The Risk Tax
The Swedish Government has submitted a proposal for a new risk tax to paid by banks and other credit institutions. The Government proposal was updated on 24 May. Since Kommuninvest would be targeted by the tax, costs of close to SEK 330 million per year would be imposed on municipalities and regions. The tax would make it more difficult for many municipalities and regions to do the borrowing needed for necessary welfare investments. Kommuninvest’s position is clear: In order to avoid these very negative effects, Kommuninvest should be exempt from taxation.
When presenting the Budget Bill for 2021, the Government, with C and L, launched a proposal for a new risk tax to be paid by banks and other credit institutions. Kommuninvest, together with the Swedish Association of Local Authorities and Regions, delivered a common response (in Swedish). The Government proposal was updated on 24 May and was then sent on a quick consultation with a deadline of 18 June. On that date, another common response (in Swedish) was submitted from the two organizations. On 2 September, the Government announced that it will move forward with the proposal by submitting it to the Council on Legislation. Revenue from the tax is included in the budget bill presented by the Government on 20 September.
The risk tax will apply to credit institutions with liabilities linked to Swedish operations of more than SEK 150 billion. In 2022, 0,05 percent of these liabilities, after certain adjustments, will be paid in risk tax to the state. From 2023, the tax rate will be raised to 0,06 percent. In total, the tax is expected to generate revenues of around SEK 6 billion per year.
Kommuninvest, which is owned by 293 municipalities and regions, is a non-profit collaboration to secure cheap and secure loans for the welfare sector. The owners cover Kommuninvest’s liabilities and other commitments through a joint and several guarantee. Funds are raised on the credit market and then lent to municipalities and regions. The large-scale set-up provides lower interest rates and safety in times of crisis. Kommuninvest has run uninterrupted lending operations during the Covid-19 pandemic and the financial crisis in 2008.
Credit rating agencies Moody’s and Standard & Poor’s have for a long time 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.
A key argument put forward by the Government is that the tax would compensate for risks that banks and other credit institutions expose the state to. This not particularly relevant to Kommuninvest. If the Government trusts that municipalities and regions will honour their guarantees – and it would be very remarkable if it did not – there is no real risk of that kind when it comes to Kommuninvest.
If the proposal was to be implemented, the consequences would be serious for Kommuninvest and thus for the municipal sector.
Out of the municipal sector’s total borrowing, Kommuninvest accounts for close to 60 percent. The risk tax would be fixed at approximately SEK 280 million for 2022 and SEK 330 million for 2023 onwards. This extra cost would have to be imposed directly on municipalities and regions in the form of sharply raised interest rates in the lending operations.
In addition, there are other problematic effects:
- Weaker collaboration
The risk tax would hit municipal cooperation in the financial area. When Kommuninvest’s interest rates rise markedly, the largest municipalities and regions would probably increase their own direct borrowing in the credit market. This is not affected by the risk tax. The benefits of large-scale municipal collaboration would decrease, which would in turn lead to further interest rate hikes.
- Lower investments
The weakening of municipal collaboration through Kommuninvest would mainly affect the small and medium-sized municipalities. Most of them do not have the capacity to borrow directly in the credit market within self-managed programs at a reasonable volume and cost. They would be forced to bear most of the increased interest costs and to otherwise face the effects of weaker collaboration.
- Increased risk
The transfer of large borrowing volumes from Kommuninvest to individual municipalities and regions would significantly raise the risk level in the financial system. Kommuninvest has large capital and liquidity reserves to be able to cope with market disturbances. Individual municipalities and regions do not.
The municipal sector, and particularly the small and medium-sized municipalities, would thus have to deal with extensive extra costs in borrowing for necessary welfare investments – in, for example, preschools, schools, nursing homes, health centers and hospitals. This would happen in a situation where investment needs are greater than they have been for a very long time.
What needs to be done? The Government has to quickly change its position. They did not get this right.
In order to prevent the negative effects of the risk tax on welfare, an exemption for Kommuninvest is necessary. This is easy to justify. As Kommuninvest is guaranteed by and only lends to the municipal sector, the risk level is very low – much lower than for the large commercial banks. In terms of risks to the surrounding society – which the risk tax is in some sense intended to reflect – there are very good reasons to treat Kommuninvest differently.
The Government has tried to find a way forward – and encountered some problems in the dialogue with the European Commission. But there is no reason to stop working. There are several other possibilities for achieving a well-balanced exemption, that take into account Kommuninvest’s distinctly low-risk profile, which the Government must now try out. If a little extra time would be required to create an exemption to protect welfare, the Government must take that time.
Kommuninvest’s message is clear: Do not let the risk tax be a blow to the municipal sector!