Released yesterday, the Finance and Capital Formation in Australia paper found finance was the fastest growing industry in the last 20 years, yet, by 2012, for every dollar of resources allocated to the sector there was just $1.50 of capital formation, compared to $3.50 for every dollar in 1990.
Efficiency in capital formation by finance is declining, despite the sector’s 10 per cent share of the economy, on par with the mining industry, according to the report.
“ISA’s work demonstrated an opportunity for the Financial System Inquiry to examine how superannuation could play a greater role in the economy,” said ISA chief executive David Whiteley.
“Transforming savings into investment in the real economy is arguably the most important job of the finance sector,” Mr Whiteley said.
Australia’s pool of savings, with compulsory superannuation as the cornerstone, is the highest in the world on a per capita basis, according to the report.
In fact, the pool is so large relative to the economy that efficient capital formation would not only drive retirement outcomes for many people, but would also materially affect the prosperity of the country, the report stated.
Two drivers of the growth of finance are the expansion of “auxiliary” financial services, such as wealth management, advice, securities trading and the profit growth of the banking sector, ISA director of policy Zachary May said.
Mr May, who authored the report, added that many resources allocated to financial services are involved in changing the ownership of existing assets, rather than the formation of new ones.
“So you are spending a lot of the labour and capital of the country moving assets around from one person to another,” he said.
“One area where there is considerable growth is in banking profits. We don’t talk about why that’s the case – that is something to be looked at later on – but it is one of the obvious industry dynamics that is part of the explanation as to why the sector is growing faster than its capital formation capacity.”
The report raises questions about wealth management and advisory services, in particular where savings are being invested.
“Are you managing that wealth in a way that you’re looking for stocks to go up? Or are you using that wealth and looking for new areas of the economy to grow? Are you looking for a new company to invest in?” said Mr May.
“In decades past, finance has focused on taking those savings and putting them into new capital. It doesn’t look like it is focusing on that anymore – at least, not as much as it used to.”
