BANKS will find it tougher to apply out-of-cycle interest rate rises on home loans if, as expected, the Henry review of the tax system urges the introduction of a tax break on savings.
A tax break on savings would be a big benefit for banks because it could generate more than $130 billion in additional deposits, potentially lowering their funding costs.
But any measure to increase deposits — which could cost the government as much as $1 billion annually in lost revenue — would come with a significant political catch, according to Royal Bank of Scotland economist Kieran Davies.
"As a quid pro quo, the government could presumably pressure the banks to reduce lending rates relative to cash rates," Mr Davies said.
Banks blamed higher funding costs for recent home loan rate rises that exceeded moves in the official cash rate. But these efforts to recoup costs have sparked a furious backlash from customers and politicians.
Some bank executives have privately expressed concern that the government might seek to extract a "social dividend" from the sector in an election year.
Details of the Henry tax review will be announced on Sunday, with Treasurer Wayne Swan recently describing the overhaul as providing long-term foundations for the tax system.
Others measures widely expected to be contained in the review are the introduction of a resource rent tax and the phased lowering of company tax rates.
Banks have been lobbying for a reduction of marginal tax rates on savings as a key measure to resolve the structural problem they face of lending more than they generate through deposits.
The Australian Bankers Association said yesterday that encouraging more savings in bank deposits could restore a reliable funding source for banks while encouraging a higher national savings rate.
Bank deposits now carry the highest effective marginal tax rates of all types of savings.
"A more equitable tax treatment of deposits will make the Australian economy less vulnerable to international financial shocks because of the reduced need for Australian banks to rely on foreign wholesale funding sources," said ABA chief executive Steven Munchenberg.
Macquarie Equities analyst Tom Quarmby believes the government could introduce a tax-preferred bank account, similar to Britain, where savers can place the equivalent of up to $8500 in low-tax accounts.
Mr Quarmby calculates this could provide an annual $130 billion increase in bank deposits, although the funds are likely to be drawn from other sectors such as superannuation, property or equities, which now have a relative tax advantage.
The ABA has argued that other measures, such as eliminating the 10 per cent withholding tax on foreign-raised deposits, would help strengthen lending competition.
Foreign-owned banks claim the tax acts as a disincentive to tap their international pool of deposits. Lenders including Dutch bank ING Direct have said the tax makes it uneconomic to access deposits sitting in other parts of the group.
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