Monday, 19 June 2017
Major Bank Levy Bill 2017, Treasury Laws Amendment (Major Bank Levy) Bill 2017; Second Reading
As has been stated previously, the Labor Party will support this measure, continuing the bipartisan approach to budget repair. Let us be quite frank about this measure: it is absolutely no substitute for a banking royal commission. We know that, as Senator Gallagher has outlined, there are so many reasons for a royal commission into the banking sector: the poor culture and the thousands of Australians who have been impacted by poor conduct on the part of the banks. But this measure is a budget repair measure, and for that reason we support it—although there are so many policy development shortcomings associated with this bill that the government does make it very hard to support even something like this.
As we heard last week, gross debt has smashed through the half trillion dollar mark for the first time in the nation's history. Labor is prepared to work with the government to achieve budget repair in a way that is fair. However, this support is not a blank cheque. Labor senators will not be excusing the incompetence of the Treasurer or the government. Labor senators are supportive of the bill, but it must be noted that the recommendations in the economics committee's report are a sign that the Treasurer has once again botched the policy process. Whether it is the backpacker tax, the low-value GST or the bank levy, there is a pattern here. We have a Treasurer who fails to properly manage the Australian economy.
The Senate inquiry, as short as it was, last week did not need much time to expose the incompetence. I could spend all day talking about the policy process problems with the bill, but I will limit myself to seven areas: first, the leak on budget day, which the Treasury secretary, Mr Fraser, was quite concerned about—quite rightly; second, the impact on consumers; third, the revenue black hole; fourth, potential responses by Macquarie, which do give cause for concern; fifth, lack of policy clarity; sixth, lacklustre ACCC powers; and, lastly, the foreign banks issue.
Firstly, on the issue of the leak on budget day, the whole process with this bank levy did not start well. We all remember the leak on budget day and the response of the share market. This is not the first time a leak has occurred prior to budget night, but a policy as market sensitive as this one is normally treated with great care. The Treasury secretary stated that very few people would have known about this policy. In his words:
On the basis of what we have been told by our staff, on the basis of informed discussions with my senior executives as to who knew when what, I would be devastated. I remain, I would be devastated, if I had thought that one of my staff had been responsible for this. I have seen nothing in the time I have been Secretary to make me think that it came from Treasury, but can I give you a guarantee? No. I don’t think anybody can.
It is important that ASIC conducts a thorough investigation and determines what exactly has occurred. How and when it was leaked is a very serious matter, and I do expect that their investigation will be thorough and will include the minister's office.
Secondly, regarding the impact on consumers, the regulatory impact statement released with the legislation stated what the Treasurer would not: that consumers, non-equity funding sources, shareholders and employees could bear the brunt of this levy. This was further underlined in the testimonies given by the banks at the hearing, where they all said that the levy will not simply be absorbed, including the Australian Bankers Association. Treasury further underscored this point through their answers to questions on notice put to them prior to the inquiry. Treasury said in their answers to questions on notice, very late on Friday afternoon, that the costing issue takes into account some pass through of the levy to customers as evidenced by previous behaviour by the banks. We were very keen to find out what the assumptions were that underpinned the costings for the revenue measure. The response I received, I might say, an hour or so before we were due to ask the Treasury representatives further questions, which I think was of some concern, was that bank responses to the imposition of the levy include some pass through of the levy to customers but also consequences for dividend payments and franking credits should profitability impacts have a flow-on effect to the amount of dividends they pay out. So, customers and shareholders could feel the consequence of this levy. It took Treasury officials to admit something that the Treasurer could not bring himself to admit.
Labor senators are disappointed that the government has chosen to hide this information from the public. Even at this late stage, after all the questions at estimates, the questions put on notice through the inquiry and questions put to Treasury officials at Friday's hearing, the details of the policy costing and all related assumptions have not been made available. The banks indicated to us—not that one has a great deal of sympathy for banks in this type of situation—that they were promised the modelling and the assumptions associated with the costings, and that has never been delivered to them.
I turn to the issue of the revenue black hole in this policy. Testimony given at Friday's hearing now gives a full picture of the pre-tax and post-tax bank levy figures that each bank is expecting to pay as a result of the bank levy. The banks are required by law under the Corporations Act and ASX guidelines to inform shareholders about the impact of the bank levy and to take this issue very seriously.
With Macquarie's answers on their expected bank levy figures, we now know that the total bank levy figure reported by the five banks totals $1.45 billion pre-tax, and $1.015 billion post-tax—a shortfall when compared to the budget's expectation of $1.6 billion, or compared to any other bank levy figure you find in the budget papers for that matter. Clearly there is a shortfall, and time will tell how large this revenue shortfall is. The Treasury officials would not admit this on Friday; they remained committed to the projections. There are two problems with this revenue shortfall. First, it seems that the figure for next year will not be met and, second, any revenue shortfall is likely to be exacerbated by lower than expected growth in the liability base in future years.
Treasury explained on Friday that the reasons for the shortfall might be due to credit growth figures and interactions with other taxes. Regarding credit growth, the assumption of 5.9 per cent liability growth year on year seems high—Senator Gallagher made reference to this—when banks such as Westpac have indicated that their estimates are in the order of four to five per cent. Any shortfall in revenue next year will widen if the banks' estimates are closer to the mark than Treasury's forecast. Regarding the interaction with other taxes, it must be said that this is quite a complicated matter. From my reading, it seems Treasury's response implies that dividend cuts could be a reasonable response for a bank to take—impacting franking credits available.
Time will tell if these revenue shortfalls will occur in reality. However, the disclosures and statements from the banks do not bode well at all for the actual bank levy revenue raised.
In addition, given that the operation of certain provisions allowing for the liability base for the bank levy to be adjusted by the Treasurer by legislative instrument only works to decrease the base, I would like the Treasurer to explain what actions he will take if the revenue shortfall does occur. I note that the shadow Treasurer, Mr Bowen, issued a release on Friday which provides a breakdown for the expected costings, both pre-tax and post-tax, for each of the major banks. We shall see whether those shortfalls do occur.
Senator Whish-Wilson touched on the issue of responses by Macquarie. I asked direct questions to Macquarie about media reports that they were considering leaving Australia. Macquarie responded by saying that no final decisions had been reached yet but that this matter was under regular review. They said:
… we would like to express our surprise that the levy is applying to Macquarie Bank, given our size and the benefit we bring to domestic competition and the role we play in bringing export income into the Australian economy. Whilst we recognise and respect the government's right to introduce laws and impose taxes for the good of all Australians, we are concerned that the impact of the major bank levy on Macquarie Group is not fully understood and that unintended consequences may result.
The concern about unintended consequences arising from this rushed policy measure was not only confined to Macquarie Bank. Other banks expressed that view.
On this matter the shadow Treasurer captured the issue very well when he said:
The bank levy liability base was clearly designed to ensure Macquarie Bank was captured by the tax so—
owns any decision by them to move operations, or to be domiciled overseas. This is quickly moving from just a terrible mishandling of the process surrounding the bank tax, to more concerns about the government's inability to manage the economy.
I hasten to add that Macquarie Bank did indicate to us that they had no current plans to relocate overseas. However, the fact that they have indicated that this is a matter that they keep constantly in review is a matter which should be on the radar screen of the government. Issues like this are foreseeable. Macquarie has been considering the issue since 2007, and the bank levy is another factor that they will use in their decision making on this issue. Like the shadow Treasurer, I am concerned that this matter shows that not only has the Treasurer mishandled the policy but that the government cannot manage the economy either. Australia deserves a government that can handle these matters in a careful, considered and thoughtful way.
The next point I want to touch on is the lack of policy clarity. Several reasons were given for the rationale behind the levy. Foremost is budget repair, and this is the aspect of the bill which Labor seeks to provide support for. However, other rationale were provided—for example, competition, complementing prudential reforms and the major banks' contribution to systemic risk. These were other objectives. After sitting through Friday's hearing, it has become much clearer that competition effects are likely to be small—notwithstanding the comments made by representatives from Bendigo Bank and ME Bank—and that the levy does not complement prudential reforms, and, if anything, is slightly detrimental to reforms like total loss absorbing capital. Treasury officials acknowledge that the levy in part is in response to the systemic risk of major banks, which, in the Treasurer's words, 'ultimately fall on the broader Australian community'.
Labor supports the bill and its contribution to budget repair, as I have indicated. However, it seems that the Treasurer has only fuelled confusion when it comes to these other policy objectives. It became clear to all senators who sat through Friday's hearing that this bill raises more questions than answers when you look at these other issues. The fact that a government dominated committee had to make additional recommendations in their report is a sign that not even some government senators are clear as to the policy purposes of the bill. If you want to confirm this, you just need to read recommendations 1, 2 and 4. Recommendation 1 recommends a review of the legislation. Recommendation 2 seeks an explanation for the inclusion of Macquarie Bank in the levy but the exclusion of large foreign banks. Recommendation 4 seeks to give APRA powers to suspend the levy in times of financial or economic distress. As these paint the picture that the Treasurer has failed to properly explain the merits of the policy to senators of his own party, it is an admission that the Treasurer has once again botched the policy process.
When it comes to competition the benefits are likely to be small. The Customer Owned Banking Association said on Friday:
We think it will have a small positive impact on competition but it is certainly not enough on its own to influence competition in the way that we would like to see banking competition promoted within the Australian banking market.
I return to comments from Bendigo Bank, who acknowledge that there was a small step in the right direction that was made in respect of this matter.
In terms of the ACCC powers, my questions to the ACCC on Friday found that the ACCC's powers to take action will be limited to scrutiny of owner-occupied and investor mortgages and not other banking products. Furthermore, the scope is limited to any cost impacts that occur before June 2018. It is concerning that the government has not appropriately equipped the ACCC to discover and take action on cost pass-through, especially after all the Treasury's comments in the media lecturing the banks not to pass on the costs. As it stands, it is likely that the design of this measure will do little to prevent banks from passing on the majority of this levy to customers.
While the Treasurer talks big, when you look at the detail, he is not taking tough action on the banks. The ACCC measure is just one example of that. I took the opportunity to ask the ACCC about the scope of the watchdog's role. The powers that the ACCC will be using are not new powers; they are existing powers. They made the point of saying they are very good powers, but these are powers that are pre-existing. So the impact of the ACCC will be basically shining a light on the activities of the bank and digging into the way the bank talks to itself about how it increases its rates so as to try to set a benchmark for the future.
I have a great deal of respect for the ACCC. I think that the work they do in certain market studies that they have undertaken—particularly the petrol retailing market—is very worthwhile, and in those situations there are examples where prices are affected by that ACCC activity. I do remain concerned that this approach seems to leave a lot of scope for the banks to pass on costs to consumers in ways that are not picked up by the ACCC's activity. The ACCC is already on the record as saying that in the financial sector there is a lack of rigorous competition, and in that situation it is very easy for market participants to pass on costs to consumers.
Finally, in relation to the points I wanted to talk about, I will talk quickly about the foreign banks. We heard evidence from the major banks, who argued the levy should be extended to cover large foreign banks to maintain competitive neutrality in finance markets. Major banks argued that foreign banks are strong competitors in low-margin international markets such as institutional banking, trade credit and custodian services, so they were concerned about business being lost to foreign banks in relation to that—the Commonwealth Bank and Westpac in particular. Labor senators noted the comments from Treasury officials stating that they had considered these issues when designing the policies. However, we remain concerned about this.
In conclusion, despite the policy process issues I have gone through, Labor will support the bill and its contribution to budget repair. The issues uncovered in the Senate estimates and the short inquiry make it clear the government has botched the policy process once again, and it is fallen to the economics committee to try to clean up the mess. It should not have to be this way, but with the incompetence of the government and the Treasurer it is clear to see. Labor will still support this bill. (Time expired)