Last year’s Federal Budget produced an unwelcome surprise for the major banks in the form of the Banking Levy. The cries of pain from those affected are now long since forgotten and any remaining sympathy for their situation has dissipated given what has been uncovered by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. With the Commission revealing what is seemingly a systemic problem in the industry, attention has now turned to whether and how the banks and other major financial institutions might be penalised and further regulated.
Against this background, the 2018 budget becomes all the more interesting; not because it does anything to single out the banks and others in the financial services sector for special (punitive) treatment as a response to their wrongdoings highlighted by the Commission, but rather because the budget is likely based on economic modelling and forward estimates that assume the sector to be in robust financial health.
And that is a potential problem.
Already, extra jobs and a stronger-than-anticipated economic performance have bolstered tax receipts by nearly $5 billion more than estimated in the mid-year review last December, and the expectation is for the budget to return to the black sooner than previously forecast. At the same time, the government is predicting that a cut in the company tax rate will lead to greater economic output, increased employment and higher wages, and that with this growth will come increases in government revenue. Confidence in these predications is what has enabled the government to announce that it will no longer seek to increase the Medicare levy in order to support the NDIS, and has provided it with room to increase expenditure across portfolios whilst also delivering income tax cuts to low- and middle-income earners.
“…it is not unreasonable to assume that there will be some significant fallout in relation to the financial performance of the industry in the next few years.”
But with the banking and financial services sector in disarray — and further revelations about malpractice no doubt likely to emerge as the Royal Commission rolls on this year — it is not unreasonable to assume that there will be some significant fallout in relation to the financial performance of the industry in the next few years. Not least, a lack of public trust and confidence in financial products and services may see a downturn of sales and activity. Furthermore, it is likely that the Commission will hand down recommendations that lead to a more stringent regulatory environment that includes bigger financial penalties for misconduct and which will substantially increase compliance costs within the industry. All this could impinge on performance and profitability in banking and financial services for at least the short to medium term, and lead to (notably overseas) investor nervousness in the sector. One could even go further seeing a downturn in the sector’s performance impacting on the financial markets and the economy overall.
Such a scenario has implications for how we view the 2018 budget. The Government is aiming to return to a budget surplus of about 0.5 per cent of GDP. That for some — including Labor — is believed to be too slim and leaves the economy vulnerable to economic volatility. Notwithstanding the planned cut in the corporate tax rate — and there is an argument that this may be of vital assistance to banking and financial services given what else may be coming down the line for it — the budget is, at least in part, based on a revenue base that assumes continuation of the recent strong performance of the sector. These calculations may not though take into account any possible downturn in economic activity in the sector and the impact of this on government revenue.
In short, if the budget is based on economic modelling and forward estimates that assume things will continue as they are in the banking and financial services sector and not as they could turn out to be, that could be bad news for the government’s delivering on what they have promised and its capacity to secure budget repair.
So while we may all agree that the Royal Commission will achieve a great deal and was long overdue, there may, in the context of the 2018 budget, be a significant price to pay for what it has revealed.