Future Fund has a super solution
by Richard Denniss
[Originally published by The Guardian Australia, 30 April 2020]
Bank bashing is always popular in Australia and it’s by no means confined to one side of politics. It was the former prime minister Malcolm Turnbull who introduced the big bank levy and gave us the royal commission into misconduct in the financial services industry. And, just last week, Scott Morrison and Josh Frydenberg reportedly “slammed” the big banks for being slow to process loan applications from small businesses waiting to receive their share of the promised $130bn jobkeeper wage subsidy payment.
But no matter how hard governments bash, it doesn’t put a dent in the banks’ profits. Last year the big-four banks, which between them control 78% of the home loan lending market, made more than $41bn in profit. To put that in perspective, of every $100 of income in Australia, $2.10 goes to the big-four banks.
While Morrison might be frustrated with the banks over their response to his jobkeeper package, the chief executives of the big banks are counting their lucky stars – and the new cash that the prime minister has sent their way – thanks to the design of that same policy.
The jobkeeper payment of $1,500 a fortnight is expected to cost around $130bn over the next six months. For comparison, the total commonwealth budget for health and education is only $119bn, and that’s for 12 months’ worth of the most essential services. Jobkeeper is, by far, the most expensive social policy in Australian history. But despite its enormous cost the policy cannot help employers unless the banks help them first.
When the Morrison government announced the program on 30 March it was seen as a lifeline for millions of employees and hundreds of thousands of employers who knew that with no customers in the stores there would be no money for wages. But, unlike most lifelines, jobkeeper comes with strings attached.
While it’s more than four weeks since Morrison announced the wage subsidy, no employers have yet received it. The payment is made “in arrears”, which means that eligible businesses that have lost their customers have to find the cash to pay the $750-a-week subsidy to employees for six to eight weeks.
Luckily, the banks are there to help.
A small business with 20 staff eligible for the $750 jobkeeper payment, who had to wait six weeks for the government’s cheque to arrive, would need to find $90,000 to pay their staff. And if it doesn’t have such an amount stuffed under the mattress, under the design principles of the most expensive policy in Australian history, the government expects it to go to the banks and ask for a loan.
The banks charge up to 10% interest on unsecured loans to business. With hundreds of thousands of businesses needing a private lender before they can access public funding, that’s not a bad source of profit for the banks in otherwise tough times. I know, I know, the banks are taking some risk of non-repayment but, as luck would have it, the government has also promised to underwrite the risks of loans to small business.
You would think that when a government decides to spend $130bn to help workers, it would be able to do so in a way that doesn’t require the businesses employing those workers to pay the banks while they wait for it. However, Australia’s “business-led” but government-funded approach to wage subsidies isn’t quick, cheap or efficient.
While governments like to bash the banks rhetorically, they do nothing to challenge them financially. Rather than force small business to borrow money from private banks to access the publicly funded jobkeeper, the government could have provided the cash more quickly or it could have lent the money directly to small business.
While it may seem unprecedented for governments to lend directly to individuals, the reality is that successive Labor and Coalition governments have been making tens of billions of dollars worth of loans to hundreds of thousands of Australians for decades.
The most visible form of government lending in Australia is the $60bn worth of loans we have made to our university students. On the loans formerly known as Hecs the government charges interest, collects the debts through the tax system and is, in every meaningful sense, acting as a bank. In the US, privately funded student loans are both a major barrier to low-income earners going to college and a major source of financial hardship for those who do but, in Australia, publicly funded student loans make university more accessible.
While only a small percentage of the millions of Centrelink customers realise it, the commonwealth government will lend any benefit recipients who ask for it up to $1,000 as an advance on their future welfare payments. It is interest-free, and a much better deal than credit cards or payday lenders but the government that offers the product rarely mentions it.
And then there is the pension loan scheme. If you are over 65 and own your own home then the government will lend you up to $860 a fortnight, secured against your house and repayable on sale of your house on death. It’s a reverse mortgage. No need for the banks to operate as an expensive middleman.
Bashing the banks for ripping off customers and being slow to lend to small business is easy, and popular, but it does nothing to dent the banks’ excessive profits or help their customers. Most Australians will need to borrow money at some point in their life, and in the coming 12 months far more Australians than usual will need access to borrowed money – from small businesses paying their staff, to unemployed workers paying their car rego. While private banks play an important role in our economy, for simple loans the government can step in and provide a cheap alternative. Morrison has said that there is no role for ideology when it comes to solving a crisis. In that case, let’s see government loans on the table.
Richard Denniss is chief economist at the independent thinktank the Australia Institute