The former federal treasurer and chairman of the Future Fund Peter Costello has warned one year on, the royal commission has resulted in over-regulation of the financial services sector and hindered the Australian economy, as rate cuts have lost their power.
Speaking at the AVCJ Private Equity & Venture Forum in Sydney on Wednesday, Future Fund chair Peter Costello noted that while misconduct should be exposed and dealt with, the government may have failed in achieving a balanced response.
“One of the things that’s worrying me at the moment, particularly coming out of the royal commissions, in relation to financial services has been a lot more regulation particularly on financial institutions now,” Mr Costello said.
“Banks had bad practices, they should have been exposed, no doubt about it. But, some of these laws are making it much, much harder to advance credit and the costs of advancing credit are greater and I think this is a bit of a restraint on the Australian economy.
“I think we’ve got to be very, very careful here that bad conduct … doesn’t lead to over-regulation and this is always a constant thing for government. The public rightly demands government intervene, but you [have] got to intervene in an astute way, which doesn’t damage the greater good.”
Rate cuts ‘running out of efficacy’
In economic policy, according to Mr Costello, there are three arms: monetary policy, which is set by the central banks; fiscal policy, legislation and budgeting worked on by the government; and “structural policy”, entailing everything else that determines the efficiency and productivity of an economy.
For him, structural policy includes rules on tax, competition, investment and regulatory.
Commenting on different ways to boost productivity, he listed a number of factors, including efficient taxes, good transport, education and “less intrusions in regulation”, particularly in the financial system.
“It’s right across your economy, working on all of these blockages and stoppages and making sure that you get the best outcome,” Mr Costello said.
“Now, all of those things are pretty hard and they’re unsexy. And that’s why it’s much easier just to get your central bank to make an announcement on the cash rate, because that’s just done, it’s done overnight.
“But the trouble is, after your central bank has doubled its cash cuts, we’re nearly done – you’ve still got all these hard issues to go back to.”
He added the issue is evident not only with Australia, but also in other Western countries since 2008 – where governments will rely on monetary policy from central banks because it is easier to change than fiscal or structural policy.
The day before, the RBA had cut the cash rate to an all new record low of 0.5 per cent, a widely anticipated effort to boost the local economy in the face of the global coronavirus outbreak.
“If we’re at 6 per cent, you could cut rates by 2 per cent, you’d have a real effect,” Mr Costello said.
“If you’re at 75 bps and you cut by 25 bps … will it be a lasting stimulus? Probably not. I mean it was 75 bps, it’s gone to 50. [Are] people going to rush out now and say ‘I wouldn’t have borrowed at 75 bps, but I will now at 50’?
“You can’t criticise the central bank, it can only do what it can do and what it can do is move the rate and it’s moved the rate. But to think that the moving of a rate by 25 bps, or 50 bps when it’s already at historic lows, you’re running out of efficacy.”
The US Federal Reserve mirrored the move, making an emergency cut of 0.5 per cent to a new range of 1 per cent to 1.25 per cent.
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