A month out from the Federal budget, analysts are turning their attention to Canberra, questioning how the Government will reduce the budget deficit. In recent weeks there are signs that the Government is interested in introducing a Bank Deposit Tax as a revenue raising measure. While there is no official announcement, there have been reports that the proposed measure would raise around $500 million a year.
The measure is likely to be similar to the proposal put forward by the previous Government before the 2013 election. This proposal was to place a 0.05 tax on deposits up to $250,000. Proponents of the tax argue that it is simply the Government charging a fee for providing a taxpayer-funded guarantee on deposits up to $250,000. However, last year’s Financial System Inquiry chaired by the former head of the Commonwealth Bank, David Murray, disagreed. He argued that the simplest way to make our banks (and by default deposits held with them) safer, is to increase the levels of capital they hold. A deposit tax to fund the government guarantee is merely a smoke screen. The Government has a funding problem and is using household savings to plug the gap.
The reality is this tax/levy/insurance premium does one thing, and one thing only; penalise savings. The market power of the big banks in Australia means that they have no intention of passing on the tax to shareholders by reducing profits. Instead the tax will be paid by consumers (deposit account holders) through reductions in interest rates or by increased rates on loans and other credit facilities such as mortgages or business loans.
The facts remains that Australian banks’ financial health, combined with their strength and solid outlook means that a banking collapse or crisis is unlikely in the medium to long term and downright fanciful in the short term. The Government should not be in the business of distorting investment decisions by unilaterally providing guarantees or taxing deposits.
The tax will make savings a less attractive investment option, which raises a whole host of issues. Reducing returns on deposits will make bonds more attractive. This distortion becomes problematic when only sophisticated or wholesaler investors have access to this option. The cost of doing so becomes unrealistic for the smaller and constantly fluctuating amounts that are usually placed in deposit accounts.
The loss of deposits is problematic for an industry that is in need of funds to meet the capital requirements required under the new Basel III rules. This will likely lead to banks looking for alternative ways to raise funds, creating the possibility that hybrid securities will be used to fill the funding gap, which as discussed in Shining a Light on Hybrid Securities, creates real equity-like risks for retail investors. Banks may also be forced chase funds from sophisticated and wholesales investors, increasing the strain on the financial industry generally.
A deposit tax would leave Credit Union, Mutual Bank and Building Society members disproportionately worse off than customers of the major banks. This is because they rely more on retail deposits as a funding mechanism than the majors who have easy access to wholesale markets.
While there is a clear and pressing need to improve the Federal budget, the solution lies in a broad and comprehensive tax discussion. Otherwise the tax system will become a patchwork of easy political fixes that distort consumer behavior. This will have unintended consequences in the economy and make a sophisticated solution to taxation in Australia a fantasy.
It’s time to end the daylight robbery.
Save savings.
