David Robertson is the Head of Economic and Market Research for Bendigo and Adelaide Bank. He joined the bank 16 years ago as Head of Financial Markets. His career commenced in 1989 as a foreign exchange dealer and, since then, he has worked in a range of senior roles in Treasury and Financial Markets for the State Bank of NSW, First Chicago and Commonwealth Bank. We spoke to Mr Robertson for his take on the Federal Budget 2018’s incentives for pensioners, proposed tax cuts, dividend imputation, interest rates and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
YourLifeChoices: What do you think of the Federal Government expanding its role in lending by extending the Pension Loan Scheme (PLS) to more retirees?
David Robertson: The Pension Loan Scheme was a well-kept secret. I think there had only been about $30 million in loans provided in the 30 years since it was started. There hadn’t been a great deal of take up of that product. I think it’s a good thing that it is available more broadly now. Any new offering for retirees has got to be a helpful thing.
How does the Bendigo and Adelaide Bank’s product for retirees (in conjunction with Homesafe Wealth Release) compare with the Pension Loan Scheme, which is essentially a top up for pensions which attracts a 5.25 per cent interest rate?
Whereas the PLS is a loan, the Homesafe product is an equity release product that provides an upfront lump sum. The owner of the house retains ownership, but at the end of that process the equity is effectively released through the sale of the property. It’s available only in certain postcodes and not all over Australia. Being a release of home equity rather than a loan, it certainly meets a wide range of our customers’ needs. It is available in lump sums of between $25,000 and $1 million. Interest is not charged because it is not a reverse mortgage, thus it is fee based.
If plans for tax cuts to big business go ahead and the top marginal personal income tax rate is removed, as proposed by the Federal Government, do you think this could jeopardise future budgets’ ability to return to surplus?
The consideration in tax cuts for all business is that we ensure that we remain competitive internationally. The US just recently reduced its corporate tax rate from 35 to 21 per cent. In Australia, we are talking about going from 30 to 25 per cent. The question is should the larger companies participate in that as well. I think international competitiveness is the factor that would suggest the tax should be broadly based rather than capped at a certain size. If you look at this Budget and the fact that it was ahead of expectations with $35 billion more in revenue than was forecast, a lot of that is due to business being profitable at present and that has created a windfall for Government revenue. I agree with the Business Council of Australia which says that strong business is a prerequisite to a strong economy and that leads to paying down debt more quickly and being able to provide more personal tax cuts. We are in a unique environment – we have low interest rates and low inflation – you need to tinker with tax settings to optimise the economic outcomes.
There is a risk with locking in a temporary increase in revenue and locking in a more permanent reduction in the tax rates. But having said that, I am more concerned about the Budget assumptions rather than plans to change tax brackets. There are assumptions that wages will grow 3.5 per cent and I am not sure that will happen as quickly as the Government has indicated. There’s clearly a reliance that the global economy will grow well and that China will support our economy. That is fair enough, but it remains an assumption that may or may not occur. If the assumptions are not right, that might jeopardise a Budget surplus.
Can you comment on proposed tweaks to dividend imputation and negative gearing as proposed by Labor?
I do have concerns about eliminating dividend imputation and (franking credit) tax refunds given we are in a low-interest rate environment. Because rates are at a record low, the timing seems problematic to me. And similarly with negative gearing, given the property market appears considerably more soft compared with six or 12 months ago, the timing with tinkering is problematic.
Independent economist Saul Eslake commented recently that over the past two decades the tax regime and other policy settings have seen a redistribution of wealth from the young and middle aged to older Australians. Can you comment?
I am not sure it is that simple. We do have an ageing population, we are living longer and that is a good thing. I think it is good that this Budget had a number of incentives to continue to employ older Australians. And the funding of aged care is very welcome. But as for the redistribution of wealth, I am not completely sold on that. We have one of the strongest economies in the world. It is 26-plus years since the last recession, so I wouldn’t criticise the evolution of the tax regime over the past few decades on that basis. But clearly, we need tax reform moving forward. We need to take into account changing demographics. The inherent strength of our economy is perhaps evidence the redistribution of wealth to older Australians might not be as large an issue as Saul Eslake has suggested.
How do you see banks’ housing loan books 10 years from now if increasing numbers of young Australians cannot afford to buy a home, negative gearing is tweaked, thus de-incentivising residential investors, and the regulators keep insisting that banks make it hard for young families to borrow large sums with small deposits?
Housing affordability for young families is clearly an issue. Although it is pleasing we have the first home-owners scheme and state-based concessions for stamp duty. But it does remain difficult. The measures the regulator has put in to reduce interest-only lending and investor lending has seen a welcome rise in lending to owner-occupiers. Those macro-prudential measures have been effective. Housing prices are now at far more sustainable levels. They were growing too quickly, in particular in Melbourne and Sydney. And now it seems across Australia they will be relatively flat or even slightly lower. However, our base case remains a soft landing amid a strong jobs market and with low interest rates. We are very comfortable with the credit quality of our housing loan books.
What is the outlook for interest rates?
The path the Reserve Bank (RBA) takes will be pretty important to housing prices. The RBA will calibrate rate rises taking into account the sensitivity of Australia’s housing market given high household debt. The RBA has always had a good track record of keeping a steady ship. And I expect they will continue to do so during this interest rate cycle, but nevertheless we do expect the next rate movement to be up rather than down. Most economists expect a rate rise won’t happen until next year. If you had asked me three months ago, I would have said late this year. But the softer housing market and also through the Banking Royal Commission’s increased focus on lending standards, these factors have probably pushed back that (rate rise) timing. There is a school of thought the focus on lending standards may keep property prices a bit softer for longer. So the next move is up, but it is increasingly being deferred further down the track.
What is your view on Budget initiatives now that you have had time to consider the announcements?