The government’s levy on banks has consistently delivered less than expected

The federal government’s bank levy keeps underdelivering, including a $300m shortfall in its first four years of operation.

The banks were supposed to contribute significantly to government coffers but that hasn’t eventuated.

The federal government’s bank levy has consistently raked in much less than anticipated, including a shortfall of about $300m in its first four years of operation.

This year, the budget papers show the bank levy collected about $5.92bn in its first four years and then $1.45bn in 2021-22.

Last financial year, tax receipts from the bank levy were markedly lower as consumer deposits – which are excluded from the levy – soared during the Covid-19 pandemic lockdowns.

The Coalition government imposed the controversial tax on the big four banks and Macquarie in mid-2017, as pressure increased for a royal commission into the sector’s conduct. The then treasurer, Scott Morrison, introduced a tax of 0.06 per cent applied to banks with liabilities of more than $100bn, but some products such as consumer deposits up to $250,000 were excluded.

Jefferies analyst Brian Johnson says bank levy receipts were curtailed last financial year as deposits grew faster than loans by about $230bn. The term funding facility which boosted banks’ funding during the pandemic also left lenders flush with cheap funding.

Mr Johnson believes if the government’s fiscal position starts to deteriorate again the bank levy and the quantum may be reviewed. “Most countries in the world they actually pay for deposit insurance, whereas in Australia the $250,000 guarantee that you get per (authorised deposit taking institution) under what’s called the financial claims scheme, banks don’t pay anything for that,” he said. “Given the dynamics of the decline in bank levies, and the fact they don’t pay for it, you would think that’s a subsidy effectively from the taxpayer.

“I don’t think they’ll ever take it away personally, it’s a source of revenue. Logically the banks are not paying basically for the $250,000 per ADI (government guaranteed amount).”

Mr Johnson expects the bank levy collected by the Labor government will begin to rise as deposit accounts are depleted given rate rises and as banks start repaying the term funding facility debt.

“The surplus in the system runs off pretty quickly,” he said.

The budget papers forecast the bank levy will collect $1.55bn this financial year, $1.6bn in 2023-24 and $1.65bn in 2024-25.

While the banks lobbied intensely against the tax in 2017, they are now largely resigned to it being a cost of doing business. That didn’t stop attempts, though, during the depths of the pandemic to get the levy scrapped.

In late 2020, ANZ chief executive Shayne Elliott questioned whether the nation’s largest banks should still be subject to the levy given the impact that the Covid-19 pandemic was having on the sector and the economy.

Mr Elliott stressed that while interest rates were close to zero the tax was a bigger imposition on banks. “Even if I pay you for your deposit zero, I still have to pay six (basis) points to the government,” he said. “It’s essentially become the marginal cost of funds.”

Around the same time, Commonwealth Bank’s chief executive Matt Comyn said while he didn’t expect the levy would be reduced, he suggested the funds could be redirected by banks.

He noted they could pass on the funds allocated to pay the bank tax to higher wages or investment in the economy.

But the then treasurer Josh Frydenberg was quick to rule out changing the levy, as the government spent up big on Covid-19 pandemic support measures.

Interest rates have been raised aggressively by the Reserve Bank in six hikes since May. That has boosted the banks’ margins, what they earn on loans less funding and other costs, but competitive pressures may limit the upside.