Which bank could give Australians a better bang for their buck? The RBA

How would you like to be able to get most of your mortgage from the Reserve Bank of Australia at the cash rate of 1.5% rather than three times that after your bank has slapped on its margin for the same money?

How would you like to forget worrying about how to exercise your "super choice" wondering how much of your money will disappear in commissions on the side and multimillion dollar senior executive salaries? You wouldn't need to if you could access the super schemes governments already run for their own public servants. They're professionally managed with lower fees and better investment returns than retail and industry super funds.

It's strange, given all that reform we had in the 1980s and 90s, that we didn't make it to something as economically rational and helpful as that.

Still, the Productivity Commission's current inquiry into competition in finance gives it the opportunity to make that right with simple, compelling recommendations from the heart of the reformer's playbook.

Recall National Competition Policy from the 1990s? It institutionalised the idea that all restrictions on competition should go if they couldn't be independently justified. Except one that is.

The principle of "competitive neutrality" embodied in National Competition Policy "levelled the playing field" by protecting private businesses from competition from governments where that competition reflected unfair advantages government agencies might have – for instance exemption from tax. This made good sense. But so focused were the reformers on the benefits of private enterprise that they said nothing about levelling the playing field in the other direction – where governments were already delivering services to some while refusing them to others.

And here's the thing: because finance is riddled with "market failure" – in other words, because the incentives of those in profit-seeking financial firms align so poorly with their customers' interests – don't presume that private firms are more efficient. Quite the contrary.

As the Grattan Institute's Jim Minifie showed in 2015, public sector funds achieved the highest average net returns over the 14 years to 2013, exceeding 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 $2tn in super, there's a vast sum at stake. And peace of mind for Australians knowing that they could access the same low-cost, professionally managed super any public servant can access rather than the current regulatory palaver of first "super choice" and then MySuper and default funds.

Meanwhile there's that set-piece talking point about whether we should have a people's bank. Well here's the thing: we already do. When Westpac or the Commonwealth make payments to each other or need to park or borrow some cash, they head down to the people's bank. Which bank? The government-owned Reserve Bank of Australia (RBA) – Australia's central bank – sits at the apex of our banking system facilitating payments between you and me even as we bank with different banks by allowing those banks to make payments between each other using their RBA-provided "exchange settlement accounts". When one bank has more money overnight than it needs, it can park it with the RBA while another with a shortfall borrows it.

Given this, it's quite misleading to think of banking as privately owned and run. It's a public-private partnership with the RBA wholesaling basic banking services to the commercial banks and effectively guaranteeing their debts if they can't meet them. The commercial banks then go retail franchisee and "upsell" RBA services back to us.

However, as commentators around the world are increasingly realising, the internet now renders the exclusivity of this arrangement obsolete. Central banks can now make such services available to allcomers. I've argued the RBA should also fund the super-safe portion of mortgages – up to just 60% of the value of your home. It's much safer than their lending to our banks via "repurchase agreements".

The economic gains from taking competitive neutrality seriously in this way are very large. A 2016 Bank of England paper that looked at central banks facilitating payments with their own digital currency estimated gains of 3% of GDP. That exceeds the PC's estimate of the gains from national competition policy throughout the 1990s in electricity, gas, urban water, telecommunications, urban transport, ports and rail freight.

Much of this gain arises from government money creation in lending to householders (under my model) or in issuing digital currency (under the Bank of England model). Currently the people's bank – the RBA – creates about 3% of the money stock in printing banknotes with the rest created by commercial banks as they make loans (nice work if you can get it!). These new arrangements would see governments creating around half the money we use which would generate tens of billions in revenue allowing tax cuts or increased expenditure elsewhere.

More promisingly still, by recommitting to a more sophisticated, less tendentious understanding of the principle of competitive neutrality we could take a first big step beyond the simplistic slogans – markets good/governments bad – that have dogged economic reform and made it such a disappointment looking back.

Where market failure abounds – and that's nowhere more true than finance – problems should be tackled on their merits with public and private sectors each playing to their respective strengths.