”Don’t let the risk tax affect the municipal sector”

When presenting the Budget Bill for 2021, the Swedish Government, together with the Centre Party and the Liberals, launched a proposal for a so-called “risk tax” to be paid by banks and other credit institutions. The proposal is now out for consultation until 13 November. Tomas Werngren, CEO of Kommuninvest, is sharply critical of the fact that the proposal, in its current design, would have very negative effects on the municipal sector.

What is the problem?

– I have no particular views on the Government, with C and L, wanting to increase the taxation of the financial sector. But I strongly oppose that they in this first proposal have chosen a design that would mean that the municipal sector, and particularly the small and medium-sized municipalities, would be hit very hard. I assume that this is a lapse that has affected the quality of the proposal.

With this design, Kommuninvest, the municipal sector’s tool for collaboration in the financial area, would be forced to pay the tax in full. This would add an extra cost of about SEK 330 million in 2022 and around SEK 385 million from 2023 onwards. Given that Kommuninvest is a non-profit collaboration, this entire sum would have to be paid by the municipal sector through sharply raised interest rates on the loans to municipalities and regions. At a time when the economy of the municipal sector is under pressure and the investment needs are very substantial, it would be highly inappropriate to impose a tax on municipal cooperation. Almost SEK 400 million annually is significantly more than the Government, at SEK 250 million, is planning to spend in its proposal for a special municipal delegation. To give with one hand and take away with the other is unfortunately not a policy line that inspires confidence.

But that is not the whole story. The effects would be even worse than that. If the tax would be implemented in line with the proposal, a number of large municipalities and regions, which run or have the opportunity to run their own market programs, would probably increase their direct borrowing in the market. Only municipalities and regions in collaboration, through Kommuninvest, would be taxed for borrowing in the international and Swedish capital markets. Municipalities and regions that turn directly to the market would not be taxed. This would mean that Kommuninvest, whose volumes would be reduced, would have to adapt. Working at lower volumes, with weaker economies of scale, would in turn lead to further interest rate increases for those municipalities and regions that cannot turn directly to the market.

The largest municipalities and regions could thus, for their part, limit the negative effects of the tax. Their main problem might be that they would maybe not, in the same way as today, be able to use Kommuninvest as a safe haven for secure and stable borrowing in turbulent times. For the small and medium-sized municipalities and regions, however, the majority of which depend on Kommuninvest for all their borrowing, the negative consequences would be far-reaching. Investment plans would probably have to be cut – with a very serious impact on welfare delivery.

The irony is that a risk tax targeted at the municipal sector would significantly increase the risks in the financial system. If substantial credit volumes would be moved from Kommuninvest, which has large capital and liquidity reserves to cope with market disturbances, to individual municipalities and regions, which do not have any such buffers, this would be very problematic from a risk point of view.

But would not it be reasonable for the municipal sector to be treated in the same way as commercial banks?

– No, there is no reason in such an argument. Quite the contrary.

The very core of municipal cooperation in the financial area is that the owners, 292 municipalities and regions, cover Kommuninvest’s liabilities through a joint and several guarantee. Credit rating agencies Moody’s and Standard & Poor’s have for quite some time now given Kommuninvest, like the Swedish Government, the highest possible credit rating: triple A with a stable outlook. This rating reflects the value and strength of the joint and several guarantee from the municipal sector.

If the Government trusts that municipalities and regions will honour their guarantees – and it would be very remarkable if it did not – there is for Kommuninest no real risk of the type that the risk tax is intended to compensate for.

In the situation that has now arisen – what would you like to see as a solution to the problem?

– Fortunately, there is a simple and clear solution to apply. Within EU legislation, there is now the category of ”public development credit institution”. These are credit institutions that have been established on a public basis, that serve a socially beneficial purpose and whose liabilities are guaranteed by the public sector. The category was introduced to create a more proportionate regulation of credit institutions that work in a public role and at clearly lower risk-levels than, for example, commercial banks.

The Government now has to introduce an exemption from the risk tax for public development credit institutions whose liabilities are guaranteed by the public sector. Such an exemption would cover Kommuninvest. This is a very reasonable way forward – and clearly the right thing to do.

What are you doing now to bring about such a change?

– We are in multiple dialogues with a large number of stakeholders who in various ways are linked to the issue. To begin with, we are focused on making it clear what a proper impact assessment would actually look like. On the basis of such a deeper understanding of the consequences, it will then be easier to discuss the solution.

I do have high hopes that this problem can be sorted out. It is so difficult to see that there would be a genuine political will to realize the very hard blow to the municipal sector, and thereby essential welfare services, that the first version of the risk tax proposal entails.

The Risk Tax