Opinion – Budget 2017: bank shaming or politics as always?

19-May-2017

By Rodney Lester

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Political veteran Laurie Oakes remarked that the federal Government’s 2017 Budget was a clever political move that “stole the thunder” of Opposition Leader Bill Shorten by neutralising Labor on heartland issues such as Medicare, education and particularly the banks. Clearly, this budget was not just about the economy but politics - as always.

Already much has been made of the multi-billion-dollar levy on the big banks. It is projected that the levy will cost the big four between $300-$400 million each every year. Apparently, as news of the levy was leaked, investors in the banks freaked out and $14 billion was wiped of the value of their stock. Australian Bankers Association chief executive Anna Bligh even said the measure could "threaten the stability" of the financial system.

With Labor and the Greens supporting the levy, it seems the only question is whether the banks will absorb the cost or pass it on. The big banks are businesses of course, and the resounding answer from most is that “of course they’ll pass it on!” However, a case can be made why they shouldn’t.

Their sheer size and market share means they have been able to exhibit oligopoly-like behaviour for years, with returns on equity consistently higher than banks in most other advanced countries (at about 10 to 15 per cent). As Prime Minister Malcolm Turnbull noted: the banks affected have “$33 billion of after tax profits. They are the most profitable banks in the world.”

On top of this, Treasurer Scott Morrison noted that the big banks have been benefiting from the implied government guarantee to back them (as they’re too big to fail) since the GFC. The estimated value of this implicit guarantee means the banks’ borrowing costs have been lowered by about 0.17 per cent, saving them about $3.8 billion a year. The proposed levy will get just 35 per cent of this windfall back. The budget levy makes this guarantee more explicit, and some say that making this guarantee explicit may even result in banks’ borrowing costs being further reduced, saving them even more money.

After seeing the levy in this light, it does seem that much of the budget outrage on display from the finance sector could be confected.

But something else that hasn’t been talked about much at present, which adds weight to the “faux outrage” argument, is that the Budget also confirmed the government’s intention to legislate the rest of its $65 billion, 10-year company tax cut plan. In April, the Treasurer said: “The government will present legislation for tax cuts for larger businesses when it believes it has the support of the Senate.” If Oakes is right, that support may come after the next election.

The point is that modelling done by the Australia Institute indicates this proposed company tax cut would save the big banks about $2 billion a year (based on 2015 figures), rising to over $3.4 billion a year in 10 years’ time, based on the Commonwealth Treasury’s Mid-Year Economic and Fiscal Outlook 2016-17.

If these figures are right, this might be a case of not “robbing Peter to pay Paul”, but rather “robbing Peter to pay Peter later as long as Peter “takes one for the team” and helps us win the next election”.

Taking Oakes’ cue, the Coalition needs a circuit breaker to help dispel the public perception they favour “looking after their big bank mates rather than the punters”. They don’t want a Royal Commission; neither do the banks. What better way to distance themselves from the banks than to have a very public stoush over a big bank Tax. The Coalition being seen to stand up to the banks could also help blunt opposition to the full corporate tax cuts, and deliver the banks massive windfalls once they are legislated.

The Coalition has had many months to develop a strategy for the banks that would be popular with voters. How long it took and whether they did it with or without any input from the banks, is a moot point. The levy seems to be politically, at least, a lay down misère for the government.

As with any federal Budget, the government will definitely have an eye on the political and voter reaction to it. The outcomes may not always be the best thing for the economy because political considerations will come to the fore.

But since society itself is not a simple (or even complex) economic model, this is exactly what we should always expect.

Rodney Lester is consumer and adviser services director with Adviser Ratings.

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