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Fears are growing in the City of London that chancellor Rachel Reeves will target banks to help shore up the UK’s public finances, despite executives warning a tax raid on lenders would damage the government’s growth agenda.
A surcharge on the sector’s profits or even a new bank levy is seen as a possible way to help fill a fiscal hole estimated by economists to be at least £20bn.
“Politically it is an easy target,” said one senior banker. “No one likes banks, they are seen as a whipping boy for the government.”
Another City figure said: “We aren’t stupid. There’s a bunch of Labour MPs, including Angela Rayner, who are looking for ways to get more money. Financial services are an obvious target.”
Rayner, the deputy prime minister, proposed raising the higher corporation rate for banks from 28 per cent to 30 per cent in a memo to Reeves in May.
Some Labour officials close to the Treasury agree that a move to raise bank taxes at the autumn Budget would help reassure the party that the government was sharing round the fiscal pain.
One said: “They won’t do a wealth tax but they could do something on the edge of a wealth tax, like raising taxes for banks.”
Another agreed that an increase in the bank corporation tax surcharge on profits was likely, perhaps raising up to £3bn. The sector is also subject to a separate balance sheet levy.
A report by the IPPR think-tank published on Friday argues the Treasury should impose a new levy to recoup “windfalls” made by lenders as a legacy of the Bank of England’s quantitative easing programme, undertaken in the wake of the financial crisis.
The scheme entailed the BoE purchasing hundreds of billions of pounds of government bonds, buoying commercial bank reserves at the central bank.
These are now being remunerated at the BoE’s official rate, which stands at 4 per cent. Reeves and the BoE have previously warned of the dangers of tinkering with the mechanism.
Bank executives went public with pre-emptive warnings against fresh taxes on the sector during bumper results in the past few weeks.
As Lloyds reported a surge in pre-tax profits to £2bn in the second quarter, Charlie Nunn, the lender’s chief executive, said increased taxes “wouldn’t be consistent” with the government’s growth agenda.
NatWest chief Paul Thwaite insisted “strong economies need strong banks” as the lender also reported better than expected profits.
Barclays chief CS Venkatakrishnan highlighted that financial institutions were already “among the biggest taxpayers in the country” while Georges Elhedery, HSBC chief executive, said higher taxes risked “eroding our continued investment capacity”.
Another senior banker noted that the UK sector’s earnings and returns may have risen but valuations were still below US rivals and in line with historical averages. “These are not super profits,” they added.
Any tax decisions taken by Reeves will be determined by the size of the fiscal hole exposed by Office for Budget Responsibility forecasts, which have yet to be prepared for the autumn Budget. Estimates vary wildly about the state of the public finances.
Higher debt interest and a possible OBR downgrade of productivity forecasts could worsen the situation, although some in the Treasury still hope that the hole could ultimately be less than £20bn.
Reeves has said that securing growth is her priority and that she is acutely conscious of the risks of overtaxing the wealthy and productive parts of the economy.
Speaking to the House of Commons Treasury select committee last November after her first Budget, Reeves said she had now set the envelope for spending for the parliament and that “we are not going to be coming back with more tax increases or, indeed, with more borrowing”.
A Treasury spokesperson said: “The best way to strengthen public finances is by growing the economy, which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms.”
Industry lobby group UK Finance said: “Adding another tax would make the UK less internationally competitive and run counter to the government’s aim of supporting the financial services sector to help drive growth and investment in the wider economy.”
