Interview with Sabra Lane
ABC Radio, AM Program
5 October 2010
SUBJECTS: Interest rates; Competition in the banking sector; Inflation; Savings; Defence budget
LANE:
Mr Swan, good morning and welcome to AM.
TREASURER:
Good morning Sabra.
LANE:
The Reserve Bank is meeting today. Some analysts are expecting that it will lift rates. You've already warned the banks not to lift their rates beyond the RBA if that happens. You've made that call in the past and some banks haven't listened, you've been ignored. What else can you do rather than just give them a public lecture?
TREASURER:
Well, I don't think we should jump the gun on the Reserve Bank board decision, we don't know the outcome there yet, they take that decision independently. But I can call this as I see it, and there is absolutely no justification whatsoever for the banks to move over and above any decision taken by the Reserve Bank on the official cash rate. Their profits are very healthy. Their net interest margins are back to levels that we saw prior to the Global Financial Crisis and their impairment levels are coming down. In their Financial Stability Review released last week the Reserve Bank made all of these facts very clear.
So there is no justification for the banks to move over and above any decision that is taken independently by the Reserve Bank. But you're right, we do not regulate these rates in Australia, but it is the case they are very profitable and there is no justification whatsoever for them to move over and above any decision taken by the Reserve Bank.
LANE:
The Greens say that the banks should provide a fixed interest gap mortgage with an interest rate set at a fixed amount above the bank's borrowing costs. Is that an idea worth following up?
TREASURER:
Well, what we've put in place is a series of effective measures to increase competition in the banking sector and one of the sad consequences of the Global Financial Crisis is that it did restrict competition in the banking sector; it did strengthen the big four. So we've been making investments in Residential Mortgage Backed Securities to give the smaller lenders a hand, to give them access to finance and finance which they can get at a cheaper rate. That's been effective and is beginning to work over time. We've put in place tough new consumer laws, particularly laws which can ban unfair mortgage exit fees, and we remain ready to take on board other measures should they be necessary to ensure greater competition in the banking sector.
LANE:
Previously you've talked about the ACCC and the fact that it has powers and if it needs more powers, the right powers, that you'd be happy to have a chat with them. Is that a 'nudge, nudge – wink, wink' to the Commission's Graeme Samuel?
TREASURER:
No it's not. It's simply stating the fact. The ACCC does have powers to deal with collusive behaviour but if the ACCC-
LANE:
Are you disappointed that they don't use them?
TREASURER:
Well, the ACCC operates independently from the Government, but if they required further power and they came to me and indicated they thought there was a deficiency in the law, of course the Government would look at that and take action. We are very serious about competition in this area and we always stand ready to take further actions should they be required.
LANE:
You say you're ready and you talk about warning the banks, but aren't you just admitting basically, that you're pretty powerless other than just bash the banks when they do the wrong thing?
TREASURER:
I'm not doing that at all, in fact we put in place a series of measures which I think are very important. Our investment in AAA rated Residential Mortgage Backed Securities has been very important to boost lending from smaller lenders, from credit unions, and smaller banks. That's been effective but of course these things take time to work. And of course, the new consumer laws that we've put in place, very important, a first in Australian history. These things all take time to work and they have been put in place methodically by the Government over the past few years.
LANE:
The Reserve Bank Governor has talked about inflation concerns, specifically that the mining boom will fuel inflation. How concerned are you by that and are you worried that the bank might launch a pre-emptive strike today against that fear?
TREASURER:
Well, we've been concerned about capacity constraints in this economy for a long period of time and on our election to Government in 2007 we began to put in place a range of policies to expand economic capacity in the economy. You might recall back then inflation was very high. The previous government had refused to make the critical investments in infrastructure - particularly road, rail and port. We've spent a couple of years putting in place important economic capacity building infrastructure to take pressure off inflation so we can grow sustainably, and that's important as we go forward. That's why the-
LANE:
Are the concerns unfounded?
TREASURER:
No, well, they're not unfounded - we regard the mining boom mark II as a significant challenge and opportunity for our country. It does give us the capacity to grow more strongly, but it does also put a clear focus on capacity constraints and that's why in the recent election campaign we talked so much about the need to invest in infrastructure - particularly in our mining regions - the need to lift productivity, to invest in skills and training more generally. These are all important parts of our long-term program to ensure we can grow sustainably, create prosperity and to spread opportunity.
LANE:
The Red Book that the Finance Department prepared for the Finance Minister and released on Friday which sort of outlines potential problems in the lay of the land, it points to significant pressures on the Budget and the Department advice says the commitments the Government made to the Independents worth $2.4 billion over the forward estimates haven't been factored in. It also pointed out that ongoing overseas Defence commitments haven't been factored in; they're worth $1.7 billion. Are these threats to returning the Budget to surplus in three years time?
TREASURER:
Sabra, we've had a very strong record in finding savings, $83 billion worth over three Budgets. We made it very clear when we published the agreement with the Independents that expenditure there would be offset. There has been some commentary about the bids for health – they don't even come to the Government until early December – and independent boards will look at those bids and make recommendations to the Government. But we will fully-
LANE:
(Inaudible)
TREASURER:
-I'll come to Defence in a minute. We will fully offset any of those commitments in the normal way in our Budget.
But when it comes to Defence, we settled Defence funding a year or so ago. We have given them predictability and certainty and we've made it very clear we will not see our troops in the field want for any protection.
So we've made our commitment in terms of Defence funding to provide the certainty there, to find the savings, to fund important initiatives in the White Paper. All of that is out there and before the Australian people. But when it comes to savings, when it comes to the return to surplus in three years, three years early, that is our commitment. It's a very important part of our medium-term fiscal strategy which is achieved principally by our two per cent expenditure cap.
LANE:
Mr Swan thanks for your time.
TREASURER:
Good to be with you.
