Nine months on from the delivery of the Murray Financial System Inquiry report, the report recommendations that lie within the government’s bailiwick have sat idle. While the Australian Prudential Regulatory Authority has smartly got on with its task of “setting capital standards such that Australian authorised deposit-taking institution capital ratios are unquestionably strong”, the government has been “consulting” on a report that contains a lot of recommendations the big banks don’t like — especially around superannuation and financial advice.
Strangely enough, however, one of the few recommendations the banking cartel likes has been inexplicably expedited by the government. Seemingly desperate to restore a sense that the government might actually be governing, rather than fending off a media “jihad” and planning to dump Treasurer Joe Hockey, Prime Minister Tony Abbott appeared with Hockey to announce that the Financial Claims Scheme, which protects authorised deposit-taking institutions’ deposits up to $250,000, would not be funded by a deposit tax as Labor had proposed in 2013; instead, in line with the Murray inquiry recommendation, it would be funded “ex post”. That is, in the event a financial catastrophe struck and the government had to protect consumers’ bank deposits, it would collect the money to cover the cost afterwards — not fund it from an ongoing, fractional tax on deposits.
You don’t need us to explain how Abbott spun this — Labor the party of higher taxes, Coalition removes taxes, etc, etc.
The political fly in the ointment is that Hockey had already put the tax into the budget — where it will garner around $500 million a year to start off — and had actually defended doing so, just a few months ago. In fact, his own department had, along with APRA, ASIC and the Reserve Bank, actually proposed the idea in the first place. Talking to The Australian Financial Review‘s Phillip Coorey in April, Hockey ridiculed the ex-post funding model. “There’s very few countries that impose a levy after failure … if there is a financial failure, god forbid, of any scale, it would have systemic ramifications. So you’re not going to impose a tax on, you know … on whoever’s left.”
Yesterday, Hockey’s and Abbott’s rationale (Abbott was visibly uncomfortable talking about the subject once a journalist pushed him off his talking points, and Hockey had to intervene) was that APRA’s increased capital requirements made the tax redundant. And there’s something to that argument: with stronger institutions, the risk that the Financial Claims Scheme will ever be needed is naturally reduced, so why impose a tax — except, of course, as a way of helping the budget, which was another reason Hockey was originally keen on it.
Except, let’s consider Hockey’s comments in April. “You’re not going to impose a tax on whoever’s left.” Hockey’s absolutely right. Imagine a treasurer — especially a Liberal treasurer — standing up after a major financial crisis, which has likely sent the Australian economy into recession anyway, and declaring that what was left of the financial sector would be slugged with a levy to recover the cost of implementing the FSC. That cost — even assuming it was limited to covering ordinary deposits, whereas in reality the government would probably be pumping vast sums of money into banks just to keep them afloat — would run into the tens of billions. The largest deposit holder, the Commonwealth Bank, currently holds over $450 billion in deposits; Ireland’s bank bailout in the wake of the financial crisis cost 40 billion euros.
The idea of slugging the smoking ruins of the Australian financial sector with a levy to repay tens of billions is, politically, bizarre. And that would means — just like Ireland — Australian taxpayers would be on the hook for the cost, and spend years, perhaps a decade or more, enduring austerity budgets as governments tried to curtail spending to fund the cost. But dumping the tax is good for two key stakeholders of the government — the big banks, who are one of the government’s most favoured sectors on its list of crony capitalist favourites, and the Coalition backbench, which has never understood the tax or liked it, even after Hockey crafted a compromise in which only the largest institutions would pay it, in effect handing a (tiny) competitive edge to smaller banks.
The hypocrisy extends beyond Hockey’s backflip. In late 2008, to make sure our banks maintained access to wholesale funding markets, the Rudd government introduced a wholesale funding guarantee, funded by a very small fee on the banks. That (along with the government’s deposit guarantee) helped the same banks that oppose the deposit tax scheme stay alive and in business, as did the Reserve Bank pumping over $60 billion into the entire financial system. It was so successful, the guarantee was only needed for six months before it was withdrawn.
But the fee turned out to be a great earner for government: the scheme finishes at the end of October this year, when the last of the guaranteed debt expires, and has generated $5.5 billion in revenue since late 2008. That’s close to $800 million a year for the budget bottom line — and the banks have willingly gone on paying the fee (they have actually been repaying it faster than they had to because the cost of borrowings fell more quickly than expected).
Apart from helping both Wayne Swan and Joe Hockey’s budget bottom line, the income from the guarantee fee ensured that Australia was one of the few countries in the world where the government was a net recipient of funds from the banking system as a result of the financial crisis (the RBA also received fees and interest income from its loans in late 2008 and early 2009 as well). The banks were willing to pay those fees and charges because the alternative was so frightening. Now that conditions have eased, interest rates are low and earnings are strong, the banks don’t want to know about risk management against a future financial crisis. And why would they when they know taxpayers will step up?