SA bank tax: Could the law of unintended consequences mean the whole thing backfires?

Posted

June 23, 2017 13:09:43

Governments will be kicking themselves they didn’t think of the bank tax lurk before.

Key points:

  • Banks are likely to recoup the tax through higher charges on SA customers
  • SA tax likely to erode bank profits only by an “immaterial” 0.2pc, but that would rise rapidly if followed by other states
  • It could lead to more more mortgage hikes, higher home loan losses and job shedding

The banks are not only a soft target — the electorate’s distaste for them crosses all known political lines — but a big target as well.

As South Australia’s Treasurer Tom Koutsantonis gleefully pointed out, the big four collectively rake in $30 billion in profits annually. He only wants a small cut of the action.

Actually, state governments had thought of it before with the financial institution duty, which was a nice little earner back in the day.

The states handed back the rights to that particular honey pot, and a range of other taxes, in exchange for the riches from the GST.

Now the GST doesn’t appear to be enough — or at least the carve up between the states is no longer a happy, sharing kind of thing. It looks like it’s time to head back to the ATM.

SA tax modelled on federal tax

Unlike the rest of us, the governments don’t need to keep their bank balance up, nor do they pay any fees on withdrawals.

Mr Koutsantonis did a handy “cut and paste” job on the federal bank tax.

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The SA bank tax on the big four and Macquarie will also be set at six basis points of applicable liabilities per annum, with an adjustment for state’s share of GDP — just 6 per cent.

All up, that should raise about $100 million for the cash-strapped SA Government.

As long as the banks are solvent, there’s money there for the taking — so it is all upside, right? Not necessarily.

The banks will claw the money back

The banks, it should be noted, are not gormless stooges.

Yep, they’ll hurl abuse back.

“An opportunistic and ill-considered cash grab,” ANZ boss Shayne Elliott said.

He then sunk the slipper into the South Australian Government, pointing out the tax would harm business investment “at a time when its economy is struggling with low growth, low business confidence and high unemployment”.

There’ll be predicable challenges to the legality of the tax, but where South Australians will feel the impact is in their bank statements.

Anyone with a postcode in the 5000s can expect to pay more for mortgages and corporate loans.

As UBS’s Jon Mott points out, that is just the start of what could be a campaign of retribution.

“Threatening to move operations such as call centres and processing centres out of South Australia” is an option Mr Mott noted.

“The banks could potentially ration credit in South Australia which would have a direct negative impact on the economy,” he added.

It is a far bigger fight than another $100 million as the banks will be keen that other states don’t do the old cut and paste trick too.

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The banks will be mindful of the overseas experience where the UK bank tax has so far been raised nine times since its introduction in 2011.

“Pandora’s Box is officially open,” Mr Mott said.

“We believe it is possible the other states may follow SA’s lead and introduce further levies on the banks.

“Additionally, with the federal election 12 to 18 months away, further increases in the federal bank levy cannot be ruled out, especially if the Australian budget remains under pressure.”

The law of unintended consequences

Initially, the SA tax won’t have material impact on bank earnings, hitting pre-tax profits by about 0.2 per cent.

Morgan Stanley’s Richard Wiles says SA’s move raises the raises the risk of unintended consequences on the broader economy.

“Hypothetically, if other states adopted a similar policy, we estimate an impact of around 0.5 per cent apiece [in pre-tax profits] for Western Australia and Queensland and closer to 1 per cent apiece for Victoria and New South Wales,” he said.

“We think it raises the risk of unintended consequences for the Australian economy at a time when consumers face a cash flow crunch and the outlook for the mortgage market has fundamentally changed,” Mr Wiles said.

So what does that mean? Well, according to Mr Wiles, quite a lot.

“[The] potential consequences include more home loan repricing, a higher chance of ratings downgrades, higher wholesale funding costs, more cost-cutting and full time employee reductions, rising non-housing loan losses and a higher chance of dividend cuts.”

That economic hardship would then flow through to federal and state finances, putting budgets under more pressure, probably prompting treasurers to head back to the ATMs.

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Topics:

banking,

tax,

sa

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