the disruptive intrusion from digital or Fintech.

So we suspect the focus will be more on poor disclosure, bad contracts, and areas where the community has been most vocal – for example, poor financial advice, disputed insurance claims, and SME lending and foreclosure.

We will be interested to see the extent to which the mortgage industry is impacted.

From an industry perspective, it introduces a whole new set of risks for potential investors to consider, and so while the political uncertainty has been defused, the ongoing industry uncertainly may lead to a risk premium being required to placate investors, so leading to some upward pressure on product pricing.  But it is unlikely to lead to any fundamental structural reform.

Context

Australia has one of the strongest and most stable banking, superannuation and financial services industries in the world, performing a critical role in underpinning the Australian economy. Our banking system is systemically strong with internationally recognised, world’s best prudential regulation and oversight.

Most Australians are consumer sof banking, superannuation and other financial services. The superannuation system alone in Australia has created more than a $2 trillion retirement savings pool, which continues to grow rapidly, and which compels all working Australians to defer income today for their retirement.

All Australians have the right to be treated honestly and fairly in their dealings with banking, superannuation and financial services providers. The highest standards of conduct are critical to the good governance and corporate culture of those providers.

These standards should continue to be complemented by strong regulatory and supervisory frameworks that ensure that all Australian consumers and businesses have confidence and trust in the financial system.

The Government will appoint a distinguished serving or former judicial officer to lead a Royal Commission into the banking, superannuation and financial services industries.

The Commission’s inquiry will not defer, delay or limit, in any way, any proposed and announced policy, legislation or regulation of the Government.

Terms of Reference

1. The Commission must inquire into the following matters;
a) the nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf);
b) any conduct, practices, behaviour or business activity by a financial services entity that falls below community standards and expectations;
c) the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members;
d) whether any findings in respect of paragraphs 1(a), (b) and (c):
i. are attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the industry or relevant subsector; and
ii. result from other practices, including risk management, recruitment and remuneration practices;
e) the effectiveness of mechanisms for redress for consumers of financial services who suffer detriment as a result of misconduct by a financial service entity;
f) the adequacy of:
i. existing laws and policies of the Commonwealth (taking into account law reforms announced by the Government) relating to the provision of financial services;

ii. the internal systems of financial services entities; and

iii. forms of industry self-regulation, including industry codes of conduct;
to identify, regulate and address misconduct in the industry, to meet community standards and expectations and to provide appropriate redress to consumers and businesses;
g) the effectiveness and ability of regulators of a financial services entity to identify and address misconduct by those entities;
h) whether any further changes to:
i. the legal framework;
ii. practices within financial services entities; and
ii. the financial regulators,
are necessary to minimise the likelihood of misconduct by financial services entities in future (taking into account any law reforms announced by the Government); and
i. any matter reasonably incidental to a matter mentioned in the above paragraphs, 1(a) – 1(h).

2. In conducting its inquiry the Commission should give priority to matters which in its opinion, have greater potential for harm if not addressed expeditiously.

3. Inquiring into the matters set out in paragraph (1)(f), the Commission:
a) must have regard to the implications of any changes to laws, that the Commission proposes to recommend, for the economy generally, for access to and the cost of financial services for consumers, for competition in the financial sector, and for financial system stability; and
b) may have regard to comparable international experience, practices and reforms.

4. However, the Commission is not required to inquire, or to continue to inquire, into a particular matter to the extent that to do so might prejudice, compromise or duplicate:
a) another inquiry or investigation; or
b) a criminal or civil proceeding.
And, the Commission may choose not to inquire into certain matters otherwise within the scope of this Inquiry, but any such decision will be the Commission’s, alone.

5. The Commission is not required to inquire into, and may not make recommendations in relation to macro-prudential policy, regulation or oversight.

6. The Commission may submit to the Government an interim report no later than September 2018 and must submit a final report within 12 months.

The final report is to contain:
a) its findings; and
b) any recommendations relevant to the inquiry that the Commission thinks fit.

Definitions

financial service entity means an entity (other than a Commonwealth entity or company) that is:
a) an ADI (authorised deposit-taking institution) within the meaning of the Banking Act 1959;
b) an entity that carries on the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, including:
i. a general insurer within the meaning of the Insurance Act 1973; and
ii. an entity undertaking life insurance business within the meaning of the Life Insurance Act 1995.
c) a person or entity required by section 911A of the Corporations Act 2001 to hold an Australian financial services licence or who is exempt from the requirement to hold a licence by virtue of being an authorised representative; or
d) an RSE licensee of a registrable superannuation entity (as that term is defined in the Superannuation Industry (Supervision) Act 1993) and any entity that has any connection (other than an incidental connection) to the RSE licensee of a registrable superannuation entity.
Macro-prudential policy and regulation means policy and regulation, including as to the structure, role and purpose of financial regulators, that is concerned with containing systemic risk, which can have widespread implications for the financial system as a whole, beyond simply the banking system.
misconduct includes conduct that:
a) constitutes an offence against a Commonwealth, State or Territory law in relation to the provision of a financial service, as existed at the time of the alleged misconduct; or
b) is misleading and/or deceptive; or
c) indicates a breach of trust or duty or unconscionable conduct; or
d) breaches a professional standard or a recognised and widely adopted (conduct) benchmark.

Major Banks Call For “Proper” Banking Inquiry

The four banks have now sent a letter to the Treasurer asking for a properly constituted inquiry into the financial services sector to be established.

The letter is signed by the current CEO’s and Chairs: ANZ chairman David Gonski, ANZ CEO Shayne Elliot, CBA chairman Catherine Livingstone, CBA CEO Ian Narev, Andrew Thorburn, Westpac chairmen Lindsay Maxsted, and Westpac CEO Brian Hartzer.

We are writing to you as the leaders of Australia’s major banks. In light of the latest wave of speculation about a parliamentary commission of inquiry into the banking and finance sector, we believe it is now imperative for the Australian Government to act decisively to deliver certainty to Australia’s financial services sector, our customers and the community.

Our banks have consistently argued the view that further inquiries into the sector, including a Royal Commission, are unwarranted. They are costly and unnecessary distractions at a time when the finance sector faces significant challenges and disruption from technology and growing global macroeconomic uncertainty.

However, it is now in the national interest for the political uncertainty to end. It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people. It also risks undermining the critical perception that our banks are unquestionably strong.

As you know our banks have acknowledged that we have not always got it right, and have made mistakes. Together with the Government and regulators, since 2014 we have been taking action to fix issues, and improve what we do and how we do it. We have collectively appeared before, or taken part in 51 substantial reviews, investigations and inquiries since the global financial crisis, 12 of which are ongoing. We continue to demonstrate our commitment to doing the right thing by our customers and seeking to ensure those genuinely affected by these mistakes are appropriately compensated.

A strong, well-regulated and well-governed banking system is in the interests of all Australians and is critical to job creation and fairness. The strong credentials of the banking system ensured Australians were spared the worst of the Global Financial Crisis, and have been fundamental to the ongoing performance of our economy despite global and domestic political turmoil.

We now ask you and your government to act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence.

In our view, a properly constituted inquiry must have several significant characteristics. It should be led by an eminent and respected ex judicial officer. Its terms of reference should be thoughtfully drafted and free of political influence. Its scope should be sufficient to cover the community’s core concerns which include banking, insurance, superannuation and non-ADI finance providers. Further to avoid confusion and inconsistency, the inquiry must to the most practical extent replace other ongoing inquiries.

It is vital that the terms of any inquiry consider the many reviews and inquiries that have been conducted into the banking sector in recent years; the significant government and industry-led reforms that have been and will shortly be implemented; the 44 recommendations made in the Financial System Inquiry in 2014; and the broad and positive contribution that banks make to the Australian economy and to millions of customers and shareholders.

It is also important that any inquiry reports back in a timely manner so that we can have certainty about the findings and move forward to implement any recommendations.
We will work hard to ensure our contribution to any process helps to further strengthen Australia’s financial services system.
Throughout this, our focus will remain on our customers. We are proud of the work our people do every day to support them. That work continues.

Keep Me Posted calls on the industry to support the ban on paper fees

From KeepMePosted.

Are we finally heading towards the end of paper billing fees?

On Tuesday 21 November, Treasury launched the process that could see the end of paper billing fees for Australian consumers.

“There has been a significant shift away from paper billing in recent years,” Mr McCormack, Minister for Consumer Affairs, said. “Yet not every Australian consumer has the means to access digital billing and it is unfair to punish them for being unable to do so. Better outcomes and protections are needed for those consumers who do not have the option to transition to digital bills and who can least afford to be penalised.”

Keep Me Posted, which has been working tirelessly for the last 18 months to obtain legislative reform, worked with the Minister’s office in the lead up to the consultation and met with Treasury’s representatives on Thursday afternoon as part of the consultation process.

“We clearly stated Keep Me Posted’s position to support a total ban on all billing fees, which is option 2 of the consultation paper,” said Kellie Northwood, Executive Director, Keep Me Posted.

“We call on all Australians, industry stakeholders, interested groups and consumers to have their say and support the ban.”

Treasury’s consultation paper explores the costs and benefits of five (5) options, including the prohibition of paper fees, option 2. Keep Me Posted says it is the only option that can guarantee consumer protection against unfair and discriminatory charges.

Treasury is seeking submissions from consumers and consumer advocates, businesses and environmental groups. Individuals can leave an informal comment on the website or post a simple letter to Treasury.

According to Treasury’s estimates, the total annual cost of a ban would be between $80 and $93 million for the sixteen (16) Australian businesses with the largest customer base. As a comparison, it is expected that abolishing ATM fees, measure that was announced in September, will cost the big four banks $500 million a year. The relative cost to businesses doesn’t seem very high compared with the financial pressure that is put on vulnerable consumers.

Keep Me Posted doesn’t accept the idea that electronic bills are a ‘free’ option for consumers to receive their bills and statements. “When you opt-in to electronic bills and statements it means you need to possess and keep an electronic device, pay for an internet subscription or for mobile data, and more often than not you pay to print the bill at home,” commented Kellie Northwood.

According to the World Economic Forum’s Global Information Technology Report 2016, with a rank of 100 out of 139 countries for fixed broadband internet tariffs, Australia lags way behind in terms of internet affordability. More, the latest Deloitte report into mobile usage shows that 43% of smartphone owners regularly exceed their data allowance with a collective cost of $300 million a year in extra charges.

Further, the ACCC reported that Australians lost nearly $300 million to scams in 2016, $84 million in losses being reported to Scamwatch and nearly $216 million to ACORN and other scam disruption programs. The majority of these scams, 43%, were delivered by electronic means while only 4.1% came in the mail. In October, ACCC revealed that False billing is one of the top three (3) scams that Australians are most likely to encounter online.

Tim Hammond, Shadow Minister for Consumer Affairs and vocal supporter of the ban welcomed Treasury’s consultation paper and urged Australians who don’t want to pay extra to receive a bill by post to make a submission. Tim Hammond also criticised the Government for not tackling the issue sooner. Back in June, Tim Hammond moved a motion in Parliament to ask the Government to restore consumer protection. “We’ve got to restore the playing field for those who don’t have easy access online to make sure they are not getting stung for paper bills,” Tim commented.

“For Australians consumers, we really want the issue to be solved as soon as possible,” concluded Northwood. “It’s time for Government to apply a bit of good old fashioned common sense and make it clear to super profit companies that hidden or added costs along the way are not acceptable.”

Australians have until Friday 22nd December to make a submission.

Should You Pay For A Paper Bill?

Interesting consultation from the Treasury of the impact of digital migration of consumer bills, and the emerging trend to charge for a paper version, which may adversely be impacting those unable or unwilling to go digital.  They suggest 1.2 million households are digitally excluded.

NBN Co forecasts that 94 per cent of households will have internet access by 2020, and 100 per cent by 2030. However, there is still a sizeable minority – 1.3 million households as of 2015 – who do not have access to the internet. These consumers currently have no practical way to transition to digital billing.

Individuals surveyed provided a variety of reasons for not accessing the internet. Many of the reasons provided do not suggest that the individuals fall into disadvantaged groups. However many cite a lack confidence or knowledge to access the internet or cost as the main reason for not accessing the internet. Based on the number of households who indicated cost or knowledge as their reason for not accessing the internet, Treasury estimates there are approximately 1.2 million Australians who do not have internet access at home because they either cannot afford it or because they believe they do not have sufficient technical skills. Given the relatively low cost and large benefits associated with having internet access, Treasury assumes a majority of the consumers who indicated cost as coming from one of the disadvantaged groups described. Additionally, in digital inclusion suggest many consumers who indicated lack of knowledge as a reason not to access the internet also likely come from one of the disadvantaged groups identified above.

In addition to those with no internet access there are also many Australians who lack the technical skills or appropriate technology to enable them to pay bills online. Digital inclusion is a measure of groups and individuals ability to access and use information and provides some insight into the makeup of this group.

Digital inclusion tends to decline with age and is lower among Australians with a disability and Indigenous Australians. Additionally, one in five Australians only has access to the internet through a mobile device. Modern mobile devices allow users to complete a majority of tasks that previously required a laptop or desktop, however some users may have difficulty reviewing their bills on a three to five inch screen. Mobile only internet access has been linked with socioeconomic factors including low income and low education levels.

Consumers who elect to receive paper bills and pay fees due to fear of online scams are an important subset of this group, although paper bills may also lead to identity fraud through mailbox theft. Unfamiliarity with the internet has been raised by many stakeholders as key reason why consumers do not want to transition to digital billing and justification for opposing paper billing fees.

Some consumers with lower levels of digital inclusion will still chose to receive digital bills. However a subset of this group will face significant barriers that may prevent them from accessing bills online and will instead pay paper billing fees. This suggests that there are likely disadvantaged consumers who have access to the internet, but still have no choice but to pay paper billing fees.

The provision of bills in a digital format, when compared to paper billing is often seen as a simpler, lower-cost and more environmentally friendly option for businesses and a more convenient option for consumers. Digital bills can also be integrated with other digital services and information such as electronic reminders or notifications, access to previous billing information, and online changes to personal details. For these reasons, it is viewed by some as being in the interest of business and the broader community to transition customers to digital bills. Paper billing fees – a charge for customers who elect to receive a paper bill – are a common mechanism used to encourage consumers to make the change to digital bills.

While many consumers may have the option to transition to digital bills, but choose to pay paper billing fees due to personal preference, there is a concern that this is not the case for all consumers. These consumers may pay paper billing fees out of necessity, because they do not have the ability to access digital bills.

There may be scope for the Government to take action to protect these consumers.

The policy options analysed in this RIS are:

  • Option 1 — the status quo, with an industry led consumer education campaign;
  • Option 2 — prohibition (ban) on paper billing fees;
  • Option 3 — prohibiting essential service providers from charging consumers to receive paper bills;
  • Option 4 — limiting paper billing fees to a cost recovery basis;
  • Option 5 – promoting exemptions through behavioural approaches.

Further evidence on the likely impact of all options is required to conduct an informed evaluation of the options and to determine which approach should be pursued. The views of stakeholders will inform a final, Decision Making Council of Australian Governments (COAG) RIS.

 

US Corporate Tax Reform: Implications for the Rest of the World

The Treasure has released a paper “US Corporate Tax Reform: Implications for the rest of the world” which examines the likely impacts of the US reforms on the US and on the rest of the world, placing the US changes in the context of the global trend toward lower corporate taxes.

The paper says that the economic impact of the Republicans’ tax plan will depend on how time and compromise shape the package that is ultimately legislated. Key in this regard is the size of the cut, how it is funded and whether investors believe it is a permanent reduction.

On 27 September 2017, the United States (US) Administration and Republican Congressional leadership released a framework for US tax reform, including a reduction in the federal corporate tax rate from 35 to 20 per cent.

The key elements of tax framework with respect to corporate tax are:

  • a reduction in the federal corporate income tax rate from 35 to 20 per cent;
  • immediate expensing of depreciable assets (except structures) for at least 5 years;
  • limitations on interest deductions;
  • the removal of the domestic production deduction;
  • an exemption for dividends paid by foreign subsidies to US companies (where the US company owns 10 per cent or more of the foreign company); and
  • a one-time tax on overseas profits.

These proposals were reflected in the draft of the Tax Cuts and Jobs Act released by the House Ways and Means Committee on 2 November 2017.

This paper examines the likely impact of this reform on the US and rest of the world, placing the US changes in the context of the global trend toward lower corporate taxes.

In theory, a corporate tax rate cut stimulates investment by making more investment opportunities sufficiently profitable to attract financing. The extent to which this is the case in practice will depend on how the tax cut is funded and whether investors consider the tax cut to be permanent. If the corporate tax rate cut results in an overall reduction in tax on US investments and investors believe that the tax cut is permanent, we are likely to see an increase in the level of US investment. If investors believe that the tax cut is temporary, the effect on US investment may be minimal. Ultimately, the economic impact of the plan on the US will depend on how time and compromise shape the final package.

If a US corporate tax cut does result in an investment boom, goods, labour and funds will be required. In a scenario in which the investment boom is largely funded domestically from US savings, negative impacts on the rest of the world are likely to be short-lived and modest.

Realistically, however, a US investment boom is likely to be only partially funded domestically and would draw funds and goods from the rest of the world. In this scenario, the rest of the world would experience a decline in capital stock resulting from the flow of capital into the US. The magnitude of the resulting welfare loss in those countries will depend on the size of the US corporate tax cut; how it is funded; the elasticity of the US labour supply response and the US saving response. For Australia, the size of the negative impact will also depend on how other countries respond.

While the size of the US economy means changes to the US tax system have particular significance, it is important to consider these reforms as part of an ongoing trend. As capital markets have become increasingly global and business location increasingly mobile, governments have sought to drive economic growth in their jurisdictions by lowering corporate tax rates. The US reforms have the potential to accelerate tax competition between jurisdictions, making Australia’s current corporate tax rate increasingly uncompetitive internationally.

While the Administration and Republican Congressional leadership have indicated that they will ‘set aside’ the idea contained in the House Republicans’ 2016 plan to move to a destination-based cash flow tax (DBCFT), this paper also provides a discussion of the theoretical underpinnings of the proposal.

The Problem of Business Investment

John Fraser, Secretary to the Treasury spoke about Australia’s Business Investment Challenge in his Sir Leslie Melville Lecture.

The bottom line is as the mining investment boom ended, Australia has struggled with weak investment in the non-mining sectors, weighing on the labour market, productivity and ultimately economic growth.

Governments to pursue coordinated reforms that provide businesses with certainty, promote innovation and productivity improvements and support the ongoing transformation of the economy.

But there are no silver bullets!

One thing we know will be vital to our economic prosperity going forward is business investment.

Investment in new productive capacity creates employment opportunities, raises future incomes and supports innovation.

Recent Treasury research indicates that Australia has generally been more reliant on capital deepening than multifactor productivity growth to fuel its aggregate labour productivity growth.

This research is publicly available on the Treasury Research Institute website.

We are doing far more research in Treasury but some necessarily must remain confidential.

Productivity-enhancing policies are vital because of the link between productivity gains and real wage increases.

We know that higher productivity is the best way to increase real wages across the economy and, based on Treasury’s recent analysis of longitudinal business data, it is clear that average real wages are higher for businesses with higher labour productivity.

Both capital deepening and multifactor productivity will be important to support further growth in labour productivity – so business investment is critical to our economic prosperity.

Recent trends

Over the past decade, Australia’s experience with business investment has played out in two starkly different stages.

Chart 1 – This chart shows the unprecedented investment boom to build new supply capacity in the mining sector in response to strong demand for resources and higher commodity prices.

Chart 1: Business investment

Such was the strength of the mining boom that total business investment increased as a per cent of GDP noticeably over this period.

This was one important factor in our economy’s resilience through the GFC, supporting jobs in a whole range of industries and seeing benefits flow on to wages and capital returns throughout the economy.

Of course, it is hard to know precisely why our economy fared so well during the GFC.

The flexibility of the economy, prudent monetary policy and a sound financial system – as well as demand from China – all played their part but it is difficult to single out any individual factor.

While mining investment declined for a time during the GFC, the demand for our resources was such that mining investment increased through to its peak in 2012-13, helping to counteract the global tide of recession through that period.

Since then, mining investment has rapidly receded.

Crucially, business investment outside of the mining sector did not take up the slack as the trend in mining investment reversed.

The share of non-mining business investment as a per cent of GDP began to fall following the GFC, and in recent years has fallen to around its lowest share of GDP in the past 50 years.

In 2016‑17, non-mining business investment was around 9 per cent of GDP.

As is clear from the chart, this is between 2 and 2 ½ percentage points of GDP below the long run average prior to the GFC – so there remains a gap that we would hope non-mining investment could fill.

In an environment of low interest rates and generally positive economic developments the extent of the weakness in non-mining investment was somewhat perplexing.

Australia has not been alone in facing this challenge.

In meetings with my counterparts from the New Zealand, Canada, UK and Ireland Treasuries over recent years weak business investment has been one of the key concerns discussed.

COBA welcomes Government move on credit reporting

COBA says consumers stand to benefit from the Turnbull Government’s decision to nudge major banks to participate in comprehensive credit reporting (CCR).

“COBA welcomes Treasurer Scott Morrison’s announcement of a CCR regime from 1 July next year, starting with the four major banks,” said COBA Acting CEO Dominic Dunn.

“As the Treasurer notes, other lenders are likely to follow suit quickly to improve their competitive position and their credit decision making.

“COBA’s position is that participation in CCR should be voluntary for smaller lenders because they have more of an incentive to participate than the largest lenders and should be able to do so according to their own priorities and resources.

“The landmark Financial System Inquiry (FSI) report in 2014 found that the net benefits of participating will differ between different classes of credit provider. For a major institution with a relatively large customer base, early participation may provide, at least initially, relatively larger benefits to smaller participants than for the institution itself.

“But as participation and system-wide data grow, net benefits increase for all CCR participants.

“CCR has the potential to increase competition because lenders will have more information about consumers, which means they will be able to better match credit types and amounts to borrower capacity. Lenders will have capacity to more accurately price credit relative to the risk profile of the borrower.

“The banking market is an oligopoly and regulatory interventions must be designed to give the competitive fringe of smaller players every chance to take on the major banks.

“The Treasurer’s announcement on CCR is consistent with this approach. Regulatory compliance costs have a big impact on the competitive capacity of smaller players.”

The Treasury View Of Household Debt

John Fraser, Secretary to the Treasury, gave an update on household finances and housing as part of his opening statement to the October 2017 Senate Estimates.  More evidence of the Council of Financial Regulators group-think?  The view that debt is born by those with the greater capacity to repay belies the leverage effect of larger loans in a rising interest rate environment.

Housing market and dwelling investment

The housing market is another sector which we will be monitoring closely.

In recent times, Australia has experienced one of the largest booms in housing construction since Federation, supported by record low interest rates and strong population growth.

Since June 2014, dwelling investment has constituted around 11 per cent of our economic growth.

Much of this has been driven by an unprecedented increase in the construction of high-rise apartment blocks in our east-coast cities.  As a proportion of GDP, medium and high density housing construction is now 1.7 per cent, more than double its long-run average.

Housing market activity also continues to be characterised by some quite stark regional differences. Over the past three years, dwelling price growth in our capital cities has been around double that of regional areas. Also, as the east-coast states have experienced strong growth in investment and prices, the market in Western Australia has been much weaker.

However, as noted at Budget, forward indicators of housing construction, notably for apartments appear to have peaked.

The most recent national accounts show that dwelling investment grew by 1.6 per cent in 2016-17, which is less than we expected at Budget.

We expect that residential construction activity will decline moderately over the next few years, although an elevated pipeline of building work will underpin the sector.  Strong population growth in our east-coast cities will also support housing demand going forward.

Victoria continues to have the fastest growing population of all the States and Territories, growing at around 2.4 per cent through the year to the March quarter 2017.  New South Wales and Queensland each had population growth of about 1.6 per cent through the year to the March quarter 2017.

Over the past few months, dwelling price growth has moderated in our east-coast cities. After years of strong price growth, this is desirable.

Household debt

The state of household finances is an issue that is getting close attention in Australia and that is understandable – but it should be placed in context.

Several considerations should provide some comfort to those concerned about household debt levels.

While household debt has risen over recent years, interest rates have also fallen.

The net result is that the share of household disposable income going to interest payments is currently around its long-term average.

Many households have taken advantage of low interest rates to build substantial mortgages buffers, currently equivalent to over 2 ½ years of scheduled repayments at current interest rates.

And the distribution of that debt is concentrated in high income households, with around 60 per cent of debt held by households in Australia’s top two income quintiles – households that are best positioned to service that debt.

More broadly, any assessment of the sustainability of Australia’s household debt position requires consideration of the assets that those households hold against their debt. We shouldn’t just think about one side of the household balance sheet.

The Australian household sector’s asset holdings are considerable, at around five times greater than its debts – Australian households may have over $2 trillion in debt, but they also hold over $12 trillion in assets.

That said, asset values can always fall (and often do) while debt values generally don’t, squeezing net worth in the process.

And perhaps more importantly, around 75 per cent of household assets are in housing and superannuation.

The fact that households need homes to live in, that it takes time to sell properties, and that superannuation is ‘locked away’ until retirement means that these assets cannot easily provide liquidity to households during periods of financial stress.

It’s also the case that higher debt levels have made households more sensitive to any increase in interest rates in the future.

The Reserve Bank will be mindful of this when thinking about domestic monetary policy, though global monetary conditions can also impact upon the wholesale funding costs of Australian banks.

For these reasons, Australian financial regulators are alive to the risks presented by household sector debt, and will continue to closely monitor and enforce sound lending practices by Australian financial institutions

Macroprudential policies

House price growth has moderated recently and there are welcome signs of moderation in investor and interest-only residential lending activity.

However, it is too soon to make a final assessment of the impact of APRA’s March 2017 macroprudential measures on lending.

These measures included maintaining the growth limit on investor loans first introduced in December 2014 at 10 per cent and limiting the flow of new interest-only lending to 30 per cent of total new lending.

Treasury and regulators will continue to be vigilant in assessing developments in the financial system and the adequacy of policy settings for maintaining financial stability.

While banks’ progress against these measures has been positive, regulators will need to think carefully about whether future efforts to maintain financial stability should lean against cyclical excesses or address structural risks within the financial system.