Lower interest rates, richer households: Just add a dash of competition

Interest rates would be half a percentage point lower and Australian households up to $5000 better off as part of a decade-long overhaul of the banking sector and economy-wide reforms ranging from mechanics to medicines agreed to by the nation’s treasurers.

As federal treasurer Jim Chalmers revealed the most significant change to the Reserve Bank in a generation would start just before next year’s election, he and his state counterparts were warned by the Productivity Commission that years of inaction had to be turned around to lift the living standards of all Australians.

Federal Treasurer Jim Chalmers.Credit: Alex Ellinghausen

The commission was earlier this year charged by Chalmers and state treasurers to look at the economic payoffs from 26 major reforms that governments of all political persuasions have examined, delayed or ignored for more than a decade.

In modelling made public on Friday, the commission found the economy would gain between $26 billion and $45 billion or between $3000 and $5000 per household a year. Not only would people be richer, the commission estimated inflation would be between 0.7 and 1.5 per cent lower than if nothing were changed.

One of the biggest gains would come from making it easier for people to change banks for mortgages and small business loans. The commission argued the big four banks use their size to effectively lock in customers on interest rates higher than they need to be. Interest rates could be up to 0.5 percentage points lower through more competition which, on a $600,000 mortgage, would deliver a $200-a-month saving.

The use of cheap sign-up rates, which are then increased after a short while, have effectively become loyalty taxes. Smaller banks, without the deposit bases of their larger competitors, faced rules that made it difficult to access funding they could then use to win new customers.

According to the commission, just boosting competition for mortgages and small business loans could make every household $750 a year better off and help alleviate the country’s housing crisis.

“This has the potential to have significant flow-on effects for the Australian economy, with increased private sector financing promoting further economic growth while lower home loan rates could provide a sizeable increase in disposable household income,” it found.

Overhauling the different and complex occupational licences between the states, the commission found, would boost the economy even more, at between $5.1 billion and $10.3 billion.

The government this month said it would introduce a general “right-to-repair” rule, following complaints from farmers and car owners that multinational firms are using intellectual property rights on their vehicles to prevent low-cost repairs by non-dealership mechanics.

So-called “golden handcuffs” used by employers to prevent staff from moving to competitors, the commission found, costs the economy up to $5.1 billion. It also found gains could be made by changing the ways governments tender for contracts, targeting anti-competitive behaviour in the pharmaceutical sector and making it easier for patients to use telehealth services.

Chalmers told his fellow treasurers that the government’s success in parliament getting support for a raft of policy reforms, including the overhaul of the Reserve Bank, showed change could be delivered.

He said the proposals examined by the Productivity Commission would form the basis of a decade-long period of competition reform that would benefit all Australians.

“We can achieve more working together than we can alone,” he said. “The national competition policy reforms of the 1990s brought a period of sustained economic growth, and this new, ambitious, decade-long program will deliver significant benefits for consumers and businesses across Australia.”

Some of the Reserve Bank reforms, such as less frequent but longer meetings and press conferences by governor Michele Bullock, have already been in place since they were recommended by an independent review of the bank.

Press conferences delivered after each meeting of the Reserve Bank have been in place this year after an independent review.Credit: Louie Douvis

But the review’s most important proposal, to create a standalone committee focused solely on setting interest rates while retaining a bank governance board, had been stalled in the Senate for the past six months until this week. The Coalition refused to back the changes, accusing Chalmers of wanting to stack the new committee.

Chalmers revealed on Friday that the new committee would not sit until after the RBA’s mid-February meeting early next year.

Markets and economists do not expect the RBA to start cutting interest rates until May, which is firming as the month Anthony Albanese will go to the polls.

Chalmers said he would consult the Coalition on appointees to both the interest rate committee and the governance board.

“We will appoint first-class, first-rate people to both of the new boards of the Reserve Bank. We have put a lot of thought into it already,” he said.

Shadow treasurer Angus Taylor said that by relying on the Greens to support the RBA reforms, the government would adopt the minor party’s “radical” economic policy after the next election.

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