Banking on the ATO

Some months ago one of my children’s teachers - I’ll call her Tania - sought my advice. Having recently sold her house, she was terrified of her life savings disappearing in some bank failure before she’d had a chance to reinvest it in another house. I told her, shamefacedly - three quarters of a century since the Great Depression - you still can’t keep your money completely safe.

The Government’s guarantee should have calmed Tania’s nerves (though I hear she’s still nervous - and authorities report that demand for $100 bills has surged). When the market calms down and the guarantee is lifted in three years why shouldn’t we have somewhere for people to keep their money safe?

I’ve previously outlined in this column how it could be done. You already have an account with the Tax Office. Since the government helps itself to penalty interest if you’re late paying tax it seems only fair that it pay interest on your surplus.

You can already make internet payments from your bank to your ATO account. The Government should commission the software to enable you to use your ATO account to make internet payments enabling you to pay anyone with an ATO account. Voila! A simple, safe and dirt cheap savings and payments system.

And the system could also interface with the existing bank payments system - the one you use to pay people over the net. None of this should be subsidised. Indeed, the government could fund it - including an appropriate return on investment - from interest margins and/or charges, just as banks do.

I reiterate the idea not just for its own sake, but also to illustrate a particular approach to that vexed question of the role of government at a time of great questioning. Note two things:

First, though the proposal expands government services, it doesn’t lurch back to the pre-reform era. Back then, governments owned banks only to have them operate just like private banks - which eventually made it hard to see the point of public ownership. So I’m not suggesting branches around the country - though governments could allow account holders to pay for those services and contract them out to existing public and private retail networks like banks, post offices, supermarkets and gas stations.

Instead, existing government infrastructure would be leveraged to create a powerful new facility that would cost less and offer more - instantaneous payments without counterparty risk between government guaranteed accounts - than existing arrangements offer.

Second, it’s cognitively efficient. Rather than send the Tanias of the world on the anxious wild goose chase of assessing banks’ respective creditworthiness, we build the simple, safe solution they’re looking for while leaving them free to seek more exotic, higher risk and return solutions elsewhere.

Oh - and I’m waiting for Tania to ask me where to invest her super, because, while super choice is a great thing for those in the know, for Tania it’s another nightmare of cognitive inefficiency. Tania’s a great teacher. But since she wouldn’t fancy her chances of choosing a good fund, what advisor will she consult? How will she tell how knowledgeable they are of if they’re mainly motivated by commission payments?

There’s one further choice Tania should have. It’s already provided to public servants: unless they take charge and put their super elsewhere, there’s a large default fund, professionally managed (at arms length from government) with scale economies and an absence of commission payments that minimises management fees.

Wouldn’t these low cost government services “crowd out” the private sector?

Australia’s pioneering HECS scheme provides the model. HECS crowds out private lending - partly because its interest rate is subsidised (which I don’t support). But the main reason it crowds out the private sector is that the government’s access to the tax system makes income contingent loans practicable, where private lenders would shy away from all but the best risks.

I’m a big fan of the private sector - I’m in it! But just as more efficient private firms crowd out less efficient firms in markets, providing they’re not subsidised, if government services out-compete private firms, so much the better. It helps us evolve our way towards a more truly complementary relationship between private and public endeavour, as private resources that are crowded out resurface where they’re more productive to do things that governments are too big and awkward to do well.