How do you win an election by promising to increase services at the same time that you promise to decrease taxes? Easy, privatise the tax and welfare systems. At least that appears to be the strategy implicit in Labor’s banking policy released yesterday. And one shouldn’t be surprised, because that’s what a lot of “Third Way” thinking boils down to.
So how does this work? Well, let’s look at the salient parts of the policy first. Labor has promised to force all banks to offer a fee free account to national health care card holders – apparently a benefit to one-in-four Australians. As well they are requiring all banks to give 6 month’s notice of any proposed branch closures. They will also audit communities where bank services have been withdrawn, and will give the banks 12 months to address any “identified shortcomings”. If the bank response is not satisfactory they propose to establish a “Bank Community Obligation Fund” to restore and expand banking services. This will be funded by the “Big Four” banks, plus St George (bad luck to St George CEO Gail Kelly the architect of its recent success).
Price controls will also effectively be imposed on bank fees with any proposed increase requiring ACCC approval. It’s not all bad – there are some good parts to the policy, including clearer credit card statements, but then, you’d hope after spending the time since the last election on this policy they could get some parts of it right.
The justification for all of these moves is that banking is “an essential service”, and the four major banks are very profitable. The effect is that while lower cost banking – a social service – will be provided to a significant slice of the population it will be delivered by the banks (i.e. privately) at the cost of more expensive banking services to the rest of us – a tax – and possibly decreased bank profits – another tax.
There is undoubtedly a lot of community support for this, but it ought to be resisted for the following reasons.
While in our society banking may be an essential service, there are many things even more essential. Take food for example. Using the logic of this banking policy a next logical step would be to assess communities to see whether they need a larger grocery store, and if you think they do and Coles or Woollies refuse to go there, then force them to pay into a “Grocery Community Obligation Fund” so the government can sort the situation out for them. Don’t laugh. That approach by post World War II Labor governments in Queensland led to butchers shops being government owned.
The spin-doctors would have us believe that Latham represents a new way for Labor. Instead, this policy mirrors a very old way that predates the modern social welfare system. If Labor thinks that bank accounts are costing too much, there are two conventional and sensible things that they can do about this. One is to increase social security benefits to cover the cost; and the other is to estimate the cost of the service and pay the banks a community obligation service fee to meet it. Both of these solutions are fair and transparent and spread the obligation over the whole community.
Part of the attraction of this scheme is that slugging banks for welfare services looks to most people as morally challenging as swatting a cockroach. It’s ironic that while bank services have improved staggeringly over the last 20 years, the public’s regard for them has plummeted. 20 years ago you had to make an appointment to see your bank manager – he or she rarely called on you, even if you were a large borrower. First homeowners had real problems accessing finance. Only the well-off could get bank loans. Most were palmed off onto the bank’s finance company subsidiaries where they could borrow, but only at exorbitant rates of interest. Cash management trusts paying reasonable rates were only very new. Automatic teller machines were becoming common, but you didn’t have EFTPOS at every supermarket cash register where you could also withdraw cash. There was of course no such thing as Internet banking.
The upshot of many of these improvements is that banks no longer need to maintain as extensive a network of branches. It’s not that there are fewer services, just that they are delivered in different and, from my point of view, better ways. That’s another danger of the Labor policy – that it will stifle innovation.
Not that innovation has been an unalloyed good for the small depositor. Twenty years ago banks carried a lot of “loss leader” business in the way of small accounts that paid minimal interest but charged even more minimal fees. All that changed with the advent the aforementioned cash management accounts and mortgage brokers like Aussie Home Loans’ John Symons. By separating the home lending business out from the deposit taking business, Symons brought the cost of home loans down. The banks had to match him, but that meant that they could no longer cross-subsidise loss making services like small deposit accounts from home loan interest rates. The result? The percentage of their income earned in fees increased, and was increasingly paid by low income earners.
This new Labor policy will presumably further advantage the finance broking industry, while forcing the banks to look for other areas in which to build their business. So what? Well, banks may look highly profitable, and they are, when times are good. But they are the most heavily leaveraged companies on the stock exchange with gearings of around 90%. When the economy is booming that makes it possible for them to earn more than 20% on shareholders funds, and when the economy turns bad, it give bankruptcy a whole new meaning. Australians are highly productive workers, but only because we run a capital intensive economy. Making it difficult for the organisations whose job it is to finance that capital is not a smart way to run a modern economy.
I’m not sure who Latham is trying to target with this policy. It will appeal to large sections of the elderly and some rural voters, but I suspect not sufficiently to overcome their natural inclinations to play safety first. It will unsettle business and more economically sophisticated voters, and it may play into the hands of the government when it comes to homeowners. Our research is showing that homeowners are worried about a possible housing bust and higher interest rates. That’s the drum that Costello was beating when he said in response to this policy that any “credit card health warning” as proposed by Labor should “also warn customers of likely interest rate rises under a Labor government”.
When it comes to voting – interest rate policy trumps private sector financed populism most times. Labor appears to me to be getting over-anxious and letting Howard back into this game.