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.