Taking competitive neutrality seriously: my challenge to the Productivity Commission

Competitive neutrality

Australia coined the expression "competitive neutrality" at the summit of our reform prowess in the mid-1990s - alone among the more aggressive Anglophone liberalisers in coupling economic reform with economic equity. But it was always confined to the notion of constraining government to compete fairly, rather than drawing more fully on government's potential to outperform profit-seeking firms in the presence of serious market failure.

In this regard, competition should be regarded as 'fair' and presumptively efficiency-enhancing whenever public provision is offered at prices that reflect underlying resource costs. In finance, possible advantages government agencies may enjoy include:

• The directness of their relationship with the fundamental architecture of the monetary, financial and tax systems;
• The public's greater trust in the integrity of services provided by government;
• The lesser extent to which senior executives have hitherto been able to exploit their positions as insiders to extract rents from others;
• The tendency for government-backed firms to be substantial players in their markets and so the access this gives them to scale economies.

Banking

Banking has been built on competitive non-neutrality. First, commercial banks receive basic banking services from the central bank which are inaccessible to citizens. Second, the commercial banks - who 'retail' and upsell to their customers the basic banking services of payments and savings initially 'wholesaled' by the central bank - are themselves advantaged against other businesses which cannot themselves directly access those services.

And yet, since at least the advent of the internet, we've been able to cost-effectively end this non-neutrality by allowing all-comers access to central bank services to save money in central bank accounts, be rewarded at the overnight cash rate and use those accounts to pay others.

Indeed central banks have 'retailed' their services to the public since the Bank of England's dominance in bank note issue was legislated in 1844. Remarkably, there's been no hint of something analogous online.

Ending this non-neutrality would be disruptive, but in precisely the way that competitive neutrality was disruptive when used as a shield for business against unfair competition from government agencies. It helped move our economy towards a healthier division of labour between publicly and privately provided services.

As I've outlined in several publications,⁷ allowing central banks to provide unsubsidised basic banking services to all who sought them would generate large gains. Since my initial publication in this area, Bank of England research has argued that, coupled with the issuance of digital currency, central banking for all could add 3% to GDP - a remarkably large number. Much of the gain comes from the revenue accruing to government from money creation, something which is generated in my model with central bank lending against super-collateralised assets.

Superannuation and funds management

The principle of competitive neutrality would also offer a useful means by which the excessive margins in the provision of superannuation services could be tackled. Given the resources governments invest in account and funds management to support public servants' superannuation, those services should be available to all those wishing access to them.

Naturally, Australians' right to have others managing their money should be preserved, but the public sector has been a better wealth manager than most alternatives. As the Grattan Institute's Jim Minifie observed in 2015, "public sector funds as a group have achieved the highest average net returns over the 14 years to 2013". Their average annual returns exceeded those of the entire APRA-regulated superannuation industry by 1.1 percentage points, industry funds by 0.6 percentage points, and retail funds by 2.2 percentage points per year over that period.

With $2 trillion in super and a sizeable chunk of wealth management outside superannuation, there are vast sums at stake, not to mention the peace of mind for Australians whose compulsory super was initially at the convenience of their employer - and/or their union - which was then revised through successive regulatory palavers of 'super-choice' (are you feeling lucky?) and then MySuper and default funds.

Service delivery and market design

Since the reform bug hit in the 1980s, policy-makers have felt comfortable addressing policy problems with a degree of abstraction via market design. The pre-reform approach - this is a problem that's not being addressed, so government should step in and address it directly - is now exercised as a last resort if policy-makers can overcome their distaste for 'picking winners'. Certainly, we should consider sophisticated market design if we think it will be superior. But policy problems should be solved on their merits.