It's intensely frustrating to see a politician bring in a measure that is absolutely correct, just the spot on right thing to do, and then watch him mess it all up with subsequent little changes. This is the case, I fear, with George Osborne and the bank levy over in the UK. The original idea was just super and yet the various changes that have been made to it since inception have near gutted the point and purpose of the whole thing.
This is the little point that has set me off:
Research by KPMG found that more than 70pc of the levy is paid by British banks. The government originally set a target of raising £2.5bn a year from the charge, but got just £1.6bn from it in the year 2012/2013 and is expected to raise £2.3bn in the current tax year, according to the Office for Budget Responsibility.
The shortfall has been caused by the rapid shrinkage of bank balance sheets against which the levy is charged. This shrinkage has forced the Treasury to increase the tax seven times since it was announced in 2010.
Here's the economic background. We have a problem with the "too big to fail" banks. Which is that they're simply too large and too important in relation to the rest of the economy that no one is ever going to let them fail. Even if the directors spend every penny in the vaults and all they can borrow and more on sex and drugs the government simply isn't going to let the banks themselves fail. This both imposes a cost on the wider society and also acts as a subsidy to the TBTF banks. For they can, as a result of this implicit guarantee, borrow more cheaply. Further, the existence of the guarantee means that the taxpayer is on the hook for some unknown amount of money in the event of a potential collapse. And we really don't like having those sorts of subsidies and open ended liabilities lying around the economy.
The answer to this is a Pigou Tax. The danger lies not in where the banks lend the money but in where they borrow it from, it's their liabilities we're worried about, not their assets. So, we should impose a tax equal to a reasonable insurance fee for the guarantee that we're offering. And given that some liabilities (say, overnight funding from the money markets) are more risky than others (say, long term bond issues) there should be a variance in the tax dependent upon the liability profile of each individual bank. Finally, perhaps we should not charge this tax on liabilities that are already insured under other schemes and also already paying premiums under those schemes. And that's exactly how the bank levy started out.
But look what it's morphed into now: the Chancellor, Osborne, has seen that this is a nice revenue earner. And when the banks change their behaviour, reducing liabilities and moving more of those they keep into the safer, longer term funding sources, he wants to maintain that nice little earner. So when they reduce risk he just keeps upping the price of the insurance on the risk that remains. Which is entirely the wrong way to go about things. For what we really want to happen is that the banks change their behaviour so that there is no risk at all left. The desired revenue from this tax is in fact nothing: for we'd all far prefer to have no TBTF banks at all.
That is, as I say, what annoys me so about what is going on. The bank levy was brought in with the correct design and has been achieving its goal or reducing the risk in the banking system. But in the blind pursuit of revenue Osborne is morphing it from a risk reduction mechanism into just another earner for the Treasury. Which really wasn't the point of it at all.
