Economists forecast that banks will face difficulties to apply out-of-cycle interest rate increase on home loans if the Henry tax review by the Federal Government will implement a tax break on savings.

A tax break on savings would be advantageous for banks since it could generate a sum of $130 billion in additional deposits, meaning, it will lower their funding cuts. However, if deposits increase, the government may lose $1 billion annually in lost revenue.

"As a quid pro quo, the government could presumably pressure the banks to reduce lending rates relative to cash rates," Kieran Davies of royal Bank Scotland said.

Banks are already fuming with the higher funding costs for recent home loan rate increases. Still, the efforts to compensate costs were condemned by customers and politicians.

Few bank executives admitted its worries that the government might try to enforce a "social dividend" from the sector during the election year.

The Henry tax review will be disclosed formally on Saturday. Treasurer Wayne Swan recently provided information on the long-term foundations for the tax systems.

It is believed that the tax review will introduce a resource rent tax and low company tax rates.

Banks continued to lobby for a reduction of marginal tax rates on savings to resolve the structural problem of lending more than generating through deposits.

The Australian Bank Association disclosed yesterday that encouraging more savings in bank deposits will reinstate the funding source for banks and encourage higher national savings rate. Bank deposits now own the highest effective marginal tax rates in different types of savings.

ABA chief executive Steven Muchenberg said that an equitable tax treatment of deposits will help the Australian economy defend itself from the global crisis so that banks now have the option not to seek help on foreign funding.

Analyst Tom Quarmby of Macquiarie Equities further suggests that the federal government should also implement a tax-preferred bank account, which is similar to Britain, where savers can put their savings up to $8500 in low-tax accounts.

ABA also added that a 10 per cent cut on foreign-raised deposits would also strengthen lending competition.

Foreign-owned banks said that the tax will be disadvantageous for international depositors.