Beware the bank levy panacea

It’s popular with voters, but that doesn’t make it perfect.

As politics goes, the federal government’s proposed bank levy was pretty smart. The amount, a trifling 0.06%. The impacted parties, five banks that are hardly at the top of most Australians’ Christmas card list. And all in the service of a bipartisan political goal: getting the budget back into the black.


Bank tax backlash

The former head of Treasury Ken Henry has criticised the government’s bank tax, saying it’s misleading to suggest it won’t be passed on to customers.

Oh sure, the banks are trying to whip up some disquiet among shareholders, putting the impost in terms that income-seeking investors most easily understand: the per share impact on dividends.

So far, short of a marketing masterstroke by the banks, it’s Government 1, Banks 0.

And yet… in a plot twist that wouldn’t exactly impress Hollywood, but makes waves for economic and investment types, the ratings agency Standard & Poor’s just undid one of the government’s big selling points: that increasing costs for the big banks levelled the playing field for the little guys, who don’t have to pay the levy.

S&P, highlighting economy-wide issues and risks, downgraded 23 small and regional lenders, but left the Big 5 alone — after all, the government was backstopping the big boys, but the smaller guys didn’t benefit from the same largesse.

Except that, as some have noted, including Greg McKenna on Twitter this week, it’s hard to imagine the government letting the little guys fall over, without coming to the aid of depositors. Which makes you wonder why S&P downgraded them, and not the larger banks.

And then there’s the mystery of the tax-deductible tax. Which makes perfect sense, right? I mean sure, we can’t deduct the GST, or the Medicare Levy from our own taxable income, but then, we’re not large financial institutions.

They’re not exactly clear wins for the banks — they’re still on the hook for the levy — but it softens the blow somewhat.

But here’s where the idea starts to get a little questionable. You would have heard almost every financial expert in the land tell parents not to guarantee loans for their kids. At best, it’s an unnecessary risk, and at worst you have relationship breakdowns and the guarantors can lose their own houses.

But you know who the newest guarantor on the block is? Yes, the nation’s financial father, Treasurer Scott Morrison. “Don’t worry.” the Treasurer is telling local and overseas financiers, “just give the big banks the money. If they’re not good for it, I’ll pick up the tab.”

Now, as McKenna and others have noted, that was the implicit reality anyway. But by making it explicit, the government has removed any remaining doubt that it would ride to the rescue. Now, let’s say you’re a large Australian financial institution looking to borrow money for something a little risky. In the past, the funder might have baulked. But now? Uncle Scott will get the tab if worst comes to worst. If you’re thinking ‘Isn’t that the very definition of ‘moral hazard’?’, you’re right.

And let’s be clear: the government is putting up a decent ‘national interest’ case for the tax, but it’s not like the money is being raised and put in some sort of Future Fund-esque piggy bank for the proverbial rainy day. The feds will spend the money today, and leave the potential clean-up bill for later. Now, to be fair, the government would have cleaned up the mess with out without a levy anyway, so the taxpayer might as well get something by way of an ‘insurance premium’, but it would have been more prudent to put away at least some of that cash, just as insurers do.

So is this a good tax? Well, it will depend largely on your ideological view of taxation and spending. To my mind, if you’re going to try to balance the budget and won’t or can’t cut spending, a levy on the banks is probably a clever way to do it. It’s unlikely to have a material impact on economic activity, but will raise billions in the coming years, that can be used to redress our current structural ‘fiscal imbalance’.

And while the bank CEOs and lobbyists will complain — it’s their job to argue against anything that hurts shareholders, after all, so we should cut them just a little slack on this one — the bank levy strikes me as imperfect, but a decent component of a plan to get the budget back on track.

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Scott Phillips is the Motley Fool‘s director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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