The Risk Tax
The Swedish Government, together with the Centre Party (C) and the Liberals (L), has submitted a proposal for a new risk tax to paid by banks and other credit institutions. Since Kommuninvest would be targeted by the tax, costs of close to SEK 400 million per year would be imposed on municipalities and regions. The tax would also 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, “public development credit institutions” whose liabilities are guaranteed by the public sector, and thus Kommuninvest, should be exempt from taxation. The introduction of the risk tax must not be allowed to be a hard blow to the municipal sector.
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. A short memorandum on the proposal has been distributed for consultation. Kommuninvest has, together with the Swedish Association of Local Authorities and Regions, delivered a common response (in Swedish).
The risk tax will apply to credit institutions with liabilities linked to Swedish operations of more than SEK 150 billion. In 2022, 0,06 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 0,07 percent. In total, the tax is expected to generate revenues of around SEK 5 billion per year.
The memorandum contains no analysis whatsoever of how the risk tax would affect the municipal sector. The account of the consequences of the proposal is thus clearly deficient.
Kommuninvest, which is owned by 292 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 in the memorandum 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 be implemented, the consequences would be serious for Kommuninvest and thus for the municipal sector.
Out of the municipal sector’s total borrowing of approximately SEK 700 billion, Kommuninvest accounts for close to 60 percent. Kommuninvest’s liabilities amount to around SEK 550 billion. The risk tax would thus be fixed at approximately SEK 330 million for 2022 and SEK 385 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 undermine 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. Major changes would be necessary.
- 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. With a changed and reduced Kommuninvest, they would be forced to bear most of the increased interest costs and to otherwise face the effects of undermined collaboration. Investment plans would probably need to be cut – with severe consequences for welfare operations.
- 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 both extensive extra costs and increased difficulties in borrowing for necessary welfare investments – in, for example, preschools, schools, nursing homes, health centers and hospitals. This would happen in a situation where budgets are tight and investment needs are greater than they have been for a very long time.
What needs to be done? The only reasonable thing to do for the Government, with C and L, is to quickly change their position. They did not get this right. An important reason might be that the impact of the proposal on the municipal sector was excluded from the initial analysis. Now this should, on the basis of a proper impact assessment, be about choosing a different path. The obvious solution would be to make an exemption.
Within EU legislation, the category ”public development credit institution” has recently been established. 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 under a public guarantee and/or at clearly lower risk-levels than, for example, commercial banks.
What the Government now needs to do is 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 would be a simple and straightforward way to solve the problem.
Kommuninvest’s message is clear: Do not let the risk tax be a hard blow to the municipal sector!