Dreaming of a single transtasman economic market

Australian Treasurer Peter Costello's goal of a single transtasman economic market depends on one crucial factor - banking.

Costello has made no secret of his ambition to achieve major results since the single market concept was floated after his annual meeting with Finance Minister Michael Cullen in Melbourne in January last year.

But the sticking point is getting a resolution to the strongly divergent views on how to harmonise banking supervision in New Zealand and Australia.

At the January meeting, the ministers said they would look at ways to harmonise the supervision and regulation of their banking systems and their competition, accounting and security-offering rules.

But the big picture has got buried as the two politicians try to overcome national interest sensitivities and bureaucratic infighting - particularly on the banking issue, made more contentious by claims that Australian banks were rorting New Zealand's rules to avoid paying their fair share of tax.

Yesterday, Costello was keen to reinforce why he believes the single market is so important.

"I regard Australia as a small country in a global sense. We are 20 million people. We are in a region which is incredibly culturally diverse - different religions, different races. We are in a world that is moving to large trading blocs.

"Australia has to find its way, and it seems to me that the closest most natural complementarity goes with New Zealand."

To the Treasurer, the upside from forming a single market is obvious.

"If you look at Australia and New Zealand, our companies will get easier access to a market of four million and you will get easier access to a market of 20 million.

"The benefits are very much skewed in New Zealand's favour."

"There will be advantages to some Australian businesses - I hope that will just be another peg in keeping our economies strong, which I would say to the Australian public is good for their jobs and their futures."

Turning rhetoric into reality has proved more difficult than Costello expected.

It took some hard talks between him and Cullen on Thursday before the pair emerged with a proposal to form a council of leading stakeholders to push the banking issue along.

The body language at their joint press conference was telling. So was the repartee.

Asked "Are we facing an ambitious Australia and a cautious New Zealand?" Costello replied, "No, no, you're facing two amorous friends who move and respond in the way good relationships operate."

Chimed Cullen: "Everyone knows I'm not quite as ambitious as Treasurer Costello."

Costello: "Not quite as amorous, either."

Laughter broke out at Cullen's veiled reference to his Australian counterpart's undisguised ambition to succeed John Howard as Prime Minister and leader of the Liberal Party.

There was more laughter later when Costello told a Trans Tasman Business Circle dinner that "I've generally found passion ignites better when both are amorous".

The serious point, that New Zealand and Australia are clearly out of sync on some key issues, particularly banking, was not lost on his Wellington audience.

New Zealand's Reserve Bank and Treasury are opposed to an Australian Treasury proposal to give responsibility for supervision of our banks to the Australian Prudential Supervisory Authority, which monitors all Australian financial institutions.

Cullen reinforced the issue to his Cabinet colleagues in August, spelling out his opposition to New Zealand forgoing decision rights over policy affecting its largest banking institutions and the ability to manage the banks in a financial crisis.

These are strong national sovereignty concerns.

Some of Cullen's colleagues share the same worries that the New Zealand economy could be exposed if banking controls cross the Tasman.

The sensitivity over the differing proposals to harmonise banking supervision was again apparent yesterday when Cullen swiftly played down suggestions that Australia was pressuring New Zealand to consider a single transtasman banking regulator.

In a terse press statement, Cullen said: "All we have committed to ... is to enhance co-operation, review transtasman crisis response preparedness, provide policy advice on the principles of policy harmonisation, and report on possible legislative changes to ensure the Australian Prudential Regulation Authority and the Reserve Bank of New Zealand can support each other in the performance of their regulatory responsibilities".

Costello had said the Trans-Tasman Council on Banking Supervision would run an "open ended exercise with no pre-defined end points".

But even as Cullen was trying to play down concern, Costello was making it abundantly clear in his Herald interview that "single regulation would be the endpoint".

Three options are effectively on the table.

First, what Costello terms a reversion from the current situation where each country regulates its banks and is responsible for its own prudential supervision and depositor preference system.

Second, a mid-point with two institutions but the same rules "so you are regulated twice; it just turns out the regulation is the same".

The third, Costello says, is "the more hard-nosed alternative which says that rather than doing the same rules twice we do the same rules once."

"I think reversion would be a bad thing ... I think harmonisation would be an improvement, but not a major improvement, and single regulation would be the endpoint."

Costello is concerned progress on this issue has become clouded by the controversy over whether Australian banks have rorted the New Zealand tax system.

Inland Revenue alleges the banks have reduced their effective tax rate to 10 per cent instead of the usual 33 per cent company rate by financing their New Zealand operations through loans instead of capital.

Last year IRD gave several banks revised tax bills.

"I wouldn't condone any company circumventing tax laws in my own country or in New Zealand," said Costello.

"I'm not aware there is any evidence."

He is keen to minimise any suggestion that Australia is bullying its smaller neighbour.

"I don't want to push anybody into doing what they don't want to do, because that would be counterproductive. The only thing I would say is if we can't do banking we're not going to be able to do much else, are we?"