Grant Robertson considered taxing banks’ ‘windfall’ profits

Finance Minister Grant Robertson followed advice to ditch the idea of imposing additional taxes on banks. Photo / NZME

The Government considered taxing banks’ windfall profits, but ditched the idea on the back of advice from officials.

Documents released by the Government show Finance Minister Grant Robertson, ahead of the May Budget, sought advice from the Treasury on the extent to which banks were generating windfall or supernormal profits, and whether a tax could be imposed in response to this.

The Treasury came back to Robertson on February 10, concluding, “the large New Zealand banks have persistently elevated levels of profitability relative to comparator banks in other countries, which may indicate enduring excess profits”.

It recognised banks’ profits were “likely supported by favourable economic conditions arising from the fiscal and monetary response to the Covid-19 crisis, but there is no clear evidence of windfall profits”.

The Treasury didn’t recommend imposing a tax on the sector, “given the risks to confidence in the certainty and predictability of the tax system, the possibility of the tax burden being borne by bank customers, and the effectiveness of future monetary and fiscal policy responses to economic crises”.

It said that should Robertson want to tax banks, he could apply a one-off levy to windfall profits made in the past, or temporarily top-up the corporate tax rate.

Robertson then asked the Treasury and Inland Revenue for more information on the first option – imposing a retrospective levy on large banks that made persistently high profits.

He saw this as a way of helping cover costs related to Cyclone Gabrielle and storms in the upper North Island.

The agencies responded on March 10, saying the levy could be applied to net profit worth more than $1 billion in the 2021 and 2022 years.

They said it would raise between $230 million and $700m.

But ultimately, the Treasury and Inland Revenue said this kind of levy would have “significant unintended consequences”.

They worried banks might fear the levy could be imposed again in the future, so pre-emptively pass on costs to customers.

They said applying a retrospective levy could be seen as arbitrary and damage confidence and future investment decisions.

The agencies also said banks might not participate in programmes aimed at influencing interest rates and inflation, like the Reserve Bank’s Funding for Lending Programme, if there was a perception returns might be subject to future levies.

Finally, the Treasury and Inland Revenue said, “Imposing a temporary levy imposes costs on previous uncompetitive behaviour, but may not disincentivise future behaviour.”

They recommended Robertson get the Commerce Commission to do a market study on competition in the sector.

The Government followed this advice. The commission has just started its investigation and will report back next year.

Robertson said the Government also concluded costs associated with the adverse weather events were manageable.

As unveiled by the Herald in March, Robertson around the same time also sought advice from the Treasury and Reserve Bank on using a more technical avenue to effectively tax banks.

Currently, the Reserve Bank pays banks interest, at the official cash rate (OCR), on the cash they keep at the Reserve Bank to settle transactions with each other, the Crown and the Reserve Bank.

The effective “money printing” the Reserve Bank did in 2020 and 2021 (via its Funding for Lending and Large-Scale Asset Purchase programmes) to suppress interest rates saw banks’ settlement balances explode seven-fold.

So, the Reserve Bank has been paying banks increasingly high rates of interest on very large sums of money. It’s currently paying banks 5.5 per cent interest on a whopping $50 billion.

Central banks in other parts of the world have been in the same boat. Accordingly, there has been some debate among academics over whether central banks could save taxpayers money by paying banks lower rates of interest on parts of their balances.

The Herald put the idea to Robertson late last year. He got Treasury and the Reserve Bank to investigate.

The Reserve Bank, in particular, strongly opposed the idea, fearing it could hamper the transmission of monetary policy.

In other words, it worried that if the Reserve Bank paid banks less interest on part of their settlement balances, banks might charge customers less interest on their loans. This could stymie the effectiveness of the Reserve Bank’s OCR hikes, aimed at dampening the economy to cool inflation.

Robertson listened to the advice and ditched the idea.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.