Today, a Senate Inquiry into the Major Bank Levy Bill 2017 was held in Parliament. Executives from the major banks and their associations gave evidence to Senators on a range of issues concerning the bank tax, including its likely effects and the policy process that led to its design.
Here are six key takeaways from the hearings.
1. Large scale deregulation and liberalisation of the financial sector is required
Australia is a corporatist country. Many sectors – finance, telecommunications, air transportation, groceries, internet service delivery – are dominated by a small number of large incumbent firms. Their market position is, in part, protected by regulations that make it difficult for smaller competitors to enter the market.
In the financial sector this includes the implicit government guarantee to bail-out a financial institution in the event of a failure. Anna Bligh, CEO of the Australian Bankers’ Associations argued that “I cannot imagine any Australian government of any political persuasion allowing one of our banks to fail.”
While large incumbent businesses may enjoy this position, the corresponding effect is that it is difficult for them to prosecute effective arguments against increased government encroachment. If some regulation is good, why is more bad? If the government guarantee is desirable, why is it wrong for the taxpayer to seek recompense for it?
In the future, it will be important for the banks to argue in favour of free enterprise capitalism, rather than crony capitalism. Yes, reducing regulation and red tape will have a negative effect on the market share of large incumbent businesses. But a more decentralised banking sector would make it more difficult for the government to justify interfering in the commercial affairs of financial institutions, which will be a long run benefit to the sector.
2. The process to develop the tax was poor
The hearings confirmed what has already been widely reported: that the design of the levy was rushed and lacked clarity of purpose.
Stakeholders had just two days to make a submission on draft legislation and only two days to provide a submission to the Senate Inquiry. The Commonwealth Bank noted that they only had one meeting with Treasury officials to discuss details of the policy. While Westpac noted that they had not received any modelling from Treasury despite requests.
In addition, the banks were required to sign non-disclosure agreements in order to receive details of the tax which is highly undemocratic and illiberal.
3. The tax is likely to be increased
Concerns were raised that the tax would likely be increased for two key reasons: firstly, the tax may not meet its revenue target, and, secondly, raising the tax is an easy option for future governments to meet any shortfall to general revenue.
A number of banking executives noted that this raises uncertainty about the future trajectory of the tax and is discouraging investment.
A similar tax introduced in the United Kingdom has been increased four-fold since introduction.
4. There is no such thing as absorbing a tax
Westpac was very strong on this point. Peter King, Chief Financial Officer of Westpac argued “a bank is not an entity separate from customers, shareholders, suppliers and employees.” Ultimately, a combination of these groups will pay the tax through, for example, higher borrowing costs and lower returns to shareholders.
Mr King also argued that the total tax liability increases as lending increases, which effectively makes the levy a tax on growth.
5. The tax has already had a negative effect
A number of the participants noted that the levy has already had a negative effect on the banks, financial markets, consumers, and the broader economy. Anna Bligh argued that $32 billion of share value was lost following the announcement of the tax.
This follows observations by business leaders outside of the financial sector, such as Alan Joyce, CEO of Qantas, that the levy is raising concerns that other profitable enterprises will be targeted for specific taxation.
Indeed, Mr King noted that “this law codifies the notion that it’s ok to tax a small number of companies to fill a budget gap just because they can afford it.” The effect has been to create uncertainty for investors. Mr King argued that institutional investors have already downgraded their position in Australia due to the tax.
6. There should be a sunset clause
All participants argued that, if the rationale for the levy is for Budget repair, then the levy should sunset once the Budget returns to surplus.
See the IPA’s submission to the Inquiry into the Major Bank Levy Bill 2017 and the Treasury Laws Amendment Bill 2017 here.