The Australian context
In assessing priority areas of financial sector reform, the Inquiry has taken into account the following characteristics of the Australian economy:
- Australia is an open market-based economy. The Australian financial system is predominantly privately owned and operates according to market principles.
- Australia is, and is likely to continue to be, a substantial net importer of capital. Australia has a relatively small but well-educated and skilled population. It has significant endowments of natural resources that cannot be fully utilised without foreign investment. Ongoing access to foreign funding has enabled Australia to sustain higher growth than it otherwise could. The financial system has an important role in facilitating funding from, and investing in, offshore capital markets.
- The structure of the Australian economy will continue to evolve, as seen in the shift from mining-led investment to broader activities in non-mining sectors. The financial system plays an important role in assisting the economy as it adapts to such changes by facilitating the reallocation of financial resources.
- The Australian population, like many around the world, is ageing. This trend is likely to result in a lower proportion of the population being of working age, dampening long-term economic growth and placing greater fiscal pressures on governments. In this environment, a well-functioning superannuation system will be important in alleviating these pressures and ensuring good outcomes for retirees.
- The Australian economy faces a considerable productivity challenge. Compared with the last decade, productivity growth will need to be stronger to maintain Australia’s living standards, as our terms of trade continue their expected decline and the population ages. The financial system plays an important role in facilitating productivity growth by funding the economy more efficiently, including funding new businesses and using new technology.
- With the advent of digital technology, Australia is in the midst of one of the most ubiquitous, generally applicable technology changes the world has seen. Its effect has been, and continues to be, revolutionary as innovative business models insert new competitive tensions into a variety of industries. For the financial system, technology-driven innovation will continue to change the financial products offered to consumers and the very nature of financial intermediation.
- Australian financial system assets have grown from the equivalent of around two years’ worth of nominal gross domestic product (GDP) in 1997 to more than three years’ worth of nominal GDP.1 Compared to international peers, Australia has a relatively large financial system.2 In particular, superannuation assets are expected to continue to grow and increasingly influence funding flows in the economy.
- Some sectors of the Australian financial system are concentrated. In particular, the banking sector is concentrated, with the four major banks being the largest players in many aspects of the financial system and having significant market influence. Such concentration creates risks to both the stability and degree of competition in the Australian financial system.