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The impact of the South Australian bank levy

Matt Grudnoff

The announcement of a new state level bank levy in South Australia has upset the big banks. This is not surprising and the big banks along with their lobby group the Australian Bankers Association have launched a self-interested campaign to stop the levy. Like most industry political campaigns it relies on exaggerated claims about the impact of the bank levy on ordinary people and the South Australian economy.

The South Australian bank levy is designed in the same way as the federal bank levy. Banks cannot avoid the levy by not banking or investing in South Australia. The proposed levy will therefore not disadvantage South Australia compared to any other state or territory.

As with the federal bank levy, it will only impact the big four banks (Commonwealth Bank, Westpac, ANZ and NAB) as well as Australia’s largest investment bank Macquarie Bank. The rate of the levy is set so it will raise from SA the same amount as the federal levy that comes from South Australia. This is achieved by calculated the ratio of South Australia’s Gross State Product and Gross Domestic Product. At the moment this is about six per cent of the total levy. This effectively means the South Australian bank levy is the same size as the federal levy in South Australia.

The South Australian bank levy is proposed at 0.0036 per cent or 0.36 basis points. That is $3.60 in every $1,000,000 of determined liabilities. It is expected to raise about $90 million per year over the next four years. Together the five CEOs of the big banks make about half of what the levy is expected to raise each year. The amount the levy is expected to rise also represents just 0.2 per cent of the $44 billion in pre-tax profits the big five made last year.

 

“The reality is that the bank levy will have no real impact on ordinary South Australians and its design means that it will not disadvantage South Australia compared to any other state or territory.”

 

The bank levy is not a new idea and has been implemented in many other countries around the world, particularly in Europe. This, along with the size of the levy, means it will have no material impact on sovereign risk.

The bank levy also represents a good opportunity for the federal government to encourage state governments to raise more of their own revenue. The federal government has recently complained that the states are too reliant on it for their revenue. When the states want more revenue they have in past suggested the federal government increase the GST. This means the states get all the revenue and the federal government suffers all the political pain of increasing a tax.

The federal government should take this opportunity to encourage the state governments to follow South Australia’s lead and implement their own bank levies. This means state governments would be more reliant and responsible for their own taxes. The federal government should use the COAG process to encourage this to happen.

The banks are as unhappy with the announced South Australian levy as they were unhappy with the federal government’s bank levy. This is not unexpected as it opens up an additional tax on the banks and if the South Australian government is successful, it could see other states follow suit. The South Australian bank levy is only tiny in size but the ferocious reaction of the banks is in part because they are concerned that other states will follow South Australia’s lead.

As is increasingly the case in Australia, the reaction has been over blown with exaggerated claims of sovereign risk and lost investment opportunities for the South Australian economy. Such exaggeration needs a closer examination.

Matt Grudnoff is The Australia Institute’s senior economist. This article is a summary of the discussion paper Bank levy in South Australia: Doing as the Treasurer says, doing as the Treasurer does.

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