Are record bank profits fair?

Sam Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. You may have heard the Commonwealth Bank recorded a whopping profit this week, but how is it making such huge money during a cost of living crisis and is it fair that it is today? Economist Angela Jackson on whether the banks should be hit with a super profits tax to make things easier for the rest of us. Angela. The Commonwealth Bank. It’s doing okay.

Journalist: The nation’s biggest bank has posted a record profit, despite many borrowers feeling the squeeze.

Sally Sara: While you might be struggling with paying your mortgage, the Commonwealth Bank has posted a record full-year profit of $10.16 billion profit.

Sam Hawley: That sounds pretty good to me.

Angela Jackson: Uh, look, it’s doing better than okay. I think you can say. Certainly, this is, you know, much higher or higher than the market had been expecting. It is an exceptionally healthy profit.

Sam Hawley: The Commonwealth Bank, seems to know it’s a bit of a sensitive time to be making so much money. Yes. When so many Australians are finding it hard to make ends meet.

Matt Comyn: Well, look, we’re very conscious that many Australians are feeling under pressure in the current environment.

Sam Hawley: Matt Comyn, the head of the Commonwealth Bank, he’s been sort of defending this strong profit.

Matt Comyn: Ultimately, the size of the profit is a function of the size of the bank and of course, strong banks for Australia are a good thing.

Angela Jackson: He has been and I have to say it’s been a pretty good class in terms of media management. They put out some other data yesterday about the households that were feeling it tough. So they sort of faced up to that pretty much head-on and then took a bit of the heat out of that headline profit figure. You know, you’re paying that increasing amount every month to the bank and it’s getting harder and harder in terms of your mortgage. And then you see this profit figure. It’s a pretty bitter pill for a lot of households to swallow.

Sam Hawley: Yeah, sure is. All right. So let’s talk a bit more about the data that the Commonwealth Bank has put out in connection with this record profit that it’s made in a minute. But just tell me, Angela, are the other banks doing as well too?

Angela Jackson: So we’ll hear more from them in the coming weeks. But yes, basically we saw in their half-year profits that they were also up significantly.

Journalist: Australia’s biggest banks have all reported their half-year results and the bottom line is their profits are ballooning.

Alan Kohler: Nab’s interim profit increased 17% to $4.07 billion.

Sally Sara: Westpac has delivered a bumper half-year profit of $4 billion.

Angela Jackson: So this isn’t just the Commonwealth Bank doing well. The entire banking sector is doing well in this period and there are several reasons for that. You know, in an environment where interest rates have been rising, the banks have made, you know, hundreds of billions of dollars worth of loans to consumers and businesses at set interest rates. And when those interest rates go up, they end up getting more money for the money they have lent out to people.

Sam Hawley: That’s one reason, I suppose, then, that the banks are doing quite well. What are the other reasons?

Angela Jackson: A lot of the banks managed to get quite a lot of money out of the Reserve Bank to lend, particularly to businesses during the pandemic, which they borrowed at around 0.1% when those interest rates were very low. They’re now able to earn when they redeposit that money at the current cash rate. So they’re making a huge margin on that money. Okay.

Sam Hawley: Hang on, hang on. That was it.

Angela Jackson: I know.

Sam Hawley: Yeah, Hang on a minute. Hang on. So they borrowed money during the pandemic at a very, very low-interest rate. That’s sort of public money because it’s from the RBA, right?

Angela Jackson: That’s exactly right. Which was lent really to try and stabilize the banking sector, to encourage the banks to lend, which they’ll have to fully repay by the middle of next year at 0.1%, so a very low-interest rate. And of course, because interest rates have now risen, the banks can redeposit that money with the Reserve Bank and earn a much higher rate of interest and therefore pocket that additional money really with no risk on their behalf and no real effort to be honest with you. So it’s a pretty extraordinary situation that we’ve found ourselves in.

Sam Hawley: So the banks are taking in these huge profits when a lot of Australians are struggling with higher interest rates. When the Commonwealth Bank released its profit results, it also released this extra data that we mentioned before. Several slides give a sense of how Australians are faring at the moment. And it’s not great, is it?

Angela Jackson: No, and I think particularly it shows for younger Australians that it has been a very difficult period. Their savings have dropped around 6% for the youngest Australians and there are those Australians that are doing it most tough, whereas older Australians over 65, even with the higher cost of living, even though they’re not necessarily still earning for many of them, wage income saw their savings go up 5%, so there is this huge difference across age brackets.

Sam Hawley: As part of these slides. The CBA also estimates that 3.4% of those people on variable loans that they took out in the last five years are in a negative cash flow. That means that they’re spending more money than they earn. Does that mean that there could be a wave of mortgage defaults coming?

Angela Jackson: Look, I think what I would expect to see is it’s unlikely we’ll have a wage of mortgage defaults unless unemployment rises substantially.

That said, clearly a lot of households are now in a situation or an increasing number of households or in a situation where they are struggling to make that mortgage payment because it’s increased so substantially and they’re having to eat into savings and that that is a trend that’s likely to continue over the next 12 months, where we expect interest rates to stay relatively high and an increasing proportion, of course, of households are coming off those very low fixed rates onto that variable rate. People will generally do whatever they have to do to keep their homes. It’s unlikely we’re going to see a substantial increase in that.

Sam Hawley: Right. So, Angela, this doesn’t sound fair that young Australians are suffering while the banks are recording massive profits. The Australian Competition and Consumer Commission says it doesn’t think there’s enough competition in the market. Its deputy chair, Mick Keogh, was on Radio National Breakfast and he thinks that this needs to change.

Mick Keogh: All four majors are essentially the same and they work on a live-and-let-live basis where they don’t try too hard to compete. They all get a comfortable profit.

Angela Jackson: So certainly, you know, Australia’s banking system is, you know, fairly well protected and it’s done that. We’ve done that and we’ve made that decision for a reason and that’s to have stability in our banking system. But what that does mean is that underpins that lack of competition, underpins these higher profits than perhaps we would see internationally and that we would see in a more competitive market.

It is a real trade and I think it is an open question about whether or not, you know, there is scope to improve competition in the banking sector and improve outcomes for customers, as well as ensure that we don’t see these super profits.

Sam Hawley: Yeah. All right. I notice in some countries like Italy, they’re trying to address this with a tax on the super profits that banks are making. Just tell me, how would that work? It’s an intriguing idea.

Angela Jackson: Look, indeed. What a super profits tax sort of does is it says, look, in some industries what we can see, you know, due to a lack of competition, due to regulatory factors, due to the nature of the industry, we can see that there are above normal profits being generated and that there is a return that you know, isn’t just explained by. Yep, great job. You’re doing a really good job.

You’ve innovated, you know, that’s fantastic. You are earning an economic rent above what would be considered a sort of competitive return. And so what we will do is we will institute a super profit on top of that and charge you more for that additional profit. The problem with doing it the way that Italy has done it and the way that some other countries have done it is it does increase risk and sovereign risk, and that can lead long term to lower levels of investment. And because of that greater uncertainty.

So you do need to be careful. While in theory, super profits taxes are quite an efficient form of taxation, the way they’re imposed has a very big impact on whether or not they’re a good thing long-term or not.

Sam Hawley: Yeah, right. Because Italy announced a one-off 40% windfall tax on local banks, but it sort of came back from that a little bit because there is a worry, of course, that the banks could potentially collapse if you go too far with these things.

Angela Jackson: Yeah, indeed. And you do need to be careful about that as well. And that’s why a well-designed profit tax, for example, in Australia, I think it does need to be on the table. We need to be having this conversation. You know, we do have a structural deficit that we can see coming up of around 2% of our gross domestic product, which is about $50 billion a year, where the Commonwealth Government will have to spend more than it is currently forecast to raise.

And so we do need to bridge that gap and a super profits tax is potentially quite an efficient way to do that, but it does need to be relatively permanent that people can plan around and well designed to ensure that it doesn’t have those negative consequences. And so I think there is probably some appetite. People see these big profits to think about such a tax on banks here in Australia. But to implement that in reaction to this wouldn’t be the best idea. I think it’s something that should be considered, you know, part of a broader suite of reforms.

Sam Hawley: Mhm. Can be very political too, can’t it? History shows us that Kevin Rudd tried to bring in a super profits mining tax at one point. That didn’t go so well.

Angela Jackson: Indeed.

Kevin Rudd:  I think it’s time the mining companies of Australia got used to the idea that they need to return a fairer share.

Advertisement: What will the proposed super tax mean Australian miners pay? 58% by far the world’s highest tax on mining.

Sam Hawley: But these taxes, they’re attractive, aren’t they, Because they can solve big budget problems, which we happen to have right now.

Angela Jackson: Yeah, exactly. And that’s why I think it needs to be part of that broader conversation, because, I mean, ultimately where we’re headed in this country is that, you know, to bridge that gap, it’s going to be wage earners that are going to be paying a lot of that additional tax through bracket creep. And that’s not very efficient or fair either. And that’s where I think a super profits tax does come in. But again, not as a sort of a one-off windfall, you know, announced overnight. It does create a lot of uncertainty and that can undermine investment going forward.

Sam Hawley: In the meantime, then, Angela, what do we do? Because this is not equitable. It’s not fair, is it, that young Australians are suffering while the banks are just raking in this huge amount of money?

Angela Jackson: There is, I think, a need for a real conversation around, you know, how we spread the pain during these times and how we bridge that gap in terms of taxation in particular between the amount that government is having to spend on services and the amount that they’re raising.

Look, there’s no doubt that and we are going to see this in the weeks ahead as more and more companies report their profits and that they’re going to be higher due in part to the higher inflation environment underpinning that and also the strong economy households that are finding it tougher and tougher to make ends meet are going to find that very difficult to swallow.

Sam Hawley: Angela Jackson is the lead economist at Impact Economics and Policy. The Italian government says it’s planning on using the proceeds of its one-off windfall tax on local banks to support borrowers and cut taxes at a time when rising rates have put extra pressure on households. This episode was produced by Nell Whitehead and Sam Dunn, who also did the mix.

Our supervising producer is David Coady. Over the weekend, Catch this Week with James Glenday, we’ll be looking at Matilda’s frenzy. Just letting you know, each Sunday this month we’ll be bringing you an episode of If You’re Listening with Matt Bevan. So look out for that in your feed. I’m Sam Hawley. Abc News Daily will be back again on Monday. Thanks for listening.