Terry McCrann on bank levy: At best government might raise about $1 billion a year

THE government appears to have either spectacularly over-estimated the amount it will raise from the bank levy or explicitly assumed the banks will pass the cost on to customers, writes Terry McCrann.

The government appears to have either spectacularly over-estimated the amount it will raise from the bank levy — or explicitly assumed the banks will pass the cost on to their customers. Generic picture: Hollie Adams

• Bank levy hits don’t add up

THE government appears to have either spectacularly over-estimated the amount it will raise from the bank levy — or explicitly assumed the banks will pass the cost on to their customers.

Based on the $965 million that the Commonwealth Bank, Westpac, ANZ and National Australia Bank estimated it would cost them each year, at best the government might raise about $1 billion a year instead of the $1.5 billion claimed in the Budget.

There is no way that the government could raise the extra $600 million or so from the last and smallest bank — Macquarie.

Macquarie is not only too small, it’s also ‘too’ smart.

This suggests that the levy might raise more like $4 billion over the four years — at best — not the $6.2 billion claimed in the Budget.

Macquarie chief executive officer Nicholas Moore and chief financial officer Patrick Upfold. Picture: Hollie Adams

That is, unless the banks moved to recoup the levy from their customers — either cutting deposit rates or lifting lending rates or doing both.

So do we have yet another Treasury budget estimate cock-up?

Or has Treasury implicitly assumed that the levy would fall on customers not shareholders?

For if the banks recouped it from customers, while the actual levy amount would stay the same, there’d be more company tax paid on the resultant ‘higher’ bank profits.

Higher is in quotation marks because the banks would just be returning their profits to the pre-levy levels. If indeed they could: they would have to do it in the competitive market.

All this ‘calculating’ is before assessing whether the banks might decide to take some — perfectly legitimate — action to reduce the levy, by for example increasing the amount they get from deposits which are not subject to the levy.

In short, I doubt that Treasury has the slightest clue of how much the levy will actually raise over the four years.

Although frankly, whether it raises the claimed $6.2 billion, or ‘only’ $4 billion, or indeed something less, it’s pretty much a rounding issue in a Budget that is going to pluck a total of something north of $1920 billion from your pockets over those four years.

THE four banks said the levy would raise a total of $1380 million from them.

But it will be a tax deductible expense so it would cut their combined tax bill by $415 million, leaving the net raising at $965 million.

Some commentators seized on this as the explanation for the shortfall.

But that’s not correct; the Budget explicitly calculated the net levy amount after “interaction” (deductibility) with company tax.

However, if you assume the four banks would move to recoup the $1380 million in their loan and liability pricing, that would flow straight back into profit and thereby also recoup (for the government) the $415 million via extra company tax.

So the net amount raised from the four would approach $1.4 billiona year. Add on Macquarie, and we’d get near $1.5 billion.

But only because — if — the banks had passed it on, in full, to their customers.

And to repeat, that’s before making assumptions about how the banks adjust their balance sheets and behaviours to reduce the levy impact.

The government could well end up with the worst of all possible results. You get lower deposit rates and pay more on your loans; the Budget ends up with a relatively small inflow; but our banks will have been (marginally) damaged in global markets.

Or does the government embark on chasing its fiscal tail? If six points of levy only gets it, say, $800 million a year, does it up the levy to 12 points?

And when that fails to get the assumed doubled $1.6 billion but instead, say, $1.1 billion, does it up the levy again to 18 points?

I doubt that Treasury has the slightest clue of what the numbers might actually be in the real world.

I equally doubt that the Treasurer has the slightest clue of quite what he might have unleashed.

Originally published as Terry McCrann on bank levy: At best government might raise about $1 billion a year