Call For Tax Cut On Bank Deposits

Sydney Morning Herald

Saturday June 28, 2008

Danny John

A TAX cut on bank deposits would encourage people to save more and provide money for banks, allowing them to cut the high interest rates on home loans, the head of National Australia Bank's domestic business said.

Such a reduction would help bridge the gap between what the banks can tap from their own resources and what they need to raise from costly international debt markets to meet borrowers' demands, said Ahmed Fahour, chief executive of NAB Australia.

About 30 per cent of household and business lending by Australian banks now has to be met from foreign lending with the cost of that borrowing having soared in the wake of the global credit crisis. That compares to 20 years ago, when only a tenth of the same funding was from overseas.

But as a result of the current turmoil and the greater dependency on wholesale funding a relatively strong Australia in financial and economic terms is "vulnerable to the international price of credit", Mr Fahour told a debt markets conference in Sydney yesterday.

Coupled with the interest rate increases of a full one percentage point pushed through by the Reserve Bank since last November to tackle rising inflation, the banks have raised the price of home loans by a further 0.4 per cent to cover the cost of their own credit blow-out.

Mr Fahour said that if the growth in bank deposits had kept pace with the massive increase in superannuation contributions over the past 10 years, the need for banks to borrow money would have been much less. The growth of the two forms of savings were keeping track until June 1997 when preferential tax treatment saw superannuation levels take off. By June last year, superannuation funds stood at almost $1 trillion while deposits were at just over $400 billion.

By making deposits more attractive in terms of tax, the banking industry's funding shortfall could be substantially reduced or even completely closed, Mr Fahour said.

Urging the Rudd Government to consider a better tax treatment for such saving through the fiscal review now being undertaken by the Treasury Secretary, Ken Henry, Mr Fahour said that deposits were not even treated on the same equitable basis as investing the money on the share market.

As for the superannuation versus deposit tax debate, he said: "If the relativity [in growth rates] had stayed the same then we would be 100 per cent deposit funded and would not have seen the same level of pressure on mortgage prices."

Mr Fahour also urged the federal and state governments to resist pressure for tighter regulations on bank fees or direct intervention in funding markets by purchasing mortgage-backed loans as this would undermine the financial system.