Financial services vital to economic prosperity

A healthy financial sector is a key driver of Australia’s economic prosperity, according to a new report by one industry association.

A report titled Financial Sector Growth, Capital Formation and Productivity by the Australian Financial Markets Association (AFMA) noted that there is a significant link between the finance sector, investment and Australia’s economic prosperity.

“The rising share of financial services as part of Australia’s national income is a long-term and global phenomenon that’s likely to continue,” AFMA economist Stephen Kirchner said.

The report indicated that the financial and insurance services sector is the largest of the 12 industries that make up the market sector of the Australian economy. The sector has a 9.9 per cent share of output compared to the next largest sector – mining – with a share of 9.8 per cent.

Furthermore, on average, productivity growth in the sector has outperformed productivity growth in the market sector as a whole over the last 24 years.

The report stated that there is a “large body of empirical evidence establishing a positive relationship between financial sector size and economic development”.

Moreover, the AFMA rejected the idea that the financial system has become less efficient at supporting capital formation.

“There is no statistical evidence to support the view that financial sector and secondary market activity in Australia has come at the expense of capital formation,” Mr Kirchner said.

The report argued that the financial sector plays a foremost role in mobilising saving and investment and ensuring that capital is allocated efficiently.

“Public policy needs to be mindful of the relationship between financial system development, capital formation and productivity,” Mr Kircher said.

“Policies that aim to suppress secondary financial markets based on a view that there is ‘too much finance’ are likely to harm capital formation, productivity and living standards.”

[Related: Negative gearing ‘a positive force’ for the economy]

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