Wayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | Link to this | Hansard source

by leave—A year ago this month, shares in the Bear Stearns investment bank were still trading on the New York Stock Exchange at around $150; the US federal funds rate had reached 5.25 per cent after 17 successive increases; the Bank of England was looking to increase the cash rate; and both the United States and the United Kingdom were completing one of the most robust quarters of growth that either had experienced for some years. It was widely and rightly said then that over the previous five years the global economy had experienced a boom the likes of which had never been seen in human history.

In the year since then, a great deal has changed. Last week the remnants of Bear Stearns were formally merged into JPMorgan Chase, ending the existence of an investment bank which had, in its 85 years, survived the Great Depression, World War II and innumerable financial crises in Latin America, Russia and Asia to be brought down not by a financial collapse in emerging markets, not by a global recession and not by a clever hedge fund or derivative strategy gone wrong but by the consequences of poor home lending standards in the American heartlands of Florida, Michigan and California.

Bear Stearns was, of course, only a small instance of the damage wrought by what we have come to call the US subprime financial crisis. Since mid-September last year the US central bank has found it necessary to cut the cash rate seven times, US consumer confidence is close to a 15-year low and, partly because of that decline in confidence, the downturn in the US housing market, which explains so much of the downturn in the US economy overall, continues to deepen. The total announced asset write-downs and credit losses as a result of the global credit crisis for US financial institutions and global banks are now estimated to be $380 billion. Through its impact on financial markets and investment banking centred in London, the UK has also been affected by the US subprime crisis. Through losses sustained by global banks based here, Europe too has felt the chill of this long and difficult financial episode. Although to a much lesser extent, Australia also saw some of the impact of this financial crisis and within days of its appearance in the United States. Because of the global uncertainty, Australian banks also became reluctant to part with liquidity. In July last year the spread between the cash rate maintained by the Reserve Bank and the three-month bank bill swap rate sharply increased. Although subprime lending is only a very small proportion of overall Australian mortgage lending, by December the market for high-quality securitised Australian mortgages, which is largely offshore, was as dead as the market for US securitised mortgages infected with subprime risk. And though Australian business profits were strong and corporations were not highly leveraged, it became difficult for even the best names to borrow on reasonable terms directly in financial markets. Our banks found that the global market for term funding was harder to access and very expensive. They discovered, as banks abroad discovered, that at exactly the same time as they encountered new difficulties in funding for their balance sheets they also encountered sudden new demand for credit from borrowers who found it hard to obtain it elsewhere. All this occurred, I must emphasise, despite the fact that major Australian financial institutions had not then and have not now any significant exposure to US subprime debt or, indeed, had not then and have not since then experienced any significant increase in bad debt.

I can report to the House that the Australian government agencies responsible for the health of our financial system performed their duties well in minimising the impact of this global crisis on the Australian economy. APRA has conducted a rigorous program of risk evaluation and inspection in the years leading up to this crisis—a program which discouraged institutions from reckless lending. It also moved quickly to step up its monitoring activities as the impacts of the financial turmoil hit our shores. The Reserve Bank of Australia moved quickly in recognising the unusual and immediate liquidity needs of the Australian banking system. It also recognised early that, in the peculiar circumstances of this particular financial crisis, it needed to extend the range of financial instruments which it would accept as collateral in its lending operations. The prompt action by the RBA in respect of both overnight and term funding stabilised the Australian financial system, maintained confidence and permitted Australian banks to expand both their assets and their liabilities to match the new demands placed on them by business and household borrowers.

The banks themselves also responded to the US subprime crisis in a timely manner. They were able to rapidly expand their retail deposit liabilities in the second half of last year, for example, and in the first quarter of this year their high credit standing and strong global reputations permitted them to continue to access global debt markets, this time on a considerable scale.

There are certainly also problems that we encountered here during the crisis. Because the market for residential mortgage backed securities remains dormant, it has been difficult for many smaller mortgage originators to continue to compete. Highly leveraged businesses with illiquid assets have found that their model no longer works as it did when credit was more plentiful and spreads were narrower. The sharp fall in equity prices since the middle of last year has exposed the perils of speculation funded by margin lending. Though still markedly higher than they were a year ago, credit spreads are today narrower than they were a few months ago and have continued to decline in recent weeks.

Credit growth in Australia has slowed, consistent with the rise in domestic interest rates over the past three years and tighter credit conditions. But we have not seen a significant increase in bad debts. Output growth and employment remain quite firm. There have also been some positive signs in international credit markets, but I do not wish to suggest that it is all now plain sailing in the global economy. The US economy remains very weak, and it is quite possible that further credit defaults and in different areas will be exposed as a result of the deterioration in business conditions in that economy. Lending growth has slowed in that economy, credit spreads remain elevated and the lenders’ appetite for risk is much diminished.

All of this is occurring at a time of very high oil and other commodity prices, rising food prices and global inflation. In the past year the benchmark price for global crude oil has doubled while the IMF’s measure of global food prices has risen by almost 50 per cent. Pressure on global oil prices in particular is set to continue. Ongoing strong economic growth in much of the developing world, in particular China and India, is putting upward pressure on global oil prices. At the same time, supply is struggling to keep up, due to significant underinvestment in exploration and development as well as uncertainty about the security of supply from important oil producer countries, not least in the Middle East. This will continue to put pressure on family budgets right around the world, not least here at home, and constrain growth in major consumer nations.

This strong economic growth in emergent countries and the associated higher oil prices are also putting pressure on world food prices. We are addressing this at home through measures to increase competition in the supermarket sector. The government is also assisting the world’s poorest people through $30 million in emergency assistance to countries most affected by steep rises in the prices of essential food supplies.

The impact of higher commodity prices, in particular oil and food, will be a central theme of my discussion overseas, in particular at the G8 finance ministers outreach meeting in Osaka. We will discuss how to address the root causes of food insecurity in developing countries and the role Australia can play through increased development assistance, constructive participation in multilateral processes and the continued advocacy for international trade policy reform.

As a major world food producer, Australia also has a central role to play in addressing this global challenge. These are not circumstances in which we can relax or declare the financial problems of last year or their impacts now completely behind us. We only need to look at the forecasts in last month’s budget to appreciate the impacts that slower world growth combined with higher domestic interest rates will have on our economy. These also demonstrate that much of the impact on the real economy is yet to be felt.

Though we have come through the last year in reasonable shape, the government is still attentive to some sensible things it can do to further strengthen our financial system against the inevitable shocks of the kind evident in the last year. Nor are we concerned only about our own regulatory framework. We experienced here many of the effects of the US subprime financial crisis, despite our financial institutions not sharing any of its causes. That experience reminds us that, however sound our own financial system, we also need to do whatever we can to support a sound global financial system.

Both I and the Prime Minister have been in close contact with US, UK and European government leaders, with central bankers and with the heads of the major international agencies who have been grappling with the financial crisis. In the international forums in which we participate, including the Financial Stability Forum, the G20 and the IMF, Australia has pressed a firm view in support of international cooperation in addressing the crisis, greater transparency in the disclosure of risk and strengthened systems for providing early warning of emerging global financial risk.

We ourselves have responded to the recommendations of these global forums. The Financial Stability Forum, for example, has recommended strengthened prudential oversight of capital, liquidity and risk management; enhancing transparency and valuation; changes in the role and uses of credit ratings; strengthening the authorities’ responsiveness to risk; and robust arrangements for dealing with stress in the financial system. I have asked the financial regulators and my department to work closely together on the recommendations and to keep me regularly informed of the developments.

The government has also been developing two measures to strengthen our financial system. The first is the increased issuance of Commonwealth government securities, which I announced last month. This action will support market liquidity and ensure sufficient market depth in three- and 10-year parts of the government bond yield curve to support consistent pricing in the Australian market for long-term debt. There will, of course, be no increase in the net debt of the Commonwealth, because the increase in government bonds outstanding will be matched by the acquisition of new financial assets. The government is also broadening the range of securities that the Australian Office of Financial Management may invest in and accept as collateral for its securities-lending facility.

The other change which I am announcing today follows a proposal from the Council of Financial Regulators for dealing with financial institutions experiencing difficulties. The government intends to establish a financial claims scheme to give depositors in an authorised deposit-taking institution—or ADI, as the legislation describes it—prompt access to funds in the unlikely event that such a financial institution should fail. The financial claims scheme will also cover general insurance claims by households, small businesses and not-for-profit entities where the insurer has failed.

At the same time, the government will enhance the existing tools that Australia’s regulators have to effectively manage an institution in difficulty. This risk of failure of a bank, credit union or building society is, I must say, a very small one. Our framework is designed to minimise the likelihood that any institution regulated by the Australian Prudential Regulation Authority could fail. That is not to say that the rules will prevent a regulated financial institution making a loss, which is something that all businesses risk, but it is to say that the rules are designed to minimise the likelihood that a regulated institution could make a loss substantially bigger than its capital reserves or its capacity to replenish those reserves. Even where the loss threatened the financial viability of the institution, the Australian government and its agencies would seek a commercial solution to see both the remaining assets and the deposit liabilities assumed by another entity.

The outright failure of a regulated bank is, I think, very unlikely, and indeed the history of the Australian financial system shows that such failures are rare events. Were it to occur, honourable members will know that under the Banking Act depositors have first call on the assets of the failed institution. They have priority over all other creditors. This means that in the unlikely event that an ADI failed, liabilities to depositors would be paid out before any other liabilities were met. I am advised that it is difficult to envisage circumstances in which the totality of these deposits would not be more than matched by the remaining assets of the failed institution. In my view, however, it is not enough to know that depositors would very likely eventually get their money back through the liquidation process.

Many depositors, especially households and small businesses, depend on their funds in their bank accounts for day-to-day needs and would suffer considerable hardship if they were unable to access those funds for some months while an institution was wound up. Most people, for example, have their wage paid into a bank and draw it down as required. Pensioners and superannuants have their pensions paid into a bank. Students have their allowances paid into a bank. The Australian government, by and large, these days pays family allowances and so forth through banks, preferably directly into the account. It would cause considerable distress if these depositors were unable to access their funds for a considerable period of time.

We now propose that the Australian government will establish a scheme under which depositors in a failed institution would, within weeks of a failure, be refunded their deposit up to the limit, per person, of $20,000. The scheme will include chequing deposits, savings deposits and term deposits. It will cover banks, credit unions and building societies which are regulated by APRA. The scheme will be administered by APRA and, were it ever necessary to activate the scheme, the Treasurer would seek advice from APRA, the RBA and the Treasury.

These proposals are not new. They have had a long period of time in development, both under the previous government and under our government. I would also like to assure the House and through it the Australian people that these proposals are not a response to any concerns with Australia’s ADIs. As I have said, they have weathered the current turbulence well. The proposed scheme is part of a comprehensive and thoughtful package of reforms proposed by the Council of Financial Regulators and agreed by the government.

The scheme I am announcing today had its genesis in policy reviews following the failure of HIH and in the 2003 study of financial system guarantees by Professor Ken Davis. These are changes that were supported in the IMF’s financial sector assessment of Australia and have been carefully considered by our leading financial regulators. The Australian government will fund the operation of the scheme in the first instance, with taxpayers’ contributions recouped through the liquidation of the failed institution or, in the event that it was insufficient, by a levy on relevant financial institutions, which will be authorised in legislation accompanying the establishment of the scheme.

Honourable members will readily understand that this scheme is limited and designed to be limited. Its essential purpose is to have a reliable means of quickly giving retail depositors access to funds they need for their day-to-day expenses should an institution fail. It will fully cover the deposits of the vast majority of depositors in a failed institution. I am advised that approximately four-fifths of depositors have balances of less than $20,000. It should be noted, however, that a small number of large depositors with balances over $20,000 account for well over half of the volume of deposits in most institutions. These larger depositors would have access to only $20,000 under the scheme and would have access to the remainder of funds in the usual way—through liquidation. This is not and is not intended to be a general deposit insurance scheme. We are not seeking to protect large-scale investors from risk, nor to burden the banking industry with a pre-funded scheme that may never be used.

What I am announcing is a simple plan to minimise the distress for working families, pensioners and students in the very unlikely event that an Australian ADI fails. It will give them an assurance that they will get their money and get it quickly. There is nothing in this scheme which will reduce the incentive for large depositors to prudently examine the circumstances of the institutions in which they have deposited money. Nor is there anything in this scheme which abridges or circumscribes the ability of the Reserve Bank of Australia to offer liquidity facilities to an otherwise sound institution which, for one reason or another, is experiencing withdrawal of deposits at a faster rate than it can realise assets to meet those withdrawals.

Australia and New Zealand are alone among OECD nations in not having a predetermined scheme to assist depositors in the event of a financial failure of a depository institution. This scheme I announce today meets that need and in a manner appropriate to Australia’s circumstances, and that reflects the sound and successful arrangements already in place. It is designed to minimise the cost to taxpayers and the burden on existing financial institutions.

It is important to note, particularly given the most recent failure of a regulated institution in this country was the HIH collapse, that the government is also introducing measures to protect general insurance policyholders. If an APRA regulated general insurer fails, the scheme would compensate policyholders for the full amount of any valid claim under their policy. In the same way as the scheme is intended to apply in relation to banks, the focus will be on those least able to bear the losses, with eligibility limited to individuals, small businesses and not-for-profit entities. The scheme will not cover life insurance, superannuation or market linked investment products where investors are motivated to increase their returns by taking greater risks. Nor will the scheme apply to institutions which are not regulated by APRA.

In reviewing Australia’s crisis management arrangements in the financial sector, the Council of Financial Regulators also considered the suite of powers available to regulators for managing financial instability and distressed financial institutions. The council has identified a number of reforms which would enhance the ability of regulators to effectively manage a distressed financial institution and to maintain financial stability. These reforms include providing consistent arrangements for the transfer of business across banking, general insurance and life insurance, with the appropriate oversight by the courts and the regulators.

The reforms will also provide for the judicial management of general insurers and bring non-operating holding companies in the life insurance sector into the regulatory net and remove potential legal barriers to the recapitalisation of a failing institution. These are sensible enhancements to our existing regulatory arrangements, and the government will bring forward legislation to enact these proposals as part of the package of measures that I am announcing today. It is important that the government ensures that APRA and the RBA have the tools they need to act swiftly and effectively to resolve and, if possible, to avoid any crisis in a regulated institution. This is particularly important with our key financial institutions, where instability in one can quickly spread through the system and create instability in other, otherwise sound, entities.

As I mentioned, our financial system and our regulatory structures have weathered the financial turmoil of the past year well. I have had my differences with the major Australian banks, and I do not apologise for that. But there is no doubt about the strength and soundness of the Australian banking system over the last year. I do not propose to say anything today about the proposed merger between Westpac and St George, which, as honourable members will know, will be subject to scrutiny by the ACCC and APRA, as well as by me and my department. We will review the facts which emerge from this scrutiny and make our decision based on those facts.

But I want to say that in my view the issue of whether or not the merger is approved does not bear on the four pillars policy, which has been maintained in one form or another by four successive Prime Ministers and seven successive Treasurers over nearly two decades. Indeed, I take our experience over the last year as a demonstration of the soundness of the four pillars policy. These are banks which have performed as well as or better than any banks in the world during an exceptionally difficult period. Quite apart from the need to sustain competition in the banking market, I would not be at all comfortable if the soundness of our banking system depended not on the strength and risk management skills of four banks but on the strength and risk management skills of a lesser number. Whatever may be the outcome of the banking merger now under consideration, this government sees no case for changing the four pillars policy, which has served Australia well.

The Australian government is committed to working with the financial services sector to build Australia’s regional presence as a financial services centre. Innovative Australian providers of financial services have achieved considerable success in global markets in recent years. But the potential is even greater, as financial service markets in our region continue their rapid expansion. The government looks forward to working with the industry on a range of matters, including education and training, overseas market access and tax and regulatory arrangements to strengthen Australia’s competitiveness in regional and global markets for financial services.

As I mentioned earlier, Australia has been actively pressing for stronger international cooperation and an enhanced international early warning system for financial and economic risks to diminish the risks of future crises. I propose to pursue this reform agenda in visits to London later this week, to Beijing and then on to the G8 meeting in Osaka the following week.

At the same time, I will be taking to the global financial markets of London and to the leaders of the major economies in Osaka a clear message about Australia’s experience in the global financial crisis of the last year and about our prospects for coming years. I will be telling the world that we have weathered the last 12 months of financial crisis well. I will be saying that this is not because our financial system is closed against the influences of the global financial system, not because we have limited our engagement in the international economy but because we have sound financial institutions with good risk management practices, supported by a strong prudential regulatory framework and an adroit central bank. I will be saying that, after 17 years of uninterrupted expansion, the central economic objective of this government is now to use our fiscal strength to invest in infrastructure, education, skills and training—areas we think essential to support our continued expansion and which have been for too long neglected. I will be saying that Australia is and—under this government—will remain an exemplar of openness, of engagement with the global economy and of willingness to invest of our own future. I thank the House.

I seek leave to move a motion to enable the member for Wentworth to speak for 26½ minutes.

Leave granted.

I move:

That so much of the standing and sessional orders be suspended as would prevent Mr Turnbull speaking for a period not exceeding 26½ minutes.

Question agreed to.

Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

The Australian financial system is a robust and resilient one. It has withstood the turbulence of the subprime crisis, as the Treasurer has noted, because of more prudent lending practices in Australia and the very disciplined regulation of our financial sector. The numbers tell the story. In the United States, subprime loans represent around 13 per cent of all outstanding mortgages; in Australia, they represent less than one per cent. While there are some areas in Australia where there are significant default rates and very significant declines in property values—I cite some suburbs of south-western Sydney as examples of that—by and large our default rates are low historically and relative to other countries, the United States in particular.

So it is, as the Treasurer intimated, somewhat unfair that the Australian financial system has been tarred with the same brush. The securitisation markets for mortgages have been, as he said, as closed to Australian issuers as they have been to those emanating from the United States. That has obviously reduced the ability of Australian financial institutions to outsource their balance sheets, effectively, and this has had a particularly harsh impact on the smaller Australian lenders, the smaller banks and the mortgage brokers, and the various intermediaries whose presence in the market has done so much to improve competition and to reduce the cost of mortgage finance or at least the margins on mortgage finance for Australian borrowers. That has been the consequence of the subprime crisis in the United States.

It has also had an impact in that there has been a flight to quality. That has happened right across the system. The difference in the borrowing cost by a bank rated ‘A’, a smaller Australian bank, and one of the big four—a bank rated ‘AA’—has increased significantly. In other words, one of the factors no doubt underlining the thinking of the directors of St George Bank in its discussions with Westpac is that as a lower rated bank, in terms of its credit rating, than Westpac it now has to pay relatively more—relative to Westpac—to borrow money that it on-lends to customers than it did a year or two ago. And of course that works all the way through the system. Nonetheless, the system is strong and it is likely, indeed almost certain—there are no certainties in finance—to remain so.

The Treasurer has outlined a number of measures in his statement which we welcome in principle. We will need to see the detail of them all, and I am sure he will make those available in due course. I have seen no more than the Treasurer’s statement so I cannot speak to the detail of what he is proposing. But the proposal on the $20,000 guarantee—I suppose the best way to describe it is as a guarantee—per customer for deposits in a failed deposit-taking institution is one that, in principle, the previous government supported but had chosen not to announce because of a concern that, in the credit market prevailing towards the end of last year, the announcement of that measure might have created more uncertainty than it would remedy. Having said that, there are some important design features associated with this guarantee that we need to discuss now, and it is very important that the Treasurer addresses these.

Any guarantee of this kind carries with it a moral hazard; that goes with the territory. I can give you a classic example with which I had some personal experience nearly 20 years ago, and that was with the savings and loans industry in the United States. These were in effect what we would call building societies or credit unions. For many years, from time immemorial, they had had very strict prudential limits on what they could invest their money in. But there was also a $100,000 guarantee for depositors: the first $100,000 of every depositor’s account was guaranteed by the federal government. The congress decided to relax the prudential requirements but left the guarantee in place. What that meant of course—this is the classic example of a moral hazard—was that depositors knew that as long as their deposit was $100,000 or less they would get their money back no matter how risky the activities of the savings and loans company might be. So there was, if you like, an indifference on the part of depositors to risky activities by S&Ls and, as we know, many of them did engage in extremely risky activities in terms of investments—investing in junk bonds and highly leveraged real estate transactions—in order to chase yield and be able to offer higher deposit rates to their depositors. The consequence was that a great many of these S&Ls went into bankruptcy and they ended up being taken over by the US government through a vehicle called the Resolution Trust Corporation, which in my previous profession I represented in a very large bankruptcy. That was a classic case of the moral hazard going wrong. In fact it was said at the time, with the benefit of hindsight, that the government should have either left the guarantee in place and left the prudential limitations in place or alternatively, if it was going to relax the potential limitations, removed the guarantee. Doing one and not the other created that problem.

In the context of this proposal by the Treasurer here, there is a very important question which he has not answered and not addressed in sufficient detail, in his ministerial statement, and I would encourage him to do that. The question is this: does the guarantee or the assurance of a timely return of $20,000 for each depositor mean that deposits up to $20,000 have a priority in an insolvency over deposits greater than $20,000? One can readily see where the problem might arise. The Treasurer himself notes that in many of these institutions up to half of the total value of deposits is taken up by a smaller number of large deposits—of well in excess of $20,000—but the vast bulk of depositors have deposits of $20,000 or less. If for example, in a nightmare situation, there is only 50c in the dollar available to return to depositors and if all depositors have a priority, a first claim, as to the first $20,000 in their deposit, that would mean that a depositor with a $20,000 account could get 100c in the dollar back but a depositor with more than $20,000 could get considerably less than what his or her pro rata entitlement might otherwise be.

Why is that important? It is very important in the Australian context because our deposit-taking institutions have different profiles in terms of their funding base. Professor Kevin Davis noted in his report on financial guarantees following the HIH collapse back in 2004 that the credit unions and building societies have a much larger percentage of their funding base coming from what we would call retail deposits. It is a very high percentage, whereas the larger banks have a lower percentage because they access the wholesale markets for funding. In the inconceivable scenario of a major bank going into insolvency, the depositors would rank ahead of the providers of wholesale money. In those circumstances, if you like, they have a lot of headroom above other liabilities. With a credit union or a building society, that is simply not the case.

This issue is one that has been of concern to regulators, commentators and reviewers for a long time. I note that there was a good description of it in the Wallis report back in 1997. Mr Wallis makes this observation about capping depositor preference, which is what the Treasurer is talking about—capping the preference for depositors at $20,000:

Capping depositor preference is an approach adopted in most deposit insurance schemes. Under such an arrangement, depositor preference would operate in two tiers: first preference would apply up to the cap and second preference would apply to all other deposits. However, smaller DTIs which have a much heavier reliance on deposits for their funding than larger institutions could have difficulty attracting larger deposits under such a restriction and would be relatively disadvantaged in the marketplace by an arrangement designed to deal only with circumstances that are likely to arise rarely, if at all.

He goes on to say:

On balance, the Committee concluded that there should be no cap placed on the value of deposits subject to preference.

The point is a very powerful one, and it is something that we simply do not know, based on what the Treasurer said. We do not know whether the Treasurer is saying that deposits of $20,000 or less have a preference so that they all have to be returned, up to $20,000, before any remaining funds are divided between other deposit holders, or whether all of the funds available to depositors are distributed pari passu—proportionately to their interest—so, if there is 50c in the dollar available, everyone gets 50c, but the government would only step in to top up those deposits up to the level of $20,000.

The difference is a very important one because, plainly, if it is the first scenario, those depositors with sums in excess of $20,000 will, firstly, be inclined to open up several different accounts and break them up into accounts of $20,000 or less and, secondly, there will be a clear incentive for a depositor with, say, $200,000 to take that deposit to a larger institution whose funding base is composed of a smaller percentage of retail funds. It would mean taking that deposit from, say, a small bank, a building society or a credit union, and taking it to one of the big four. That flight to quality is already happening to some degree and this could exacerbate it. That is something the Treasurer should take into account. I urge the Treasurer to clarify precisely how this $20,000 guarantee is going to work.

Having said that—and that is purely a question of clarity and clarification—it is vital always for the Treasurer and the government to project confidence about our financial system. We have a very strong financial system here in Australia and we should tell that to the world. I am delighted that he is going to be travelling abroad and doing so, but he should mend his ways. Now the budget is done, he does not need to keep talking down the Australian economy, which he was doing for the first six months of his tenure. It is very important that the Treasurer of the Commonwealth of Australia speak strictly accurately and confidently about our financial system.

In that sense, it is also important to speak fairly. In the last few sitting days we have seen an extraordinary performance of venous denigration of those people in the financial community who dare to disagree with the government and with the Treasurer. You may recall that last week, in the context of debating Fuelwatch, I quoted Michael Luscombe, the chief executive of Woolworths, who had said in a call with analysts that their margins on petrol were higher in Western Australia than in anywhere else in the country, thanks to FuelWatch. Mr Luscombe is the chief executive of a very large public listed company. As the Treasurer knows, the consequences of a CEO of a listed company making misstatements about its financial affairs are extremely serious, and nobody would do that wantonly or recklessly or deliberately if they valued their reputation and that of their company.

I cited that simply to make the point that the argument that Fuelwatch would be better for motorists and would bring down prices really flew in the face of a great deal of evidence. That was one piece of evidence. The Assistant Treasurer’s response was to interject: ‘If you believe that, you will believe anything.’ In other words, Mr Luscombe was a man not to be believed. That is an extraordinary thing for the Assistant Treasurer to say. There has been no apology, no correction, no retraction—nothing. Today I cited a report by a very distinguished economist called Sinclair Davidson, from RMIT in Melbourne, criticising the methodology—insofar as it is understood—used by the ACCC in assessing Fuelwatch. The Treasurer’s immediate response was to attack the man and to say that Professor Sinclair Davidson was biased. He attacked his credibility not on the basis of what he had written and not on the basis of any of his arguments or any of his algorithms but rather by saying that he cannot be believed; he is a political confederate of the shadow Treasurer.

Then we had similar criticisms of the ACCC’s work by the expert petrol industry data provider, Informed Sources, which came out today and which really undermines the credibility and the methodology of the ACCC in a very profound way. This is an expert group. They know more about petrol price data, patterns, markets and cycles than any other group in Australia. Their data is relied on by everybody, including the ACCC. They have expressed their very grave concern about it, and the answer again from the Assistant Treasurer was to attack Informed Sources’ credibility and say that they are biased too. That type of conduct undermines the credibility of the Australian government and undermines international financial markets’ faith in the Australian financial system. It is vital that we have a Treasurer, an Assistant Treasurer and a Prime Minister who speak confidently, positively, accurately and fairly about financial issues in Australia.

If people criticise a decision of the government and go to the trouble of producing a paper—a mathematical analysis full of algebra and algorithms and setting out all of the assumptions—the appropriate response for the government is to take that on board, take it on its merits and if they believe it is wrong, to demonstrate why it is wrong. The government employs more economists than anyone else in Australia, so there is no shortage of people who can be set to work to pick holes in any analysis that is presented out of the business world. Instead, the reaction was to denigrate, to attack and to sneer. That is very damaging. It gives the impression of a government that is not interested in an accurate, well-regulated financial market but simply wants to play politics. We saw that with the Treasurer’s notorious remark, which we hope we will never see again, when, the day before the Reserve Bank met, he held that extraordinary press conference and said, ‘The inflation genie is out of the bottle.’

That made headlines around the world. The headlines and stories were saying—in the Financial Times, for example, and in the other great financial newspapers of the world—that the Australian Treasurer thinks inflation is out of control in his country. Plainly, inflation is a very serious challenge. It is a very serious global challenge and it is a very serious challenge in Australia. It has been so for some time. We recognise that, and we regularly debate the appropriateness of different measures and approaches to dealing with it. But to say that inflation is out of control was an extraordinary thing to do because that undermined confidence in our economy and, above all, it undermined confidence in our central bank. That was why when the Reserve Bank Governor, Glenn Stevens, was asked about this when he testified before the House of Representatives economics committee not so long ago, he very testily responded, ‘Inflation is not out of control.’ It is his job to manage inflation, and he has—just as the previous government had—a very proud record of managing inflation precisely in accordance with the inflation-targeting objectives of monetary policy: that is to say, between two and three per cent on average over the cycle.

It is fine for the Treasurer to stand up here today and talk about enhancing the stability and credibility of the Australian financial system, but, as with so many aspects of this government, he has to do more than talk the talk—he has to walk the walk. He has to move beyond the spin and actually demonstrate that he has a commitment, a real commitment, to the type of confident, accurate and disciplined economic management that is expected from the Treasurer of a great country and a strong economy like Australia. We have seen far too much spin from this government, and much of it has been very damaging—not just to the government in a political sense but also to Australia. He also needs to be quite precise as to how this $20,000 guarantee is going to work, because the lack of clarity there, for the reasons I described, could have very significant implications for Australian deposit-taking institutions, particularly the smaller deposit-taking institutions whose funding is much more heavily dominated by retail deposits. It would be a great pity if a lack of clarity from the Treasurer resulted in a decline in deposits in excess of $20,000 in institutions of this kind, because that would put those institutions under more pressure. They are under considerable pressure at the moment for the reasons I described at the outset of my response. I thank the House.