Study: Sector tax on banks would spark economic slowdown

28-05-2019

The possible introduction of a sector tax on banks in the Czech Republic would lead to a knock-on increase in the cost of financial products, according to an analysis conducted by the Centre for Economic and Market Analyses (CETA) published on Tuesday. This would mainly concern higher mortgage rates and more expensive loans for entrepreneurs, the study found.

Photo: Pijon, Pixabay / CC0Photo: Pijon, Pixabay / CC0 The director of CETA, Jiří Schwarz, said such a scenario would lead to a decline in credit growth, cause gross domestic product to expand at a slower rate and also reduce the state’s budget revenues.

A sector tax on banks is being advocated by the Social Democrats, the junior partner in the Czech governing coalition.

Under their proposals, the tax rate would increase progressively from 0.05 percent to 0.3 percent. This would bring up to CZK 14 billion more into the state’s coffers every year, according to the party’s estimates.

Prime Minister Andrej Babiš of ANO has rejected the idea, instead proposing the establishment of a National Development Fund. It would receive contributions from banks and possibly other companies and plough that money into long-term social and economic development.

An interest rate hike sparked by a sector tax on banks would have the biggest impact on households paying off mortgages, the new analysis found.

CETA’s Schwarz said that such a tax would therefore, paradoxically, most affect the very section of the population that had led the proposal to be put forward in the first place.

Making credit more expensive to businesses would limit companies’ investments and operating costs, he said.

CETA said that under a realistic scenario the credit growth rate would slow by two percentage points. This would in turn lead to growth decelerating by 0.86 of a percentage point, which would mean the state budget would lose around CZK 16.3 billion.

According to the report, the introduction of a sector tax cannot be recommended on the basis of experience in other countries.

In the case of Poland, the introduction of such taxation resulted in a deterioration of banks’ ratings, a fall in demand for government bonds and an increase in credit rates. In Hungary the introduction of this tax caused an increase in interest rates, which hit mortgage holders hardest.

In Slovakia it led to a decline in banks’ profitability, which in turn led the government to gradually reduce the rate with a view to abolishing it completely in 2021. Interest rates also went up in Germany.

Stanislav Kouba, a deputy minister of finance, said on Tuesday that his government department had a long-term negative attitude towards the introduction of sector taxes.

In the case of banks, they would be passed on to clients and would also distort the tax system, Mr. Kouba said.

28-05-2019