Calls for Windfall Tax on Irish Banks as Profits Soar
Surging profits and a failure to raise deposit rates have prompted calls for windfall taxes to be applied to Irish banks, reflecting measures currently being implemented across the EU. Ireland’s banking sector has cashed in on nine consecutive interest rate hikes by the ECB, with recent half-year earnings revealing bumper profits across AIB, Bank of Ireland, and Permanent TSB.
“The past few months have shown increasing evidence of price gouging and profiteering,” said Ciarán Nugent, economist at the Nevin Economic Research Institute. Nugent believes that a tax on rising bank profits would distribute money more effectively around the economy, aiding those who have been most impacted by rising price levels. He emphasized the need to ease the cost of living and address ongoing housing issues.
Several European countries have already introduced windfall taxes on banks. In July 2022, Spain implemented a 4.8% tax on banks’ income from interest and commissions for two years. Hungary, the Czech Republic, Lithuania, and Italy have also implemented similar measures. Italy’s recent windfall tax of 40% on banks’ net interest income caused a sharp drop in bank shares, prompting the government to cap the impact of the levy on each bank.
In the past six months, Ireland’s three remaining pillar banks have seen profits soar due to continuous interest rate hikes and growing concentration resulting from Ulster Bank’s and KBC’s departure. AIB posted an operating profit of over €1.2bn for the first six months of 2023, exceeding its total of €1.08bn for all of last year. Bank of Ireland reported an operating profit of €1bn at the end of June, compared to €351m in the same period last year. Permanent TSB also reported a surge in net interest income to €298m, with its mortgage market share rising from 16% to more than 23% in just one year.
In addition to surging profits, Ireland has the lowest deposit rate gains out of the Eurozone, UK, and US, with only 7% of interest rate hikes being passed on to savers. The Irish government has imposed a bank levy since 2014, but with the existing levy set to end this year, it is unclear what taxes banks will have to pay and if additional charges will be applied to their profits. The Department of Finance is currently reviewing the bank levy and will make recommendations to the Minister for Finance.
While some support the idea of a windfall tax, others have raised concerns about the unintended consequences it could bring. The Banking & Payments Federation Ireland (BPFI) believes that such a tax would make the competitive landscape more challenging for potential new entrants. The recent decline in Italian bank shares following the announcement of a windfall tax demonstrates the potential negative impact of such a measure.
The Minister for Public Expenditure and Reform acknowledged the pressure rising interest rates and inflation place on many people but stated that decisions on banks passing on profits to savers are commercial decisions made independently by the banks. The government has implemented measures to address the rising cost of living in previous budgets.
In conclusion, the surging profits of Irish banks have sparked calls for windfall taxes to be applied. While some believe that such a tax would distribute money more effectively and address pressing economic issues, others caution against potential unintended consequences. The government is currently reviewing the bank levy and will make decisions regarding the future taxation of banks.