The financial regulator has warned that continued Government cost-cutting could “ultimately compromise” the safety of the financial system.
In its submission to the Financial System Inquiry, released today, the Australian Prudential Regulation Authority (APRA) unsurprisingly expressed satisfaction with its performance.
But, as the Federal Government talks up the prospect of a slash-and-burn Budget next month, the regulator warned that cuts to resources can come at a heavy cost.
APRA said that in recent years the previous Government’s so-called “efficiency dividend” demands had made things increasingly difficult for the agency, which had to compete with a strong private sector to retain talented and experienced staff.
“The mechanism of efficiency dividends is not well-suited to an industry-funded agency,” APRA said. “Continued efficiency dividends will ultimately compromise financial safety but make no contribution to the Government’s budgetary objectives.”
In its, submission, also released today, Treasury warned of the threat to effective financial market supervision from a blurring of the lines of responsibility among the key regulators.
Treasury said the current regulatory framework was sound, with only improvement “at the margin” needed.
In a swipe at those in the finance industry chafing under more stringent international standards, like Basel III’s highly prescriptive rules, Treasury said Australia, as a significant capital importer, had little scope to ignore such developments.
In fact, the department said, many such reforms would bring regulatory standards in other jurisdictions closer to those in Australia.
But it also acknowledged problems in current arrangements, including the distortions caused by the Commonwealth’s guarantee for bank deposits, which not only create moral hazard, but give the major lenders a clear competitive advantage.
And Treasury warned of the danger that the clear demarcations that had existed between APRA and the Australian Security and Investment Commission (ASIC) were becoming blurred, undermining the effectiveness of the regulatory framework.
“Recent proposals for ASIC to take on quasi-prudential functions following the collapse of Banksia illustrate the difficulties in maintaining clear demarcations in the fact of changing products and market structures,” Treasury said.
In a fillip for SMSFs, the department endorsed the current policy approach of relatively low levels of regulation and oversight by the Tax Office to ensure compliance with taxation law.
Tag Archives: abbott government
APRA warns: cut now, pay later
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When the bank calls, bells start ringing
If, like me, in the last couple of days you’ve had a call from your bank eager to talk about how to they could save you money on your mortgage, you’ve probably twigged that something is up.
Usually they call to flog insurance policies I don’t want, or offer a lift in my credit card limit that I can’t afford.
So to hear them actually prepared to come to the table to strike a cheaper deal on what is one of their core products is an interesting development.
It tells me that their own economists have told them the prospects of an official interest rate rise sometime this year are looking pretty slim.
This is no news to the market, which sees no chance of a rate hike before March next year, and instead is pricing in the possibility of a rate cut.
As RBA Governor Glenn Stevens put it today when announcing the Reserve Bank Board had decided to hold the central bank’s cash rate steady for a seventh consecutive month, “on present indications, the most prudent course is likely to be a period of stability in interest rates”.
It also shows that the field of competition has well and truly shifted from deposits (remember when the interest rate on 3-month deposits reached above 5 per cent? It is now down to around 3 per cent), and the scramble now is to sign up home buyers.
It is pretty clear that at the moment the economy is like a dog on roller skates, desperately trying to gain some traction.
Mr Stevens said that, while consumer demand was “slightly firmer”, and data foreshadowed a “solid expansion” in housing (building approvals jumped 6.8 per cent in January to be up almost 36 per cent from a year earlier), demand for labour is weak and the unemployment rate is likely to rise higher.
Its cause isn’t helped by a Federal Government that at every opportunity thunders about the dire state of the nation’s public finances and hints darkly at the need for painful spending cuts.
In central bank-speak, “public spending is scheduled to be subdued”.
It can’t be doing anything to improve the willingness of businesses to invest. Official figures confirm private capital expenditure has been sliding for the past couple of years, even as profits have grown – gross operating profits were up 107 per cent in the year to the December quarter, yet over the same period private capex fell 5.7 per cent (and spending on plant and equipment plunged more than 16 per cent).
As Mr Stevens put it, resource sector investment is set to decline significantly, while there are only “tentative” signs of improvement in investment intentions in other sectors.
The economy is partly the victim of an unfortunate clash of timing between the business and political cycles.
The incentive for the Abbott Government is to cut hard in its first Budget, giving itself room for vote-enhancing largesse closer to the next election, while the economy could do with some productivity-enhancing infrastructure investment.
Fat hope of that at the moment.
Even more people are likely to be out of work in the coming months, and being able to negotiate a cheaper mortgage is likely to be of little comfort.
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Record low wage growth gives lie to Abbott’s IR obsession
The ridiculousness of the Abbott Government’s industrial relations obsession has been thrown into stark relief by figures showing wages are growing at their slowest rate since at least 1997.
The Wage Price Index measured by the Australian Bureau of Statistics rose by 0.7 per cent in the December quarter, taking annual growth to 2.6 per cent – the lowest rate in the 16-year history of the series.
The result gives a lie to the inflated rhetoric about out-of-control wage claims blasted out by the Government in recent weeks as it has tried to pin the blame for a succession of high-profile factory closures such as SPC, Holden, Toyota and Alcoa on workers.
It is hard to have much confidence in the economic grasp of the Government while they carry on with their IR sideshow.
Sure, wages are part of Australia’s relatively high (by international comparison) cost base, but so are energy and other utility charges, transport costs, regulatory fees and so on.
Relatively high wages, by themselves, should not be automatically seen or portrayed as something bad and undesirable, as many IR obsessives try to make out. Just ask any merchant banker.
They become a concern where they are not supported by similarly high productivity, and that can be due to a combination of factors that include (but are not limited to) work practices, such as management and investment.
The recent mining investment boom provided a prime example. Resource companies, rushing to cash in on sky-high global commodity prices, threw enormous resources of labour and capital at the task of boosting production. Price was virtually no object. This had the effect of pushing up the cost of labour (wages) and the prices of goods and services.
In the short term, this helped push up labour casts and killed productivity. But as labour-intensive construction has ended and expanded mines and upgraded ports, roads and rail links have come into operation, export volumes have boomed.
In productivity terms, the amount of value produced by each worker left in the mining sector after the building crews have moved out has surged.
Across the economy, there is a need to lift productivity, but the tired old thinking of many in Government and business who automatically equate this with screwing down on wages and conditions needs to end.
Obviously, business models built solely on competing directly with low-cost manufacturers internationally are becoming increasingly unsustainable.
But the answer isn’t to attack wages and conditions.
By many measures, Australia has a highly skilled, flexible and productive workforce.
Employers in both the public and private sectors get an enormous, they rarely acknowledged, subsidy from employees who regularly work many more hours than they are paid for.
Crude calculations using ABS employment and aggregate hours worked figures show that each employee worked an average of 35.5 hours a week in January. Take into account that around a third of these workers were part-time, and that January is traditionally a holiday period, and it suggests that a substantial proportion of the workforce work longer than the ‘standard’ 37.5 hour week, and many are likely to do so without paid overtime.
Another measure is time lost to industrial disputes. Official figures show that in the 12 months to the September 2013 quarter, an average of just 3 working days were lost to industrial disputes for every 1000 workers. These are not the numbers you would expect to see from a habitually disruptive workforce.
As was discussed in an earlier blog, Time to curb outrageous salaries – or lift investment?, labour is losing out to capital in grabbing a share of earnings. The Economist cited figures from the Organisation of Economic Cooperation and Development showing that labour captured 62 per cent of all income in the 2000s, down from more than 66 per cent in the early 1990s.
Yes, the nation has a productivity challenge. And yes, workers have a role to play in lifting productivity.
But maybe employers and managers should cast a critical eye over their own remuneration and ways of operating, rather than simply pencilling in cuts to the pay and conditions of their employees.
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Boxall in the box seat?
Just as Martin Parkinson has been forced to contemplate life after Treasury, Treasurer Joe Hockey has to contemplate life after Martin.
The question is, who will he pick? Or, perhaps more likely, who has he already picked?
Most speculation so far seems to centre around two former senior Costello staffers – Mike Callahan and Phil Gaetjens.
Both have the experience that would seem to make them obvious candidates for the position – solid background in developing and providing economic advice, a record of service to the Coalition, a familiarity with the workings of the public service, and political judgement.
Callahan knows Treasury well. He joined the department in 1974 and has spent much of his career there. Following his stint in Costello’s office (from 1999 to 2000, during the introduction of the GST) he rose through the ranks to become head of the Revenue Group between 2005 and 2007, before moving on to be Executive Director, International, from 2008 until he left Treasury in 2012 to join the Lowy Institute, where he is Program Director of the G20 Studies Centre.
Gaetjens, who has been a career public servant at both the Federal and State level, honed his political skills and judgement as Costello’s chief of staff for a decade, before moving on to become Secretary at NSW Treasury following the defeat of the Howard Government.
But there is a third former senior Costello staffer who, oddly, has so far largely been overlooked in connection with the Treasury job, but who would seem to be better qualified than both – former Department of Employment and Workplace Relations Secretary Peter Boxall.
Few top Federal public servants have borne as many scars for the Coalition as has Boxall.
He served as an economic adviser to Andrew Peacock in the late 1980s, where he helped develop the-the Opposition’s 1990 economic action plan.
Later, in Costello’s office he helped frame the Howard Government infamous first Budget, with its swingeing cuts to the public service and Commonwealth spending.
He subsequently returned to the public service where, as Secretary of the Finance Department, he was responsible for the introduction of the system of accruals, outcomes and outputs that is now in place across the bureaucracy.
But it was perhaps as Department of Employment and Workplace Relations Secretary that Boxall really earned his stripes as far as the Coalition was concerned.
The highly-educated economist, who worked at the International Monetary Fund for many years, led the Department through the introduction of Work Choices, and although the policy was eventually repudiated politically (and is still seen to have the whiff of political death about it), the quality of its implementation has never been seriously challenged.
His reputation as a fiscal conservative won’t harm his chances, either.
In an interview he gave to the Canberra Times in March 2006, Boxall detailed his outlook on the job of the public service, and its stewardship of public monies.
“It’s really our job to look at what is efficient, which is more measurable, and effective and ethical,” he said. “And that’s why in the FMA Act [Financial Management and Accountability Act under which Commonwealth departments operate] they have this section … which says that one of the duties of CEOs such as myself is the three Es: efficient, effective and ethical use of taxpayers money. Fairness is an issue for the politicians.”
It is an outlook in synchronicity with that of the Abbott Government.
As the Canberra Times put it: “He considers himself a classic liberal and thinks there is scope to continue to look at government expenditure in a lot of areas to see whether programs are really necessary. This applies even when there is a significant surplus because then there can be lower taxes.”
Little wonder, then, that when the National Commission of Audit was being formed, Boxall was an early inclusion.
Treasury Secretary is one of the top jobs in the Federal public service, requiring a combination of economic smarts, political nous, a strategic outlook, high order administrative skills and well-earned authority.
It is not a position that would treat an outsider parachuted in kindly.
It is a not a job for heroic ‘Captain’s picks’ (ala Fred Hilmer and Fairfax, or Sol Trujillo and Telstra).
Both Ken Henry and Martin Parkinson had the qualities needed to make a success of the position in generous helpings.
Whoever gets the post, it is not going to be an easy ride.
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Outlier 