New Superannuation Income Stream Rules

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has released draft superannuation income stream regulations and a draft explanatory statement for public consultation.

The regulations continue the implementation of the Government’s superannuation reforms and introduce a new set of design rules for lifetime superannuation income stream products that will enable retirees to better manage consumption and longevity risk in retirement. The regulations are intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities and group self-annuitised products.

Closing date for submissions: 12 April 2017

The purpose of Schedule 1 to the Regulations is to introduce a new set of design rules for lifetime superannuation income stream products that will enable retirees to better manage consumption and longevity risk in retirement. The new rules are intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities and group self-annuitised products. The overarching goal of the rules is to provide flexibility in the design of income stream products to meet consumer preferences while ensuring income is provided throughout retirement. Superannuation funds and life insurance companies will receive a tax exemption on income from assets supporting these new income stream products provided they are currently payable, or in the case of deferred products, held for an individual that has reached retirement.

A contract for the provision of an annuity benefit, or the rules for the provision of a pension benefit (the governing conditions) will need to meet four key elements of the standards in subregulation 1.06A(2). These elements are:

  • A requirement that benefit payments not commence until a primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated or has attained the age of 65.
  • A requirement that benefit payments, of at least annual frequency, be made throughout a beneficiary’s lifetime following the cessation of any payment deferral period.
  • A rule ensuring that, after benefit payments start, there is no unreasonable deferral of payments from the income stream.
  • Restrictions on amounts that can be commuted to a lump sum or for rollover purposes based on a declining capital access schedule commencing from the retirement phase.

Item 18 of Schedule 1 inserts a formula that will restrict the maximum commutation amount that can be accessed after 14 days from the retirement phase start day, on a declining straight line basis over the primary beneficiary’s life expectancy. The maximum commutation amount will be worked out by dividing the ‘access amount’ by the primary beneficiary’s life expectancy on the retirement phase start day and then multiplying this by the remaining life expectancy less one year at time of commutation. Life expectancy will be rounded down to a whole number of years. The maximum commutation amount will also be reduced by the sum of all amounts previously commuted from the income stream prior to the time of the commutation.

Item 11 of Schedule 1 will insert a definition to determine the value of the ‘access amount’ on the retirement phase start day for the income stream or at a point in time after the retirement phase start day. The access amount will be the maximum amount payable on commutation of an interest on the retirement phase start day as determined by an annuity contract or pension rules. Any instalment amounts paid for an interest in a deferred superannuation income stream after the retirement phase start day will then be added to the access amount at the point in time that an instalment is paid.

External Dispute Resolution Review Extended

In a statement from the Independent Review Panel: Professor Ian Ramsay (Chair), Julie Abramson and Alan Kirkland, the terms of reference have been extended.

They will now be tasked with the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and also consider the merits and issues involved in providing access to redress for past disputes.

Whilst we think dispute resolution is part of the problem, we think SME banking issues are more systemic, so other steps also need to be taken. Also note the consultation period is passed, so the public are not able to comment on these revised terms!

The Government has released the report of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Inquiry into small business loans, and as a result of this report has expanded the terms of reference for the review of the financial system’s external dispute resolution (EDR) and complaints framework (EDR Review).

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has today released amended terms of reference to include:

  • the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and
  • consideration of the merits and issues involved in providing access to redress for past disputes.

In order to fully consider the amended terms of reference, the Panel intends to release a separate issues paper on the additional matters and will seek the views of stakeholders.

The Government has provided a three-month extension to the initial reporting date of end March 2017 to enable the Panel to consider and consult on the issues contained in the amended terms of reference. The Panel will provide a separate report on the additional terms of reference by the end of June 2017.

Public consultation on the EDR Review Interim Report, released on 6 December 2016 and available on the Treasury website, closed on Friday, 27 January 2017. The Panel will still provide the Government with a final report on the issues contained in the original terms of reference by the end of March 2017.

There are two big political problems buried in the latest budget update

From The Conversation.

Whether or not we end up in surplus in five years’ time, yesterday’s Mid Year Economic and Fiscal Outlook (MYEFO) exposes nasty political problems for the Turnbull government in the here and now.

Real GDP growth for 2016-17 has been sensibly but shockingly revised down to 2% – the lowest outcome since the global financial crisis, the second lowest in 16 years and the third lowest since the long upswing began in 1991/92. Sensible, because we know, from the third-quarter GDP numbers and other indicators this year, that the upswing in residential investment has peaked before (and perhaps well before) an upswing in business investment has begun.

Shocking, because if labour productivity continues to run a little above 1% – as it has for the last four years – the implied growth in employment of 1% or so will probably not be enough to stop unemployment rising. The MYEFO projects the unemployment rate in the June quarter next year at 5.5% – lower than today and lower than the average of 5.8% over the last four years.

Yet, at 2.6% year average GDP, growth in those four years has been markedly stronger than the 2% MYEFO now projects for 2016-17. Even with the projected decline in the participation rate, the MYEFO unemployment forecast will be a struggle.

Disappointing GDP growth is political problem number one for Malcolm Turnbull and Treasurer Scott Morrison. Problem number two is the implacable persistence of substantial federal deficits.

These deficits limit the government’s response to problem number one. In 2012-2013 government receipts were 23.0% of GDP, payments 24.0% of GDP, and the deficit 1.2% of GDP. Labor lost office a little over nine weeks after the end of that fiscal year.

In these latest projections for the 2016-17 Budget, four years on from 2012-2013, receipts are expected to be 23.3% of GDP, payments 25.2% of GDP and the deficit 2.1% of GDP. Compared to 2012-13, receipts have increased 0.3% of GDP, spending 1.2% of GDP and the deficit 0.9% of GDP. Receipts are up, but spending is up even more and so is the deficit.

There are plenty of reasons for this woeful fiscal performance, mostly to do with modest increases in profits and wages and the tax-minimisation policy of former Treasurer Peter Costello. But these reasons are not ones that square with Treasurer Morrison’s rhetoric, or which can any longer be laid at the door of the previous Labor government.

Nor does the MYEFO give any confidence that the troubles of the Turnbull government will soon be eased. The path to the return to surplus depends completely on increasing tax revenue.

Spending as a share of GDP is now, according to these MYEFO projections, locked in at 25.2% of GDP right through to the end of the forward estimates period (and beyond the next election) in 2019-20. The projected decline of the deficit arises only because tax receipts are expected to increase over that period by 1.6% of GDP.

A slow economy, a rising tax take, perhaps rising unemployment, and not much room to move. 2017 won’t be cheerful for the prime minister or treasurer – or for the rest of us.

Author: John Edwards, Nonresident Fellow at the Lowy Institute for International Policy and Adjunct Professor with the John Curtin Institute of Public Policy, Curtin University

MYEFO – Will Mortgage Rates Rise?

The MYEFO was released today. In essence, it has quite an optimistic tint, but fundamentally growth is too weak, so incomes, business investment and tax takes will be depressed. Whilst there is some chance of a “free-kick” from some commodity prices, the outlook is not great, and net government debt has yet to peak. The cost of debt will rise as shows by the yield curve assumption which has lifted compared with 2016 PEFO.

“The Government’s interest payments and expense over the forward estimates mostly relate to the cost of servicing the stock of Commonwealth Government Securities (CGS) on issue, and are expected to increase over the forward estimates as a result of the projected rise in CGS on issue”.

The key question is how will this translated to the mortgage rate, which we know will be rising through 2017, as global capital markets reprice yields post the Trump election? We think this will help to lift rates higher still.

The big risk is a AAA downgrade. Such a move would lift the costs of funding for the banks, and this would need to be passed on to consumers and small business customers. The probability has firmed for a downgrade, and so the expectation must be that mortgage rates will rise further and faster than previously expected. We still expect rates on average to be 50 basis points higher this time next year. Our mortgage stress analysis shows that some households are already under the gun.

Whilst there is certainly a chance the RBA may want to cut rates to assist next year, we still think this is unlikely, given the housing boom in the eastern states and the clear limitations of monetary policy when rates are this low. In any case the cash rates and mortgage rates have become decoupled.

Here is the ABC’s MYEFO summary:

  1. Budget deficit this financial year has shrunk by $600 million to $36.5 billion
  2. Deficits over the four year forward estimates have grown by more than $10 billion
  3. The Government is still projecting a return to surplus in financial year 2020-21
  4. Net debt as a proportion of economic output will peak at 19 per cent in 2018-19
  5. Real economic growth estimates have been revised down slightly
  6. MYEFO says “commodity prices remain a key uncertainty”
  7. Estimated tax receipts are down by $3.7 billion since the pre-election budget update
  8. Tax receipts are predicted to be $30.7 billion lower over four years
  9. Tax receipts are down despite recent bounces in key commodity prices
  10. Sluggish wage growth and and non-mining company profits are dragging down tax receipts
  11. The Government has confirmed it is scrapping the Green Army program, saving $224 million
  12. MYEFO reveals extra staff for crossbenchers and other politicians will cost $35.8 million over four years
  13. The Government is closing the Asset Recycling Fund
  14. A Commonwealth penalty unit will rise from $180 to $210


More broadly, the MYEFO says:

Household consumption is expected to continue to grow at a moderate rate, supported by further employment growth and low interest rates. The household saving rate is expected to continue to decline over the forecast period as consumption growth outpaces the modest growth in disposable incomes.

Dwelling investment is forecast to grow by 4½ per cent in 2016-17 before easing to ½ per cent in 2017-18, as the current pipeline of construction — which is evident in the data on building approvals and commencements — is completed.

Business investment is forecast to fall by 6 per cent in 2016-17 and to be flat in 2017-18. This reflects further large forecast falls for mining investment of 21 per cent in 2016-17 and 12 per cent in 2017-18. The impact of this decline in mining investment on the economy is expected to diminish over the forecast period.

Employment growth is expected to be supported by continued economic growth and subdued wage growth. Employment is forecast to grow at a slightly more moderate pace of 1¼ per cent through the year to the June quarter 2017, reflecting more subdued employment growth over recent months and slower output growth. Following the recent highs, which saw almost 300,000 jobs created in 2015, employment growth has been slower in 2016. Employment growth is expected to increase to 1½ per cent through the year to the June quarter 2018 as economic growth strengthens.

The unemployment rate has declined since its recent peak of 6.3 per cent in July 2015. The unemployment rate is forecast to remain around 5½ per cent in the June quarters of 2017 and 2018. While the unemployment rate has fallen, the underemployment rate has remained elevated. These developments suggest that spare capacity remains in the labour market. The forecast for the participation rate has been revised down since the 2016 PEFO and it is expected to be 64½ per cent in the June quarters of 2017 and 2018.

Consumer price inflation is low reflecting subdued wage growth and other factors such as heightened competition in the retail sector, slower growth in rents and lower import and petrol prices. There is also a subdued inflationary environment globally.
Consumer prices are expected to grow by 1¾ per cent through the year to the June quarter 2017, before picking up to 2 per cent through the year to the June quarter 2018. This is lower than forecast at the 2016 PEFO.

Wage growth has also softened since the 2016 PEFO, in line with weaker consumer price outcomes and other factors such as spare capacity in the labour market. As with consumer prices, wage growth is expected to increase gradually over the forecast period to be 2¼ per cent through the year to the June quarter 2017
and 2½ per cent through the year to the June quarter 2018.

Nominal GDP growth is forecast to be 5¾ per cent in 2016-17 and 3¾ per cent in 2017-18. The forecast for 2016-17 is stronger than the 2016 PEFO forecast, with higher commodity prices providing an offset to weaker wage growth and domestic price

More Messing With Super?

Yesterday the Treasury released, late in the day, a consultation on the “Development of the framework for Comprehensive Income Products for Retirement“. The framework appears to open the door to new products, which offer significant opportunities for industry players to invent yet more fees and charges. Just remember the biggest killer on superannuation in the accumulation phase is the level of fees and charges. We fear this exercise will open the door to more income flows to industry participants in the income draw-down phase of retirement, and raise more disclosure questions. This could be exacerbated if distributed via Robo-advice platforms.

Bear in mind also that superannuation savings is a relatively small proportion of total household assets – property being the largest element (thanks to the massive rise in value), according to the ABS.

The paper says the CIPRs framework is not intended to encourage annuities over other products; compel retirees to take up a certain retirement income product; or replace the need for financial advice. We shall see.

The Government agreed to support the development of more efficient retirement income products and to facilitate trustees offering these products to members, in response to the Financial System Inquiry.

These products were labelled by the Murray Inquiry (Financial System Inquiry) as ‘Comprehensive Income Products for Retirement’, or CIPRs; however the Government proposes to use ‘MyRetirement products’ as a more consumer‑friendly and meaningful label.

The MyRetirement framework is intended to increase individuals’ standard of living in retirement, increase the range of retirement income products available, and empower trustees to provide members with an easier transition into retirement. Through this framework, the Government is aiming to increase the efficiency of the superannuation system so it can better achieve the proposed objective of superannuation, which is to provide income in retirement to substitute or supplement the Age Pension.

The Government has released, for public consultation, a discussion paper that explores the key issues in developing the framework for Comprehensive Income Products for Retirement, or MyRetirement products. Views are sought from interested stakeholders, in particular on:

  • the structure and minimum requirements of these products;
  • the framework for regulating these products; and
  • the offering of these products.

The Government is committed to consulting extensively with stakeholders on this framework.

A public consultation process will run from 15 December 2016 to 28 April 2017.

The discussion paper covers a lot of ground, in this complex policy area.


It is envisaged that a CIPR would be a mass-customised, composite retirement income product (for example, combining a pooled product with a product that provides flexibility), which trustees could choose to offer to their members at retirement.

The offering of a CIPR would provide an ‘anchor’ to help guide individuals in their retirement income decision-making. Importantly, an individual would have the freedom to choose whether to take up the CIPR or take their retirement income benefits in another way.

Under the CIPRs framework although different product providers (for example, life insurance companies) could administer the underlying component products, trustees would offer a single income stream to their members.

If a trustee designs a product that: meets the proposed minimum product requirements; is in the best interests of the majority of their members; and offers the product in line with the offering requirements, it is proposed that the trustee will receive a safe harbour. The safe harbour would protect the trustee from a claim on the basis that the CIPR was not in the best interest of an individual member. This is intended to provide legal certainty for trustees in undertaking the CIPR offering.


Ensuring all CIPRs meet minimum product requirements is a key way to achieve good outcomes for consumers and to increase comparability between products.

The paper seeks feedback on possible minimum product requirements of this composite product, such as requiring a CIPR to:

  • deliver a minimum level of income that would generally exceed an equivalent amount invested an account-based pension drawn down at minimum rates, with recognition of the benefit of a guaranteed level of income where relevant;
  • deliver a stream of broadly constant real income for life, in expectation (in particular, to manage 2.longevity risk); and
  • include a component to provide flexibility to access a lump sum (for example, via an 3.account-based pension) and/or leave a bequest.


The paper also seeks views on how to regulate both trustees and CIPRs, in addition to regulation of the proposed minimum product requirements outlined above.

Trustees could choose to design a single mass-customised CIPR that would be in the best interests of, and offered to, the majority of their members. However, trustees would not be required to design and/or offer a product that is in the best interests of any particular member. In designing the product, trustees would need to consider whether it is in the best interests of members to outsource the administration of underlying component product(s) where the trustee does not have the necessary skill set or scale to administer the underlying component product(s).

As is currently the case, trustees and other product providers such as life insurers could also create new retirement income products that are tailored to particular member segments or individuals, rather than to the majority of the membership. These products could be offered via personal financial advice (including through robo advice) where the adviser is required to consider the individual’s circumstances and needs. Individuals could also purchase these products via direct channels. If these products are certified to meet the proposed minimum product requirements of a CIPR, it may be appropriate to allow a label to be attached indicating that the product ‘meets the minimum product requirements of a CIPR’.


It is important to debunk some myths about the CIPRs framework. The CIPRs framework is not intended to:

  • encourage annuities over other products;
  • compel retirees to take up a certain retirement income product; or
  • replace the need for financial advice.


Below are three illustrative examples of possible CIPRs: ‘the cut’, ‘the stack’, and ‘the wrap’.

For ‘The cut’ CIPR, the deferred longevity product component could represent as little as 15 to 20 per cent of an individual’s total superannuation balance and still provide a higher and more stable

income than an account-pension drawn down at minimum rates. The large account-based pension component provides a high degree of ‘flexibility’, thereby efficiently managing the concern about dying early and forfeiting an individual’s superannuation savings.superannuation savings.

‘The stack’ CIPR would provide an individual with the flexibility to access ‘lumpy’ income throughout retirement from an account-based pension component drawn down at minimum rates. Compared to ‘The cut’, a larger proportion of the individual’s total superannuation balance would go towards a longevity product component.

‘The wrap’ CIPR represents a combination of ‘The cut’ and ‘The stack’ CIPRs and in doing so, delivers a balance of their benefits. ‘The wrap’ provides longevity risk management (through the deferred longevity product), higher income than an account-based pension drawn down at minimum rates, and provides a degree of flexibility to access ‘lumpy’ income throughout retirement.


Increasing the fees charged on a CIPR, post-commencement
Currently, fees for annuities and defined benefit pensions are essentially ‘locked in’ at the time of purchase due to the guaranteed level of income these products provide. However, for an account-based pension component or a group self-annuitisation component of a CIPR, there is a risk that increases in administration fees would decrease income in retirement. Individuals would not easily be able to change CIPRs in response to an increase in fees.

One option may be to restrict administrative fees from increasing over the life of a CIPR, although there is a risk that if administrative costs increased substantially accumulation members may need to cross-subsidise members in the pension phase.

Another option may be to rely on the income efficiency concept. However, given that administration fees would have a small effect on efficiency as compared with bequests and capital costs, there would need to be a large increase in fees before income efficiency is affected.

An alternative option could be to allow trustees to increase fees so long as there is no differentiation between the fees paid by existing members and new members of the CIPR. This would ensure trustees continue to face competitive fee pressure.

Trustees could lose the right to offer a CIPR to new members if they increased their fees only for existing members.

This paper also seeks alternative ideas on how to protect individuals from significant increases in fees that would erode retirement incomes.


In due course, consultation will also be undertaken on exposure draft legislation and regulations to give effect to the CIPRs framework.

It is envisaged that the CIPRs framework would not commence until trustees and other product providers have had sufficient lead-time to develop appropriate products. Given a commencement date for alternative income stream product rules of 1 July 2017, and the Government is currently reviewing the social security means testing of retirement income streams, the CIPRs framework is not expected to commence any earlier than mid-2018.

The Government could, at a later date, and following an appropriate transition period, consider whether certain trustees should be obliged to offer CIPRs to any of their members. Given this, it will be important for the current proposed CIPRs framework to be sufficiently robust to accommodate a potential change in trustee obligations down the track.


Transitioning Regional Economies – Study TOR

The Productivity Commission has been tasked to undertake a study on the transition of regional economies following the resources boom.


The transition from the mining investment boom to broader-based growth is underway. This transition is occurring at the same time as our economy is reconciling the impacts of globalization, technological and environmental change.

By its nature, the geography of our economic transition will not be consistent across the country.

The combination of forces driving the transition of our economy will unavoidably create friction points in specific regional areas and localities across the country, while being the source of considerable growth and prosperity in others.

The different impacts across the geographic regions of the Australian economy occur because of variable factors such as endowments of natural resources and demographics. Some regions may also have limited capacity to respond to changes in economic conditions; for example, due to different policy or institutional settings.

Scope of the research study

The purpose of this study is to examine the regional geography of Australia’s economic transition, since the mining investment boom, to identify those regions and localities that face significant challenges in successfully transitioning to a more sustainable economic base and the factors which will influence their capacity to adapt to changes in economic circumstances.

The study should also draw on analyses of previous transitions that have occurred in the Australian economy and policy responses as a reference and guide to analysing our current transition. The Commission should consult with statistical agencies and other experts.

In undertaking the study, the Commission should:

  1. Identify regions which are likely, from an examination of economic and social data, to make a less successful transition from the resources boom than other parts of the country at a time when our economy is reconciling the impacts of globalization, technological and environmental change.
  2. For each such region, identify the primary factors contributing to this performance. Identify distributional impacts as part of this analysis.
  3. Establish an economic metric, combining a series of indicators to assess the degree of economic dislocation/engagement, transitional friction and local economic sustainability for regions across Australia and rank those regions to identify those most at risk of failing to adjust.
  4. Devise an analytical framework for assessing the scope for economic and social development in regions which share similar economic characteristics, including dependency on interrelationships between regions.
  5. Consider the relevance of geographic labour mobility including Fly-In/Fly-Out, Drive-In/Drive-Out and temporary migrant labour.
  6. Examine the prospects for change to the structure of each region’s economy and factors that may inhibit this or otherwise prevent a broad sharing of opportunity, consistent with the national growth outlook.


The Commission is to undertake an appropriate public consultation process including consultation with Commonwealth, State and Territory governments, as well as local government where appropriate.

The final report should be provided within 12 months of the receipt of these terms of reference, with an initial report provided in April.

New Draft Financial Product Design Obligations Tabled

The Treasury has released its proposals today.

“The measures outlined in this paper are aimed at improving accountability for financial products in our system throughout the whole product lifecycle. Importantly, product issuers will be required to target the distribution of their products to the consumers that are most likely to have their needs addressed by the product. In addition, ASIC will be empowered to take direct action to address problems where they identify the risk of significant consumer detriment”.

The proposals relating to product design and distribution obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans). ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations.

However, the product intervention power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).

So combined they may have significant impact on the industry.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government accepted the FSI’s recommendations to introduce:

  • design and distribution obligations for financial products to ensure that products are targeted at the right people (FSI recommendation 21); and
  • a temporary product intervention power for the Australian Securities and Investments Commission when there is a risk of significant consumer detriment (FSI recommendation 22).

This paper seeks feedback on the implementation of these measures. In order to assist interested parties in providing feedback, the Paper outlines proposals to illustrate how the measures could operate in practice. This approach recognises that many of the elements of the measures are interrelated and so to provide feedback people need to be able to view the measures holistically.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Wednesday, 15 March 2017 . The responses received will inform the development of draft legislation which will be subject to public consultation.

Outlined below are the proposed positions on the nine key implementation issues for the measures.

Design and distribution obligations

Issue 1: What products will attract the design and distribution obligations?

Summary of proposal: The obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans).

Issue 2: Who will be subject to the obligations?

Summary of proposal: ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations. ‘Issuers’ are the entities responsible for the obligations under the product. Examples of issuers include insurance companies and fund managers.

‘Distributors’ are entities that either arrange for the issue of the product to a consumer or engage in conduct likely to influence a consumer to acquire a product for benefit from the issuer (for example, through advertising or making disclosure documents available). Distributors that provide personal advice will be excluded from the distributor obligations. Examples of a distributor include a credit provider that offers its customers consumer credit insurance or a fund manager that distributes its products using a general advice model.

Issue 3: What will be expected of issuers?

Summary of proposal: Issuers must: (i) identify appropriate target and non-target markets for their products; (ii) select distribution channels that are likely to result in products being marketed to the identified target market; and (iii) review arrangements with reasonable frequency to ensure arrangements continue to be appropriate.

Issue 4: What will be expected of distributors?

Summary of proposal: Distributors must: (i) put in place reasonable controls to ensure products are distributed in accordance with the issuer’s expectations; and (ii) comply with reasonable requests for information from the issuer related to the product review.

Product intervention power

Issue 5: What products will attract the product intervention power?

Summary of proposal: The power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).

Issue 6: What types of interventions will the Australian Securities and Investment Commission (ASIC) be able to make using the power?

Summary of proposal: ASIC can make interventions in relation to the product (or product feature) or the types of consumers that can access the product or the circumstances in which consumers access it. Examples of possible interventions include imposing additional disclosure obligations, mandating warning statements, requiring amendments to advertising documents, restricting or banning the distribution of the product.

Issue 7: When will ASIC be able to make an intervention?

Summary of proposal: In order to use the power, ASIC must identify a risk of significant consumer detriment, undertake appropriate consultation and consider the use of alternative powers. ASIC must determine whether there is a significant consumer detriment by having regard to the potential scale of the detriment in the market, the potential impact on individual consumers and the class of consumers likely to be impacted.

Issue 8: What will be the duration and review arrangements for an ASIC intervention?

Summary of proposal: An intervention by ASIC can last for up to 18 months. During this time, the Government will consider whether the intervention should be permanent. The intervention will lapse after 18 months (if the Government has not made it permanent). ASIC interventions cannot be extended beyond 18 months. ASIC market wide interventions are subject to Parliamentary disallowance. ASIC individual interventions are subject to administrative review.

Issue 9: What oversight will apply to ASIC’s use of the power?

Summary of proposal: Interventions made by ASIC in relation to an individual product or how a specific entity is distributing a product will be subject to administrative and judicial review. Market-wide interventions subject to Parliamentary oversight including a 15-day Parliamentary disallowance period. The Government will review ASIC’s use of the power after it has been in operation for five years.

Review into Dispute Resolution and Complaints Framework – Interim Report

The Treasury released the interim report today, containing a number of recommendations for consideration. Interested parties are invited to lodge written submissions on the issues raised in this Interim Report by 27 January 2017. The expert panel led by Professor Ian Ramsay has recommended a review of the existing financial ombudsmen system but says there is no need for a specialised tribunal to resolve financial disputes.


By way of background, on 5 May 2016, the Minister for Small Business and Assistant Treasurer, the Hon Kelly O’Dwyer MP, announced the establishment of an independent expert panel to lead the review into the financial system’s external dispute resolution and complaints framework.

The expert panel is be chaired by Professor Ian Ramsay, with Mr Alan Kirkland and Ms Julie Abramson as members. A final report is to be provided to the Minister for Revenue and Financial Services by the end of March 2017.

The purpose of this Interim Report is to make draft recommendations for changes to the EDR framework and seek further submissions and information on those draft recommendations prior to providing a final report to government. Submissions received in response to the Issues Paper have informed the draft recommendations.

The Panel has found that the existing industry ombudsman schemes are a cornerstone of the EDR framework and perform well against the Review’s core principles. However, there is scope to improve outcomes for consumers, in particular by addressing problems caused by the existence of two industry ombudsman schemes with overlapping jurisdictions.

  • The Panel’s draft recommendation is that there should be a single industry ombudsman scheme for financial, credit and investment disputes (other than superannuation disputes) to replace FOS and CIO.SCT has strengths, including its unlimited monetary jurisdiction, but the rigidity of the statutory model makes it more difficult to match the industry ombudsman schemes in terms of flexibility and innovation. This is a significant problem as existing pressures on SCT will continue to grow as the superannuation system matures and an ever increasing number of Australians enter the drawdown (retirement) phase.
  • The Panel’s draft recommendation is that SCT should transition into an industry ombudsman scheme for superannuation disputes.
    The Panel considered the merits of moving immediately to a single industry ombudsman scheme to cover all disputes in the financial system, including superannuation disputes. On balance, the Panel’s view is that it is preferable to initially introduce an industry ombudsman scheme focused exclusively on superannuation disputes, given the significance of the change relative to the status quo. Once both of the new ombudsman schemes are fully operational and have garnered strong consumer and industry support, consideration should be given to further integrating the schemes to create a single scheme covering all disputes in the financial system.

The Panel also made other draft recommendations to address gaps in the EDR framework. These include:

  • that the monetary limits and compensation caps for the new scheme for financial, credit and investment disputes be increased (relative to the existing limits and caps imposed by FOS and CIO), including for small business disputes; and
  • that there be enhanced accountability and oversight over the two new schemes, including through strengthening the Australian Securities and Investments Commission’s powers.

The Panel’s view is that these draft recommendations represent an integrated package of reforms to address shortcomings in the current EDR framework and ensure that the framework is well-placed to address both current problems and withstand future challenges.

In its Issues Paper, the Panel sought views on an additional statutory body for dispute resolution. The majority of submissions did not support this proposal. Having considered the views expressed in submissions and for reasons outlined in the body of its Interim Report, the Panel is of the view that an additional statutory dispute resolution body is not required.



Treasury Modelling Suggests Foreign Property Investors Have Only Small Impact

The Treasure released a working paper today – “Foreign Investment and Residential Property Price Growth“.  This paper explores the relationship between foreign investment in Australian residential real estate and property prices.

wolli-buildingThey take the number of foreign approvals (with exceptions), and look, at a postcode level for differences in purchase price, between those with high foreign transactions, and those will little or none.  They conclude that the increase in prices attributable to foreign investors is small when compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne during the study period. Across Sydney and Melbourne, for a typical postcode, foreign demand increases prices by between $80 and $122 on average in each quarter. Almost nothing.  We were not convinced.

The number of foreign investment approvals has trended up in recent years, which has coincided with strong property price growth in many parts of Australia. While domestic buyers make up the vast majority of demand for property, it may be the case that, at the margin, foreign buyers are affecting property prices. This is because the stock of dwellings is relatively fixed in the short run so any increase in demand, whether from domestic or foreign sources, would be expected to result in higher prices, at least until increased prices have provided an incentive for the construction of additional supply. In the longer term, the high level of house prices in Australian capital cities, relative to those in other countries, likely reflects supply constraints. These constraints include state government land release and zoning policies, infrastructure provision and local government development approval processes.

Australia’s policy for foreign investment in residential real estate aims to increase Australia’s housing stock. As such, applications from  non-residents to purchase new properties are usually approved without conditions, but non-residents are prohibited from purchasing established dwellings. Temporary residents can apply to purchase one established property to use as a residence while they live in Australia. The majority of approvals have been granted for investment into new, as opposed to existing dwellings. This suggests that foreign demand is being channelled into increasing the property supply as intended. While some commentators have argued that foreign demand is pricing out first home buyers, it is not clear that this is the case. The number of foreign investment approvals granted for new properties is especially noteworthy given new properties make up a very small proportion of the total number of properties in Australia and because first home buyers tend to buy established properties.

In recent years the level of foreign demand for Australian property has increased strongly. This has been driven largely by increasing applications from Chinese nationals, which rose from around 50 per cent of total foreign investment approvals in mid-2010 to around 70 per cent in early 2015. The increased importance of Chinese demand to Australian real estate increases Australia’s exposure to factors affecting the Chinese economy. Further, any change to the relative attractiveness of holding assets outside of China or ability to do so will likely affect foreign demand for Australian property, which may have domestic economic and financial implications.

Over the period of this study, foreign investment in residential real estate has been concentrated in Melbourne and Sydney (Chart 1).

for-tres1But despite Melbourne receiving more foreign investment approvals than Sydney, price growth in Sydney has been much stronger than in Melbourne over the period. As such, it is difficult to directly attribute price growth in Sydney to foreign investors alone. Other factors, such as the relatively low number of building approvals, commencements and completions in the late 2000s are potential longer term drivers of the recent price growth in Sydney.

To estimate the sensitivity of property prices to changes in foreign demand we develop a fixed effects model of postcode level price growth using foreign investment approvals data from the Foreign Investment Division of the Treasury as the main explanatory variable.

Despite these shortcomings the data from the Foreign  Investment Division at the Treasury is preferable to alternative measures of foreign investment in residential property. These alternative measures, such as from the National Australia Bank, are problematic because they are based on survey data from
industry participants and it is not clear how these industry participants determine whether property buyers are foreign.

Under almost all model specifications there is a statistically significant and economically meaningful relationship between foreign investment approvals and property price growth, but the majority of price growth experienced in recent times does not appear to be attributable to increased foreign demand. Instead, the fact that property price growth has been strong over an extended period is likely to have been primarily driven by other factors such as impediments to supply, especially in some regions where natural and human-imposed constraints on supply are especially limiting.

The increase in prices attributable to foreign investors is small when compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne during the study period. Across Sydney and Melbourne, the models which we consider to be the best specified indicate that, for a typical postcode, foreign demand increases prices by between $80 and $122 on average in each quarter. This is based on the average postcode in these two cities receiving around 0.6 more foreign investment approvals each quarter over time. Further, for each additional foreign investment approval beyond this typical increase of 0.6, median property prices are estimated to rise by between $145 and $222.

Given that the typical increase in the number of foreign investment approvals from one quarter to the next in Sydney and Melbourne is only around 0.6, one additional foreign investment approval beyond this trend increase would be a relatively large spike in the number of approvals. As such, it can be seen that foreign demand has accounted for only a small proportion of the increase in property prices in recent years.

While the results of this study show a consistent, but small positive relationship between foreign investment approvals and property price growth, there are some limitations. This includes the data limitations set out in Section 3, particularly around compliance and that the data reflects intentions to purchase and not actual purchases. The foreign investment data also may not pick up purchases by a citizen or permanent resident on behalf of family members overseas. Quantifying the effect of these limitations is difficult. It is also important to note that while the results suggest the impact across Australia and the capital cities is small, the impacts in certain areas or at particular times may be more intense.

Whilst we applaud the Treasury for trying to bring science to this complex issue, we think there are fundamental flaws in the analysis, which devalues the conclusions significantly.

First, we think the modelling needs to look at total demand, at a post code level by purchaser type. We know from our own surveys, demand varies significantly driven by mix of prospective purchasers. In some locations, – for example Wolli Creek, we see high demand for foreign purchasers, first time buyers, other property investors and down traders – demand is outstripping supply, and here investors are outbidding first time buyers. This is the point, supply is not uniform, and therefore the pricing equilibrium will be quite different in individual locales. Reading their method, we think this is a significant issue.

Second their measure of foreign demand is the number of foreign investment approvals. This data are sourced from the Foreign Investment Division at the Treasury and it not available to the public, so the data cannot be validated, or independently reviewed. Recent inquiries however have called into question the accuracy of the approvals data. It likely understates the volume.   Why not release the data, so we can judge?

They did not include data on advanced off-the-plan foreign investment approvals, nor price data from off-the-plan sales from such developments. We believe that this is likely to miss bulk approvals from developers who, at a single application, and approval gets multiple property transactions approved.

They make the point that foreign investment approvals are concentrated in a relatively small number of postcodes — more than three quarters of postcodes receive less than one approval every three months.  Approvals do not represent actual purchases. For example, a foreign person may receive a foreign investment approval but later decide not to purchase a dwelling. No data are available regarding properties sold by foreigners. As such, the foreign investment data are an indication of gross foreign demand not net foreign demand. For instance, if a property is sold by one foreign person to another, there is no net change in foreign demand for
dwellings but an additional foreign investment approval will be recorded.  It is unclear when an approval for foreign investment will be acted upon because the approval is valid for 12 months. However, anecdotal evidence suggests that in most cases approvals are acted upon soon after being granted. In some cases an approval may be sought shortly after a
contract is entered into but before the conveyancing and settlement period is finalised. As such, they consider leading and lagging relationships in the Results section. This yields some insights into the behaviour of foreign investors.

Foreign investment approvals data do not distinguish between houses and units, so in postcodes with price data for both houses and units, they aggregate prices for these two property types. Specifically, this aggregation is weighted by the proportion of houses and units in each postcode. In postcodes where no price data are available for a particular property type at any time — for example, units in a regional postcode — but price data are available for the other property type — for example, houses — they use the available price data as a measure of postcode
level price.

They do not control for changes in the quality of properties in each postcode through time. We do not consider this to be a major limitation because of the relatively short time period of our study. However, the lack of hedonic adjustment could be problematic where price data are derived from a small number of sales. That is, where postcode level property markets are relatively illiquid and the quality of transacted properties changes through time even though the quality of properties in the postcode more broadly does not change.

So, we conclude this exercise may generate some heat, but we are not sure it casts light on the real issues surrounding foreign buyers. The data limitations and surrounding processes need to be improved if we are to get a handle on the true story.



The Resilience Of The Australian Economy

Secretary to the Treasury, John Fraser gave an address to the Australian Government Fixed Income Forum in Tokyo. He argues that the Australian economy continues to perform well and largely as expected in the 2016-17 Budget. It remains resilient in the face of global volatility. The economy is transitioning from an unprecedented mining investment boom to broader drivers of growth.

A stronger fiscal position is necessary and should go hand-in-hand with other policies to lift our growth and living standards. The outlook for the Australian economy is positive but keeping it that way is the challenge ahead.

He also discussed the high level of household debt, and housing sector, and the lack of business inves

The outlook for the Australian economy is positive.

Australia is entering its 26th year of continuous economic growth: we did not fall into recession in the aftermath of the global financial crisis of 2008, unlike many economies [Chart 1]. And real GDP is growing by 3.3 per cent per annum, faster than every country in the G7.

Chart 1: Real GDP growth: selected economies

GDP growth over the last 10 years

Chart 1: Real GDP growth: selected economies

GDP growth through the year to June qtr 2016

GDP growth through the year to June qtr 2016

Source: National Statistical Agencies, Thomson Reuters Datastream

This is the payoff from flexible macroeconomic policy frameworks, earlier microeconomic reforms and a once-in-a-lifetime mining boom.

We are doing very well – and this sometimes gets lost in the debate in Australia and abroad – but we are not guaranteed a strong future. If we want to grow faster, we must improve productivity. With historically high levels of government debt, we need to manage fiscal consolidation, but without slowing growth.

International Backdrop

This achievement is all the more remarkable against an international backdrop of slower-than-expected recovery in the global economy following the global financial crisis of 2008.

I recently returned from the US where the Treasurer attended the Annual Meetings of the IMF as well as a meeting of G20 Finance Ministers and Central Bank Governors. Discussions there focused on the current state of the global economy and the risks in the years ahead.

Prior to the meetings, the IMF released its October World Economic Outlook. Following previous growth downgrades earlier this year the IMF’s forecasts were unchanged from its July update. No further growth downgrades could be seen as a positive sign for the world economy. But the outlook for global growth remains subdued and downside risks remain across both advanced and emerging economies.

Importantly, Australia’s major trading partners are forecast to continue to grow at a stronger pace than the global economy [Chart 2]. This reflects our trade links to Asia, where growth remains relatively strong. Indeed, 8 out of Australia’s top 10 trade partners are in Asia.

Chart 2: Global Growth

Chart 2: Global Growth

Source: IMF October 2016 World Economic Outlook, ABS cat. No. 5368.0 and Treasury

Our region, Asia, is important for Australia, but also for the global economy. Asia continues to drive the world economy, with the IMF predicting the region will contribute more than 60 per cent of global growth through to 2021.

Of particular importance – for Australia and the world – are the implications of the transition of the Chinese economy towards a more consumer-driven growth model from its present reliance on investment. Sustainable growth in China is in our interest and China’s economic transition will present opportunities for Australia. However, this process is unlikely to be smooth and there is a tension between policies to support short-term growth and the structural reforms required to rebalance the economy.

The potential for this transition to lead to a greater-than-expected slowdown in the Chinese economy remains a key risk to Australia, the region and the global economy.

We are leveraged into the Chinese economy through many channels. One of the most important is merchandise trade [Chart 3].

Chart 3: China’s share of merchandise exports (selected regional economies)

Chart 3: China’s share of merchandise exports (selected regional economies)

Source: IMF Direction of Trade Statistics

That said, there will also be opportunities for Australia in China’s longer-term transition. Our past trade has mainly been focused on demand for our commodities; however, as China transitions trade will become more focused on demand for services.

Japan will also continue to present opportunities for Australia as our second-largest export destination and our second largest source of foreign direct investment.

Australia’s Economic Transition

In addition to the global headwinds, Australia is managing a transition of its own.

Australia’s terms of trade — the ratio of our export to import prices — reached its highest level in over five decades in 2011, and has since fallen by a third, underpinned by developments in bulk mining commodity prices [Chart 4].

Chart 4: Australia’s terms of trade

Chart 4: Australia’s terms of trade

Source: ABS cat. no. 5206.0.

As you are no doubt aware, in response to higher commodity prices Australia underwent a once-in-a-lifetime resources boom. Mining investment made an average contribution of 1 percentage point per annum to growth in the five years to 2012-13. It peaked as a share of GDP at 7.5 per cent in 2012-13. Since then it has made an average subtraction from growth of around 1 percentage point per annum as resources projects have been progressively completed.

Historically, resources booms have typically ended in nasty adjustments. Indeed, other commodity exporters have faced major economic downturns in response to the unwinding of their resources boom.

But, so far, Australia is successfully managing its transition to broader-based drivers of economic growth. Adjustments in interest rates, movement in the exchange rate and moderate wage growth are all working to shift resources from mining-related sectors to other sectors, particularly the service sectors.

In this regard it’s important to recognise that the Australian economy is quite diversified. Mining contributes 8 per cent directly to industry output. But, the Australian economy is heavily based on services, with the combined services sector comprising about 70 per cent of industry output and about 80 per cent of employment.

The transition is evident in labour market outcomes, with all employment growth over the last two years coming from services industries, mainly within the private sector.

It is also evident in strong growth in service exports, underpinned by an exchange rate that has depreciated by around 30 per cent against the United States dollar since the peak of the terms of trade in September 2011. Service exports grew by about 20 per cent over the last three years – as we take advantage of a growing middle class in Asia to increase our exports of tourism, education and business services.

Take tourism as an example. Export growth is being driven by a sharp increase in Chinese tourists. Around 1.2 million Chinese tourists have travelled to Australia over the past year – growth of around 22 per cent on the previous year. We have also seen a strong rise in visitors from other Asian nations.

Domestic Economic Outlook

Despite global volatility and the economic transition, the domestic outlook remains positive and is evolving broadly in line with our official forecasts.

The major contributors to ongoing growth include steady household consumption, strong growth in dwelling construction in major cities and a ramp up in exports. These are providing an offset to falling business investment.

Looking at the economy as a whole, the one thing we are missing is a resurgence in business investment. But that is a characteristic of many advanced economies.

Turning to the sectoral story in more detail, household consumption is expected to continue to grow steadily, underpinned by steady employment growth, low interest rates and a falling saving rate as households smooth consumption expenditure, including in response to the decline in the terms of trade. This follows a period of generally rising saving rates as households reacted to the rise in the terms of trade and uncertainty caused by the GFC and its aftermath.

Conditions in the housing market remain strong. This has been underpinned by a shift towards medium-high density dwellings, particularly in New South Wales, Victoria and Queensland [Chart 5]. That said, some indicators in the housing market have moderated since last year. While the level of housing investment is expected to remain high, growth is expected to ease as a record number of dwellings reach completion.

Chart 5: Building approvals

Chart 5: Building approvals

Source: ABS cat. no. 8731.0

We are alert to the downside risk that strong construction levels, tighter lending standards and rising construction costs could lead to activity declining more quickly than expected once the large construction pipeline is complete – particularly in the high-rise apartment market.

Another issue to monitor is private debt, particularly debt held by households, which has grown in Australia as recently flagged by the IMF. This could become a greater challenge if financing conditions become less favourable. That said, while household debt has risen over recent years so too have asset values. The net worth of households has grown by 60 per cent relative to its pre-crisis levels, led by increases in housing and land values as well as superannuation holdings. In addition, the bulk of Australian debt is held by those households with the highest incomes.

Export growth is being underpinned by the production phase of the mining boom, demand from Asia and the sharp depreciation in the exchange rate since 2012. Australia continues to expand iron ore exports. And the commodity export mix is changing as liquefied natural gas, or LNG, is expected to become Australia’s second largest export over the next few years. LNG production contributed around ½ of a percentage point to real GDP growth in 2015-16 and is expected to continue to make further significant contributions in the next few years.

In Australia, sharply falling mining investment as resources projects are completed will continue to act as a significant drag on overall business investment and in turn economic growth. Mining investment is expected to fall by 25½ per cent in 2016-17 and a further 14 per cent in 2017-18 [Chart 6]. As this detraction eases it is expected that investment in other areas of the economy will pick up, despite uncertainty over the exact pace and timing of this recovery.

Chart 6: Business Investment

Chart 6: Business Investment

Source: ABS cat. no. 5204.0 and Treasury.

Conditions are conducive for investment outside of the mining sector, with low borrowing costs, signs that firms are well placed to meet financial obligations, high levels of surveyed capacity utilisation, and domestic demand forecast to strengthen. However, leading indicators remain mixed, with some business expectations surveys suggesting non-mining businesses have yet to commit to significant new investment plans. This puts Australia in line with most advanced economies which are experiencing subdued business investment.

Another feature of advanced economies – Australia included – is low inflation and subdued wage growth. The headline Consumer Price Index in Australia rose 0.4 per cent in the June quarter to be 1.0 per cent higher through the year, the lowest growth rate since June 1999.

In Australia, declines in the terms of trade are weighing on national income. The strong supply response from commodity producers in the resources boom, as well as softening global demand, put downward pressure on commodity prices over recent years. So while Australia’s export volumes have increased, the price received for those exports has fallen. This is contributing to downward pressure on wage growth.

But subdued wages growth is supporting employment. Australia’s labour market is performing well. The unemployment rate declined from 6.3 per cent in July 2015 to around 5 ¾ per cent, supported by low wage growth and a shift to more labour-intensive industries. Labour force participation has remained elevated.

Demographic pressures from an ageing population are starting to have an impact on the Australian economy but with less effect than for many other advanced economies. Another aspect of our demographics that differentiates Australia is growth in our working age population, which is expected to remain steady at a relatively strong rate of about 1 per cent per annum, largely reflecting our successful migration program.

Maintaining strong Government balance sheets

Turning now to fiscal policy, Australia is one of only ten countries with a triple-A credit rating from all three of the major rating agencies, reflecting our strong economic fundamentals, sound policy frameworks and a track-record of fiscal responsibility. Our top credit rating was an important asset during the crisis, and of course it helps to contain the costs associated with servicing our public debt.

The Australian Government attaches a high priority to maintaining these triple A ratings, especially in the context of continued global economic uncertainty and heightened downside risks. I know from personal experience in the banking sector during the financial crisis how important a strong credit rating is to investor confidence.

We are very aware that these ratings are dependent on credible fiscal consolidation and a smooth transition to a more diverse economy.  We are not complacent about the challenges to achieving these goals.

Australia fared better than most during the Global Financial Crisis. The fact is that we were prepared — we entered 2008 with the government having negative net debt, triple A credit ratings and a well-capitalised and well-regulated financial sector. It is largely thanks to these preparations that the Australian economy managed to continue its historic run of uninterrupted annual growth over this tumultuous period.

However, like many other countries we continue to feel the legacies of the crisis, including the need to focus on budget repair.  We have run fiscal deficits since the crisis and are not forecast to return to surplus until 2020-21.

While the Government has made policy decisions to control the growth in expenditure, these savings have been offset by weaker revenue as a result of low nominal growth [Chart 7]. For example, the 2013-14 Budget projected a surplus of $6.6 billion for 2016-17. Since then, Government decisions have contributed another $7.6 billion to the cause of budget repair for the 2016-17 year. However, over the same period the impact of these decisions was swamped by movements outside the direct control of the Government, mostly as a result of lower than expected taxes.

Chart 7: Impact of policy decisions and parameter changes on the budget (2016-17)

Chart 7: Impact of policy decisions and parameter changes on the budget (2016-17)

Source: Treasury

The Commonwealth government’s gross debt is projected to increase by around $70 billion in 2016-17 and is approaching 30 per cent of GDP. While our public debt is low by international standards, and our placements are well covered, we are not complacent about the recent growth in our debt.

Of course, Australia has always been a net importer of capital. This has been an important source of our prosperity and development. However, it does mean we have less head room for government debt than many other advanced economies that fund their own debt. More than half of Australian public debt is held by non-residents, exposing Australia somewhat to volatility in global capital markets [Chart 8].

Chart 8: Gross debt in the Australian economy

Chart 8: Gross debt in the Australian economy

Source: ABS cat. no. 5232.0 and 5206.0.

In thinking about the appropriate level of public debt, it is also important to consider the extent of private indebtedness, and the interlinkages. Growing private debt could lead to increased public debt. And growing public debt has implications for private borrowing, such as in the event of a sovereign rating downgrade increasing borrowing costs across the economy.

Private debt is not only at historical highs for Australia, but it is also high compared to other countries. Australian households are the fifth most indebted in the OECD, with debt equal to 186 per cent of net disposable income. Private gross household debt has more than doubled over the past two decades as a proportion of GDP.

The financial risks associated with this debt are being actively managed. More than half of Australia’s total foreign borrowing is denominated in Australian dollars and banks’ foreign exchange risk is almost completely hedged. In aggregate, net of hedging, Australia’s foreign currency exposures are on the asset side of the balance sheet, reflecting the growing pool of superannuation assets and international diversification. Taking account of the assets that Australians hold in the rest of the world, our net external debt has also been growing and is about one fifth higher than it was twenty years ago.

The Australian Government’s fiscal strategy is directed to building the resilience of our economy by keeping debt under control — returning the budget to balance through disciplined expenditure restraint and a growth friendly tax system.

Progress in fiscal consolidation will help maintain investor confidence and facilitate investment and growth. But this is no easy task. Deficits have proven very difficult to shift in recent years. In particular, low nominal growth has been a strong headwind to bringing the budget back to balance.

The priority for budget repair is to control the growth in expenditure [Chart 9]. In particular, we recognise that it is not sustainable for Australia to finance our recurrent expenditure by increasing debt.

Chart 9: Payments and receipts to GDP

Chart 9: Payments and receipts to GDP

Source: Treasury, dotted lines indicate 30-year averages

If we cannot control our expenditure, there will be greater pressure to find revenue to balance the budget. However, the Government is determined that our tax system should support the investment and innovation that is needed to fuel potential growth.

Australian Treasury analysis, published earlier this year, showed an increase in income tax would inflict significant costs in the form of reduced jobs, investment, consumption and economic growth. In particular, as a net importer of capital, the tax burden we impose on capital income needs to be internationally competitive. We also need to recognise that labour is increasing mobile and that Australia must compete for global talent.  This leads us to the fundamental conclusion that we need to contain spending.

Unsurprisingly, the focus of our efforts is in the largest spending areas, including social services. Reining in the growth in welfare spending is one of the biggest challenges confronting the process of budget repair.

Against this backdrop, the Government finds itself with a slim majority in the Parliament. This presents a challenge of needing to work with a diverse range of interests in order to advance the Government’s legislative agenda. But it is also an opportunity to build broad support for the reform agenda that is needed to secure Australian living standards into the future.

Last month, the Government made some important progress in legislating a package of $6.3 billion in expenditure reductions. This will reduce Commonwealth debt by more than $30 billion by 2026-27. It is an important start to the current term of government, though much remains to be done – including another $20 billion of announced measures that are yet to be approved by the Parliament.