Victoria bears brunt of job cuts

VICTORIA is taking the brunt of Australia's job losses. Official figures show a net 33,000 full-time jobs have been lost since April, equivalent to one in every 60 full-time positions in the state.

Yesterday's bleak jobs data came as Qantas foreshadowed hundreds of job cuts and the possible closure of one of its two heavy maintenance depots at Avalon and Tullamarine, which together employ more than 1000 people.

Late yesterday Caltex flagged that it might shut its two Australian oil refineries in Sydney and Brisbane - raising questions about the future of Victoria's two refineries, the Shell refinery at Corio and the Exxon-Mobil plant at Altona.

Caltex Australia chief executive Julian Segal said the future of its two ageing refineries has been put under review because of the high Australian dollar and competition from newer, large-scale, more efficient refineries in Asia.

Caltex has written down the value of the two refineries from $1.8 billion to $340 million. Just seven refineries are now left in Australia, all of them relatively old.

Yesterday's announcements add to a recent wave of job cuts at major companies across Australia's banking, retail and manufacturing sectors.

Nationally, the jobs figures have gone back to a zig-zag pattern. On a seasonally adjusted estimate, the Bureau of Statistics says Australia gained 46,000 jobs in January, after losing 41,000 in the previous two months.

Seasonally adjusted, unemployment edged down to 5.1 per cent, but the bureau's figures show the big movement has been of people leaving the workforce altogether. In the past year, while unemployment has risen only marginally, the workforce participation rate has fallen by the equivalent of over 100,000 workers.

Roughly half of those lost workers were in Victoria, where the seasonally adjusted figures reported another 15,000 full-time jobs lost in January. Total employment, however, remained unchanged, with part-time jobs growing, and Victoria too had an unemployment rate of 5.1 per cent.

On its preferred trend measure, the bureau estimates that the entire Australian economy has added just 22,000 jobs in the past year, mostly part-time. It is a dramatic contrast with the 344,000 jobs added over the

previous year. The bureau figures show a tale of two economies. In the past year Queensland, Western Australia and the Northern Territory have added 44,000 full-time jobs, while the south-eastern states have lost 38,000 full-time jobs.

Most of those job losses have been in Victoria. After being one of the stronger states over the past decade, Victoria is now clearly the epicentre of job losses, losing about 1000 full-time jobs a week, partly offset by about 500 new part-time jobs.

Federal government ministers hailed January's jobs growth as demonstrating that Australia's economy is fundamentally in good shape. ''There are more Australians in work today than at any stage in Australia's history,'' Employment Minister Bill Shorten told journalists.

The opposition again focused its attack on the carbon tax, saying it would cost more jobs when it took effect in July.

Premier Ted Baillieu said Victoria was experiencing a shift from full-time to part-time employment, but expressed concern that much of it might be reflecting under-employment rather than deliberate choices by workers.

Economists warned that there was worse to come, and in a wide range of industries, as the high dollar sends jobs overseas and diminished spending growth contracts jobs at home.

''We expect that over the next few months NSW and Victoria will bear the brunt of the employment correction under way in retail, manufacturing, construction, business services and finance,'' said Westpac chief economist Bill Evans. ''As such, we see the labour market weakening further in these states.''

New Reserve Bank deputy governor Philip Lowe threw in a cheerier note in his first speech, declaring he saw ''a chain that links the investment boom in the Pilbara and in Queensland to the increase in spending at cafes and restaurants in Melbourne and Sydney''.

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Australia reaps bond windfall

A SURGE of global demand for Australian government bonds has saved the federal government from issuing at least $10 billion in debt, cutting more than $500 million a year from its future interest bills.

The surge, which is the flipside of investors fleeing the turmoil of Europe, has slashed the yields on Australian bonds and cut the cost of issuing new debt by more than 20 per cent.

The latest 10-year Commonwealth bond issued this month had a yield of just 3.81 per cent, in contrast to an average of 5.33 per cent in 2010-11.

The latest five-year bond issued a week earlier had a yield of just 3.46 per cent, down from an average of 5.47 per cent in 2010-11.

Bond yields in recent months have been at or around the lowest levels in 60 years. This has created an unexpected bonus for the federal budget, significantly lifting the likelihood of a surplus in 2012-13.

The yield is the expected return to investors. Yields are falling because more investors want to own Australian bonds and are prepared to accept a lower return to do so.

Falling yields do not change the interest bill the government pays on existing debt. But they have a big impact on the cost of issuing new debt, and the cost of servicing that debt in future.

The chief executive of the Australian Office of Financial Management, Rob Nicholl, said the fall in yields had meant investors buying new issues were generally paying more than the face value of the bond.

To buy a $1 million bond paying interest at the old levels, an investor might now have to pay $1.1 million or more.

"If the cost of borrowing is lower, then it's good for Australia," Mr Nicholl told The Age. "When yields are lower, the price we receive for issuing bonds is higher and that means we can issue less face-value debt to raise the required amount of money."

The effect of the lower yields has been so dramatic that it absorbed the full impact of the estimated 2011-12 budget deficit blowing out from $22.6 billion in May to $37.1 billion in the midyear outlook released in November.

That would normally need a comparable rise in government borrowing. But Mr Nicholl said the Office of Financial Management still planned to issue $53 billion of new debt this year, the same target it had in June.

"It's the product of a whole lot of influences," he said. "Australia is a AAA-rated sovereign, and that's a shrinking club. Investors might be taking money out of equity markets and putting it into the safety of bonds paying fixed interest.

"There have been changes in currency level and hedging costs. It's not surprising that demand for Australian government securities should have risen in the current circumstances."

Reserve Bank assistant governor Guy Debelle said this week the demand for Australian bonds was coming largely from the sovereign wealth funds of foreign governments.

Mr Debelle said the Reserve estimated that 75 per cent of Australian bonds were owned offshore. He said foreign demand for Australian bonds could be partly responsible for the recent strength of the Australian dollar.

On back-of-the-envelope estimates, a 20 per cent fall in average yields on new bond issues in 2011-12 would allow Australia to issue at least $10 billion less debt than would otherwise have been needed.

In turn, that would save the budget more than $500 million a year in interest it would have had to pay on that debt.

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Bank switching booms as public anger grows

ANGRY home buyers are breaking with their banks at unprecedented rates. More than 50,000 home owners refinanced a record $12.6 billion of mortgages in the December quarter, as they voted with their feet to get a better deal.

Bureau of Statistics figures show Victorians led the way. The amount switched to other banks, building societies and credit unions in this state soared 50 per cent in two years, hitting $3.6 billion in the December quarter, up from $2.4 billion in the same quarter of 2009.

The amount refinanced shot up 36 per cent in New South Wales in the same time and 30 per cent in Western Australia. In the rest of Australia, curiously, refinancing activity has been steady or even falling.

Industry observers say the competition late last year was led by the big banks themselves, which were competing aggressively by offering larger discounts to home owners to switch banks in a sluggish market.

That competition has now been scaled back, with the banks reducing their discounts this year. Even so, the Reserve Bank reported on Friday that the average rate on new mortgages by the big four banks last month was 6.59 per cent.

This implies an average discount of more than 0.7 percentage points from their standard variable rates. It explains why Treasurer Wayne Swan has urged home owners unhappy with their mortgage to shop around.

Insiders say the standard variable rate is now an anachronism. Few new loans are written at this rate and the banks are usually quick to offer better deals to customers who threaten to leave.

National Australia Bank was the big winner from the consumer shift, because of its well-publicised lower interest rates. Last year it increased its stock of housing mortgages by $20.6 billion or 13 per cent, more than double the average growth rate of the other three.

Commonwealth, with its subsidiary Bankwest, is the biggest home lender with a book of $307.5 billion at the end of last year, according to data published by the Australian Prudential Regulation Authority.

Westpac and its subsidiary St George are second with $284.6 billion of home loans. The NAB is well behind with $177.4 billion and ANZ fourth with $163 billion.

APRA figures show starkly how dominant the big four have become in the market, as the competition regulators have allowed them to successively take over their main rivals.

The fifth-biggest home lender on December 31 was the local arm of Dutch bank ING, with $37.2 billion. It was followed by Queensland bank Suncorp-Metway ($29 billion), the Bendigo-Adelaide Bank ($22.1 billion) and the Bank of Queensland ($21.4 billion).

Last year for the first time since the global financial crisis, the four second-tier banks increased their home loans marginally faster than the big four. Their stock of loans grew by 8.6 per cent to $109.7 billion, against average growth of 7.5 per cent for the big four.

Competition for refinancing came as new lending shrank to the lowest growth rates since statistics began to be kept 35 years ago. APRA data shows the stock of mortgages held by the big four grew by $114 billion in 2008, $117 billion in 2009, $85 billion in 2010, but just $65 billion last year. The refinancing boom gave a misleading boost to the monthly home finance approvals. Year on year, lending for refinancing grew 12 per cent in the December quarter, but all other home lending shrank 3 per cent.

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COLUMN: Surplus to requirements

PAUL Romer, one of the founders of what economists called new growth theory, used to pose a question which has deep implications, going well beyond economics.

Suppose all the world's stock of structures and equipment remained, Romer mused, but our knowledge of how to create them was wiped out. Then imagine a scenario B, in which all our structures and equipment were wiped out, yet our knowledge of how to build them remained. In the long term, which scenario would leave us better off?

The answer, clearly, is the second. It is the power of knowledge, of human intelligence, our ability to think, learn and create, that is the most valuable asset of any society. Far from knowledge being a limited store, as Western thinkers once assumed, Romer argued that it is virtually unlimited. What leads to growth is the ability to imagine, to think through conflicting propositions, to invent a better solution to problems than the one we inherited.

If only humans always did so. But in the real world, the innovative idea is so often dismissed as heresy. People don't think through conflicting propositions, but rely on prejudice or loyalty to a simple idea. To embrace a better understanding of complex events means discarding an old one. And often those old ideas are convenient ones for us to believe. Often they are in our financial or political interests or come from deep ideological convictions. Mere objective reasoning can find it impossible to break through.

Australia offers plenty of examples in which prejudices block our ears to better ways of doing things. But the riots in Athens over the past week, and the long standoff over how to reduce Greece's public debt, are a dramatic illustration - on an issue with huge implications for the world, and us - of how hard leaders and the public find it to accept ideas and solutions which clash with long-held, convenient prejudices.

Yesterday, Greek MPs voted 199-74 to endorse the latest austerity package negotiated last week by the leaders of the two main parties, slashing the minimum wage to ?560 (roughly $A700) a month, and making deep cuts to pensions and government spending across the board. It is forecast to cost 150,000 jobs over the next three years. That's what they were rioting about.

But the MPs' vote was just another reprieve. Even if the next Greek government implements the package in full, which many doubt, it would deepen the crisis, not solve it. The package dictated by the European Union won't work, for reasons that have been made clear repeatedly, but not accepted. The crisis will return; the worst of it could still be ahead.

On both sides, comfy old prejudices are keeping minds closed to challenging ideas, innovative thinking, and better solutions.

The rioters illustrate why the rest of Europe doesn't trust Greece any more. They symbolise the refusal of Greeks to take collective responsibility for the crisis into which Greece has thrown the Continent, and which might take a decade to resolve. Year after year, the Greek government, on a huge scale, spent money it did not have, employed people it did not need, bought votes with lavish pensions, allowed its people to dodge paying taxes, and then lied to the EU and the world about its financial position.

Even before the crisis, after a decade of boom for the Greek economy, Greece was secretly running the biggest deficit in the advanced world, equivalent to roughly $80 billion a year in Australia. If that's how you run the business in good times, then the bad times are going to be awful. And so they were. No bank would lend to Greece any more; only aid from the IMF and the EU has saved it from bankruptcy. But in the end, bankruptcy might be inevitable.

The EU has lent on the banks to write off half their debts to Greece; but led by the German government, it wants to enforce deep austerity in Greece to start paying back the other half. Unemployment in Greece is already almost 20 per cent, and would get much worse if these budget cuts are implemented; yet the Greek government would then be running a surplus on its primary balance - that is, excluding its debt payments.

I have deep admiration for Germany's economic achievements, which are little understood by politicians or economists here. But it is an illusion to think that countries can cut their way out of trouble as deep as this, unless they can devalue their currency to make them more competitive. Greece can't do that, because it's locked into the euro. Even in Britain, outside the euro zone, the Cameron government's deep spending cuts have pushed the country back into recession - and Britain started from a far better position than Greece.

Is there a better solution? Yes, and IMF managing director Christine Lagarde outlined it last month in a speech in Berlin. Her speech was all nuance, but to paraphrase: timing matters. Yes, getting budget deficits under control is critical, but so is avoiding a deep, self-perpetuating slump. Don't cut current budgets so deeply that you drive the country into recession. Rather, protect your sources of growth, and push through big, long-term reforms that will make your budgets sustainable into the future.

Her message should reverberate here in Australia. It is not getting the budget back into surplus in 2012-13 that matters; events in Europe could make that impossible. As Treasury has shown, the long-term threat to the budget is from an ageing society. We should bite the bullet on this: phase out incentives to early retirement now, and start lifting the pension age, before the baby boomers retire. Timing matters.

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Marvellous Melbourne rises in visitor appeal

VICTORIA or more specifically, Melbourne has become a magnet for overseas visitors, accounting for almost half the entire growth in visitors to Australia over the past decade.

Bureau of Statistics figures show that the number of foreign visitors who say they spent most of their time in Victoria shot up by 60 per cent in the past decade, soaring from roughly 750,000 in 2001 to 1.2 million in 2011.

Victoria's boom emerged even though total visitor numbers to Australia levelled off, growing by just over 1 million, or 20 per cent, over the decade.

The two main tourist states, New South Wales and Queensland, saw visitors grow by just 290,000 between them.

The high dollar has dented Australia's tourist industry. In 2011, while total visitor numbers shrank only marginally, to 5.96 million, those coming for holidays as tourists slumped by 4 per cent to 2.59 million.

The number of tourists has fallen by almost 400,000 a year since the dollar started to climb towards record levels. A decade ago, after the Sydney Olympics, Australia was hoping to have 5 million tourists a year by now; the numbers have shrunk to barely half that.

The tourist drought has been most intense in Sydney and on Queensland's beaches. Total overseas visitors (including students and short-term workers) have slumped by 9 per cent in Queensland since 2005, grown just 3 per cent in NSW, yet shot up almost 30 per cent in Victoria.

Victoria has a far bigger share of visitors coming here to study, to visit friends and relatives, or for business or jobs. These classes of visitors to Australia have stabilised or kept growing as tourist arrivals have shrunk.

Surveys by Tourism Victoria show that Melbourne is the biggest attraction: 80 per cent of foreign visitors to the state never spend a night outside the capital. Fewer than one in 10 even visited the Great Ocean Road, the main attraction in regional Victoria.

The biggest growth has been in visitors from China, who are about to overtake New Zealanders as the biggest source of tourists to Victoria. Tourism Victoria estimates that in the year to September, the state was visited by 259,000 Kiwis, 252,400 Chinese, 203,600 Britons and 122,300 Americans.

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Banks' recovery rate since GFC of awesome interest

IN THE year to September 2007, just before the global financial crisis, Australia's big four banks made after-tax profits of $16.6 billion. People thought that was huge. Ian Macfarlane, former governor of the Reserve Bank, used to wonder how Australia's banks made such big profits.

In the year to September 2011, the big four made after-tax profits of $24 billion. Many, perhaps most, Australian businesses are doing worse than in 2007. Yet the banks now make profits almost 50 per cent bigger than at the peak of the boom. How much is enough?

ANZ's Australian CEO, Philip Chronican, says it decided to raise interest rates on home mortgages and small business loans by 0.06 percentage points because its margins in retail and business lending had been squeezed in recent months. I don't doubt him, but since when have banks seen these margins as fixed?

Not in the Howard/Costello era, when from 1997 to 2007 they moved in lock step with the Reserve Bank, passing on each rise and fall in the bank's cash rate, no more, no less. That had nothing to do with funding costs or margins. They were just too frightened of Peter Costello to step out of line.

Not since the GFC came. It broke their business model, so they had to raise their margins. The government guarantee and a history of sensible lending allowed them to sail through the GFC with profits only slightly lower. But once out of danger, they kept raising margins; and now their profits have soared.

Yesterday's moves were modest: on a typical mortgage, $13 a month from ANZ, $20 from Westpac. Mortgage holders are the lucky ones. You can go to the bank and demand a discount, or walk out and take one of the many cheaper loans available on the web (websites such as Canstar or InfoChoice can point you to them).

Small businesses are the captive customers. The Reserve tells us that in January, the big banks' average rates were 6.59 per cent on mortgages, 6.70 per cent on big business loans, but 8.25 per cent on small business loans. Small business can't just walk over the street and be sure of finding another loan. And it's their profits the banks are taking.

One question: will the banks pledge to reduce their interest rates in future whenever funding costs fall?

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Strong dollar a local nightmare

FOR 20 years from 1985 to 2005, the Aussie dollar averaged US70c. Now it is hovering around $US1.05. At that level, the question is: does it make sense for any firm to export manufactured goods from Australia?

It's not just Alcoa, Toyota or Holden. It's any firm that exports from Australia, or competes with imports. In the currency of global trade, producing in Australia is now 50 per cent more expensive than in the past. That applies to cars, computer games, university courses or tourism.

Between 1985 and 2005, the Aussie floated between US50c and US90c. If it got too high, firms would tighten their belts, grit their teeth and wait for it to fall. This time it's different.

The dollar is now far above its old levels. Some say it could go higher. Many, most, believe it is now up there to stay. This is not just a cyclical high, it's a structural shift. And it has wrecked good business plans that had assumed a dollar in the range it used to live in.

The destruction is going on all around us. Since the global financial crisis began, Bureau of Statistics figures show, a net 127,000 manufacturing jobs have been wiped out across Australia. One in every eight manufacturing jobs has gone already. Far more than that are under threat.

Treasury, the markets and the Reserve Bank tell us the Aussie is set to remain high far into the future, maybe for decades. It may not stay at today's level, but it will stay well above the zone it lived in before the minerals boom began. This is an epochal change, which will change Australia.

Why does the level of the dollar matter? Suppose you're a manufacturer in Clayton making plastic thingos. There's a big global market, but you're competing with manufacturers in China, Korea, everywhere.

Suppose it costs you $A10 to produce a kilo of thingos. With the dollar at US70c, that makes your costs $US7 a kilo. Suppose the world price is $US9 a kilo, then you're making a decent profit from exporting.

But with the dollar at $US1.05, suddenly your costs have jumped to $10.50 a kilo, yet the global price is only $9. To export thingos now costs you money, serious money. If you think the dollar is going to stay that high, you either somehow cut costs dramatically, or give up the game.

And that's not all. Suppose your Chinese rival can produce thingos for $US5 a kilo. When the $A was US70c, his costs in $A were marginally higher than yours; you could hold him off at home. But with the Aussie at $US1.05, his costs are now less than $A5 a kilo. He can undercut you and take away your local contracts. If you think the $A will stay up here, you don't just give up exporting - you give up manufacturing.

This is a crisis that will bring many well-run firms to their knees: not because they are inefficient, but because costs beyond their control have made them uncompetitive. It is a crisis that, if the dollar remains high as forecast, will cost hundreds of thousands of manufacturing jobs.

But seeing our politicians arguing is like watching two bald men fighting over a comb.

Julia Gillard and Wayne Swan always trot out the line that Labor understands that there are people and firms who are doing it tough. OK, but what are you are going to do about it?

Tony Abbott says he wouldn't have a carbon tax. Wow. A carbon tax might add about 1 per cent to the cost of manufacturing in Australia. The higher dollar has added about 50 per cent. What are you going to do about that?

One option is to do what others do: get the central bank to drive the dollar down. That's possible. They can do that by printing money - but that's the recipe for inflation.

There's two other ways, both unpalatable: invest overseas, as China does, or stop wage growth, as Germany once did.

Our best chance was the mining tax. A 40 per cent tax on superprofits in all mineral sectors, as originally intended, would have sharply slowed mining industry growth, reducing the upwards force on the $A and allowing other industries more room to grow. But Tony Abbott said no, Labor backed off, and even its emasculated tax is yet to pass Parliament.

In the crisis, our politicians and policy advisers have failed the test - unless you think ''do nothing'' is the correct answer. This change will leave many victims in its wake.

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Working longer, retiring stronger

THE number of older workers with jobs in Australia has almost doubled in a decade, transforming workplaces and adding almost a million employees to meet the nation's skills shortages.

New data from the Bureau of Statistics shows that, on average, 1.93 million workers aged 55 and over were employed in 2011, almost double the 1.01 million employed a decade earlier.

A revolution in attitudes and opportunities, along with the ageing of the baby boomers, has meant older men and women worked on rather than take on early retirement.

The data shows that in 2011:

73 per cent of people aged 55 to 59 were in the workforce, up from 61 per cent a decade earlier and 55 per cent two decades ago.

Last year 65 per cent of women in their late 50s were working or looking for work as well as 81 per cent of men. In a decade, the number of this age group working has swelled from 587,000 to 952,000.

53 per cent of people aged 60 to 64 were still in the workforce, a dramatic increase from 35 per cent a decade ago. The participation rate has risen rapidly among men and women, to include 62 per cent of men in their early 60s, and 44 per cent of women up from 22 per cent a decade ago.

The growth in workers in their early 60s has been colossal: from 274,000 a decade ago to 634,000 now. The number of women working at that age has roughly trebled, from 90,000 to 268,000.

In perhaps the most startling development, 25 per cent of Australians aged 65 to 69 are still working, and more of them full-time than part-time.

One in every three men in their late 60s is now in the workforce, up from a bit over one in six a decade ago. Participation rates among women of that age have more than doubled, from 8 per cent to 18 per cent.

Employment and participation rates are also growing among people aged 70 and over, although at less dramatic pace. Last year 102,000 people were working in their 70s, 80s or 90s, up from 59,000 a decade earlier. Treasury forecasts that by 2050, Australia's ageing population will require an extra $60 billion a year of spending, paid for by extra taxes. But Treasury deputy secretary David Gruen has estimated that the gap could close if Australia's workforce participation rates rise to match the best in the Western world.

The fast-rising participation rates among older workers reflect changes in the economy, employer attitudes and aspirations.

Three big recessions in the 20 years to 1991 saw a million workers forced into early retirement. By contrast, with just one small recession and rising skills shortages since then, employers have hung on to older workers, even in the depths of the global financial crisis.

The Keating government's very gradual reform to align the pension ages of men and women has now lifted the female pension age from 60 to 64.5, rising to 65 in 2014. This has removed an incentive for women to take early retirement and in any case, the figures suggest women no longer see anything wrong with working in their 60s if they want to.

With Australians waiting until later to marry, have babies and buy houses, retirement is not an option for many 60 year olds.

Aspirations have risen, too. Surveys have found that people don't want to just retire on the pension, but to live well in their retirement.

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Our grey nomads lead global charge

OLDER people are leading the way in Australia's invasion of the world. In a decade, the number of people over 60 taking overseas trips has trebled from 383,000 to almost 1.2 million, the fastest age-group growth in Australia's rapidly expanding tourist army.

The Bureau of Statistics reports that in 2011, Australians made a record 7.8 million trips overseas, 10 per cent more than in 2010 and well over double the 3.4 million trips that we took in 2001.

Roughly 150,000 left the country each week, flush with strong Australian dollars, to explore destinations from Auckland to Amsterdam.

Bureau analysis shows that while Australians of all ages are travelling overseas far more than a decade ago, the biggest growth has been among those between 55 and 74, and children aged under 10, as retirees and families increasingly embark on overseas trips.

New Zealand remains the top destination of Australian tourists, who made 1.1 million trips to the Shaky Isles last year. But Indonesia is the fastest-growing destination, with Australian visitors there mushrooming from 195,000 to 878,000 in the past five years.

The United States (798,000) is the third biggest destination, Thailand (552,500) fourth and Britain (488,000) fifth, with China (369,000) and Fiji (337,000).

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Dry powder: Why the RBA didn't

THE Reserve Bank is optimistic about Australia and the world economy, more optimistic than most. That's why it did not cut interest rates yesterday, defying the expectations of most, and a run of predominantly weak data.

The Reserve thinks growth is running "close to trend", and likely to remain so. Inflation is "close to target" and likely to remain so. The world economy looks bad, but not as bad as it did two months ago.

The interest rates borrowers pay are "close to their medium-term average". So interest rates are "appropriate for the moment".

It concluded: "Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The board will continue to monitor information ... and adjust the cash rate as necessary to foster sustainable growth and low inflation."

If the Reserve's optimism proves right, that will imply a better year for us. If it doesn't, then its board has left the door open for interest rate cuts. It reads like "decision postponed" rather than "rate cuts ruled out".

Whether the European crisis moderates or worsens is one key factor. What happens in China is another. But the data for Australia itself is also crucial.

This is the fifth year in a row that I can recall the Reserve starting out more optimistic than most of us. So far, it's been right one year in four. Let's hope 2012 lifts its average.

Yesterday, governor Glenn Stevens gave a selective reading of the main economic indicators, quoting those that look promising and ignoring those that don't. It didn't inspire confidence in the bank's judgment.

But we are not in a crisis, and there is a good case for saying the Reserve should hang onto its ammunition for when it really needs it. There is also a good case for arguing that if the banks want to further increase the margins they charge us above the cash rate, the Reserve should make them do it openly.

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Column: The big banks' marginal case

LAST weekend I got around to digging up my long-neglected veggie garden, and discovered why the silver birch tree is doing so well. The soil that once grew my veggies was permeated with new root growth, nourishing that beautiful big tree. Tough luck, I told the silver birch as I hacked them off: you'll still be a handsome tree without them.

Right now Australia needs a gardener to do something like that to our beautiful big banks. Since the global financial crisis more or less killed off their competitors, they have been spreading their roots into the soil that nourishes the rest of the economy. We want healthy banks; but we do not want them sucking nutrients from the rest of the economy.

It's a matter of having the right balance. The banks will be healthier long term if they have healthy customers. But that balance has been lost and there is no good reason for the banks to worsen it by using their market power to take even more from their customers.

Today the Reserve Bank is expected to cut its cash rate by another 0.25 percentage points. It might not do so - there are good arguments to cut, and good arguments to wait - but most of the economy is clearly weak. More nutrient, such as lower interest rates, would help it survive, if not thrive.

But the big banks are flagging that they may hold back part of any rate cut from their customers. They point out, rightly, that the cash rate has little relevance to what it costs them to borrow money. And they say their costs have risen, so don't expect to see the Reserve's cut reflected in your mortgage rate.

Let's hear their case. The Australian Bankers' Association says 60 per cent of the banks' funding comes from bank deposits, 20 per cent from short-term bonds (less than a year) and 20 per cent from the long-term bond market. It is the last one that has risen: the extra cost of our banks borrowing long-term from the market rather than each other rose about half a percentage point in the second half of 2011.

The association's chief executive, Steven Munchenberg, pleads for understanding. ''Banks do not underestimate the anger many borrowers will feel if all RBA rate cuts are not passed on,'' he says. ''For these reasons, banks have been absorbing the higher costs of bank funding for over six months now, and have not passed these costs on to borrowers.

''But banks need to balance the interests of borrowers, on the one hand, with the interests of lenders, including retail depositors and superannuation funds, on the other. In globally uncertain times, Australia's banks need a clear signal to investors around the world that our banking system is solid and healthy. A vital sign of this is the profitability of our banks.

''If investors become concerned with Australia's strength, they will charge more for the money they lend our banks, compounding bank funding cost pressures. In the worst case, banks would not be able to raise enough money to meet demand, resulting in a credit squeeze.''

Steve, you can rest easy. Shareholders may fret if the banks' profits stop growing: some of them seem to think bank profits should keep growing even if the economy goes bust. But Australia's bank profits are already in the stratosphere, whether compared with global banks or other service industries in Australia.

As the ratings agencies point out, the main risk to the ratings of Australian banks is their dependence on a property market widely seen as overvalued. If the banks hold back the full RBA rate cut, that would increase the longer-term risks they face, not reduce them.

But the biggest problem with the banks' case is that their main funding source is not the global market. Most of their funds come from ordinary Australians, through our bank deposits. And the rates the banks pay depositors have shrunk in recent months as the rival options, the share and property markets, slid sideways and downwards.

In the six months to last month, the Reserve Bank reports, the average rate the banks paid on term deposits fell from 4.5 to 4.2 per cent. The average rate paid on ''special'' deposits fell from 6 per cent to 5.35 per cent. The banks also cut the rates they paid on cash management accounts, bonus savings accounts, and online savings accounts.

Their funding costs have risen? Show us the evidence.

As Reserve deputy governor Ric Battellino pointed out in December, the banks in fact reduced their market borrowings in 2011; their deposits rose by more than their lending. It adds up to a very weak case for the banks to make off with the relief the Reserve wants to give to those who actually need it.

Why do the banks behave this way? Because they can. As the graph shows, since 2007 they have taken from mortgage customers the equivalent of five interest rate cuts. Some of that was necessary, especially in 2009. But there is now a good case for them to start handing it back - to give customers bigger cuts than the RBA offers.

The worst victims of the banks' greed are small businesses. Since 2007, the margins banks charge them above the cash rate have shot up from 3.45 per cent to 6 per cent - the equivalent of 10 interest rate cuts. Again, some of that was necessary, but it has become excessive and counterproductive.

Julia Gillard and Tony Abbott should unite to tell the banks: hand it back. A healthy garden needs more than four healthy trees.

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