The end of conservative government in Australia

I am not a particular fan of the big Australian banks – they enjoy privileges granted by Government policy that makes the business of big banking too sheltered from competition, too easy to extract economic rents and protected by barriers that prevent new entrants to that sector. Yet in the wake of the Federal budget for 2017-18 announced last week, I find myself on the same side of the fence as the bankers. The proposed bank tax is disturbing. References to the banks in Australia really are references to bankers. The banks themselves are merely legal constructs that conveniently allows those with accumulated capital to invest in a business that will serve customers. The shareholders, the customers and the bank staff, or the bankers, are the only parties that exist. It is the bankers that earn the ire of the public for their perceived privileges and excesses.

The stated rationale behind the tax is so that the banks pay their fair share towards repairing the Federal budget. That is, the budget is in deficit. Spending has exceeded revenue ever since Labor was in power – from 2008 onwards. The current Liberal/National government has not been willing to fix it. The Government has now announced a bank tax (of 0.06% of certain liabilities on the banks’ balance sheet) that the Government expects will raise over $6 billion over 4 years.

There are a number of second order issues around this announcement that alone would be alarming. Its possibility was not discussed openly in advance. No cost/benefit analysis was conducted. The banks were not consulted in the technical details. At an information session with Treasury officials after the announcement, it became clear to the bankers that the bureaucrats do not know how the tax will work, according to media reports. Treasury officials left a meeting with the bankers with over 30 questions from the bankers unanswered regarding the proposed operation of the tax. Ordinarily, these second order issues would be enough to send loud warning bells to the Australian public. about the competence of government.

But the first order issue is the one that will alarm everyone, from the public, the investors, overseas investors and analysts of good governance. The tax has no merit other than a revenue grab. The targets, in this case the five biggest banks, were selected for no reason other than they have large numbers on their balance sheets and so a tax can raise large amounts of money. This is an arbitrary tax. This tax flouts principles of good tax policy: it treats certain economic entities differently and forcibly extracts money from them on the basis of Government whim. Why was the tax limited to 5 banks? What was it about bank #6 that exempted it?  This is an abuse of power. That the opposition in Canberra said it would support the tax in Parliament means it is certain to be legislated.

The Treasurer and the Prime Minister publicly defended the bank tax with the bizarre claim that the banks could absorb the tax, that it did not need to be passed on to customers or shareholders. I presume they believe this – otherwise why would they say it in public? But it demonstrates such a fundamental lack of understanding it is almost comical. It is as if the Treasurer and the PM think the banks are some kind of separate non-human entity with piles of their own money. Banks don’t pay taxes – only people do. The people that invest their money to run the business or the people that use the banks for banking services are the only two sources of money – there is nobody else.

The bank tax is important in itself. However, its most disturbing aspect is what it displays about the intentions of a supposedly conservative government in Australia and the undeniably dismal prospects for this country such intentions portend. This tax signals the end of a number of years of responsible government in Australia. After the disastrous Whitlam Labor government, subsequent Liberal/National and Labor governments followed sound economic policies. The beginning of the end was the Rudd Labor government’s panicked response to the GFC of 2008 and then the introduction of the mining tax in 2012. It, too, was an arbitrary tax. At least the Conservative government subsequently elected successfully repealed that tax. We have reached the end of responsible government because now this conservative government seemingly has abandoned the fight. Now, we have no major party in Parliament that will fight for good economics.

2 thoughts on “The end of conservative government in Australia

  1. David my initial reaction like yours was shock and horror that a policy could be introduced without any rationale other than “they can pay for it and we need the money and they’re not very popular anyway”. And maybe a bit of “we saved their backsides when the other side of politics wanted a Royal Commission”.

    But then I saw an intelligent defence of the new tax by Christopher Joye in AFR. In fact he said that a higher tax was justifiable. He argued that the implicit guarantee that the govt has given banks meant that their cost of funds was markedly lower than if the govt had not provided the guarantee. He argued that the govt was only recovering, if I remember rightly, one third or thereabouts of the savings they made on their funding costs as a result of the implicit “too big to fail” guarantee. He said that their credit ratings would fall, I think two notches in the absence of the implicit guarantee. That sort-of swayed me to thinking, “well maybe there is a good reason and it’s reasonable policy after all”.

    But there are still two things that I don’t understand. Firstly, if this was a cost imposed in return for the guarantee, why didn’t the Treasurer and/or Prime Minister say that? And secondly, if the new levy was imposed on a cost of funding argument, why only five banks? Don’t other banks have funding that benefits to a similar extent from the guarantee? Or is there some rationale for saying that the wholesale funders of only the five named banks would be “bailed out”, and wholesale funders of smaller banks would be allowed to suffer losses?

    So maybe I’m not as hostile as you but broadly I agree, it doesn’t look like rational government.

    Have they decided that if Mr Trump can be elected POTUS, then any element of focus on good policy is just passe? So 2016? In general terms I’m disappointed in irrational govt and this has some hallmarks of irrationality.

    • Thanks JDR – on the Joye argument, it seems to me to work only if one of the following conditions holds:
      1. The implicit guarantee is not actually required to its full extent. Some reduction in the value of it is warranted.
      2. The guarantee value is required but the Govt is happy to let the capital adequacy of the banks suffer.

      Regardless of whether 1. or 2. holds true, then the other banks should be brought into the mix. Either they are having a guarantee granted that is not warranted or they are having a capital adequacy free kick that the big 5 aren’t getting. In either case, it is an argument about banking policy, not tax policy.

      There is one other possible explanation: the Govt does not believe the implicit guarantee needs to be pared back, nor does it want to deliberately weaken the capital adequacy of the big 5. It knows that the tax can only be passed on to customers and shareholders but it is banging on about ‘ponying up to pay’ merely for grotesque political purposes. If this is the case, then that would explain why it stayed away from Joye’s argument.

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