The government’s previously strong position on its bank tax started to wobble yesterday, with plenty of help from the banks and Labor. It produced two separate but closely related issues: how much money the levy would raise, and the tax deductibility of the government’s proposed levy.
The levy is tax deductible — that much was confirmed by the government, after the banks began releasing their estimates of their likely liabilities. But had the government taken that into account when it calculated it would reap $6 billion over four years from it? Yes it had, the government eventually, after some confusion yesterday afternoon, insisted. The impact of the levy in the first year (that’s 2017-18, starting in just over a month) would be felt in company tax returns for 2018-19, which is why the levy revenue estimates varied across the next four years in the budget.
But when you toted up the banks’ self-admitted liabilities yesterday, you were left with a total take well short of the $1.6 billion expected next year — not even a billion dollars from the big four banks, with Macquarie, which has kept a low profile on the whole issue, yet to ‘fess up on its impact.
It may not be a good look for the government — one of the things the Liberals loved to do was lambast Labor for the mining tax, which raised only a fraction of the revenue it was supposed to. How incompetent is it to not even be able to devise a tax grab properly, they’d mock. But remember, it’s also in the banks’ interests to portray the tax as shambolic and poorly developed.
But in the wake of a Standard and Poor’s credit rating downgrade yesterday for Australia’s smaller banks because of fears about a bigger than expected impact from any property crunch, one of the government’s rationales for the levy is now problematic.
S&P left the main ratings of the big five banks — the Commonwealth, Westpac, NAB, ANZ and Macquarie — untouched (but not the ratings on their hybrids and subordinate debt instruments which were cut by one notch) “reflecting our expectation of likely timely financial support from the Australian Government, if needed — which in our view offsets the deterioration in the bank’s stand-alone credit profiles”.
That support is already there for the five (and 8 other unnamed financial groups) via the Reserve Bank’s Committed Liquidity facility (CLF) which this year has around $223 billion backing the 13 groups in the scheme. That is considered enough to keep them liquid and open for 30 days in the event of another credit crisis like we saw in late 2008. The government has explicitly rejected a link between the new levy and any guarantee of support, but the levy is widely seen as confirming the guarantee as well.
Standard and Poor’s decision thus entrenches the lower cost of funds for the big banks, and will probably increase the gap between them and the rest of the market — and undermines one of the rationales of the levy. “By reducing Australia’s largest banks’ funding cost advantages, the levy will also contribute to a more level playing field for smaller banks and non-bank competitors,” Scott Morrison said on budget night. By yesterday, that had evaporated to Malcolm Turnbull’s statement that “if this levy does level the playing field a little bit, then that would be good, I think”.
This rationale, by the way, was completely at odds with the government’s other claim that the banks wouldn’t have to pass the levy on — but if they didn’t pass it on, it wouldn’t affect their competitive position vis-a-vis smaller banks. The government was having it both ways.
Between this improved competitive position over the smaller banks, and the tax deductibility of the levy, the big banks may only have to find 2 to 2.5 cents in the dollar to cover the cost of the levy. A one point lift in home loan mortgage rates, a one point lift in credit card rates, or a small lift in bank fees and that’s that — no need to cut the dividend. And remember the banks are awaiting the Australian Prudential Regulation Authority’s decision later this year on how much extra capital they will need to support riskier home lending activities, so don’t be surprised if the banks add a couple of points to the increase in home loan rates that that decision will bring (Macquarie will be in a different position because it has a very small home loan book, but it does finance a lot of third party mortgages). And remember, the small banks will also have to deal with the impacts of the same APRA decision for their own home loan lending.
In fact, by this time next year the lower cost of funds for the five banks compared to the competition could mean the impact of the levy is neutralised altogether, with shareholders unaffected.
The levy is a good idea. The whingeing banks are naturally trying to make it look like a poorly-developed disaster. But the government has been caught out on its claims about competition.
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