Britain’s banking titans are back in the hot seat as Rachel Reeves faces renewed calls to hike taxes on lenders.
The self-described “iron Chancellor” has been advised to take a leaf out of Margaret Thatcher’s book with a fresh levy on banks that would hand the Treasury up to £8bn a year.
The levy – proposed by the left-wing Institute for Public Policy Research (IPPR) – would raid earnings from the banks’ quantitative easing (QE) reserves.
Carsten Jung, associate director for economic policy at IPPR, said the “flawed policy design” of QE meant “public money is flowing straight into commercial banks’ coffers”.
Quantitative easing involved the Bank of England buying a large amount of government bonds from commercial lenders to lower interest rates and stimulate the economy.
To pay for these bonds, the Bank of England created new central bank reserves for the commercial banks, on which it paid interest at its official rate.
As interest rates climbed to a post-financial crisis high of 5.25 per cent last year, the central bank was forced to pay the lenders higher interest on the reserves than what it earned from the bonds. The IPPR projects losses on these bonds – paid for by the Treasury – will top £22bn annually.
Iron Chancellor to mirror the Iron Lady?
The think tank has called for a levy in line with Margaret Thatcher’s one-off 2.5 per cent tax on lenders’ non-interest-bearing deposits in 1981.
“A targeted levy, inspired by Margaret Thatcher’s own approach in the 1980s, would recoup some of these windfalls and put the money to far better use – helping people and the economy, not just bank balance sheets,” Jung said.
Whilst it may provide a boost to the embattled Chancellor who is set to be staring down a £50bn blackhole come the Autumn Budget, the proposal would spark fierce backlash from an already highly-taxed industry.
A spokesperson for the banking industry body 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.”
The tax rate slapped on UK’s lenders drastically outsizes peers overseas, a state of affairs that has long raised questions about the country’s attractiveness.
A report UK Finance submitted ahead of the budget revealed the sector’s total tax rate in London was 45.8 per cent for 2024. This dwarfed European rivals Amsterdam (42 per cent), Frankfurt (38.6 per cent) and Dublin (28.8 per cent).
Banking giants slam potential tax hikes
The top bosses of Britain’s Big Four banks – Natwest, Lloyds, HSBC and Barclays – sounded the alarm on a bank tax’s implications on growth following the half-year reporting season.
Lloyds’ chief Charlie Nunn has also stated increasing taxes on lenders “wouldn’t be consistent” with helping boost the economy. Meanwhile, Natwest chief Paul Thwaite said “strong economies need strong banks” as he argued he would rather use the bank’s capital for loans to boost growth “for the good of the country”.
IPPR’s proposals also call for the Bank of England to slow down quantitative tightening – a process that involves the bank selling government bonds it holds from the QE program or allowing them to mature without replacement.
The think tank argues the bank selling the bonds at a lower price than it bought them for is averaging a loss of over £12bn a year.
Between the fresh tax raid and easing sales of bonds the IPPR estimates the government could save the taxpayer over £100 billion over the course of this parliament
In response to the report, the Bank of England said: “Tax and spending decisions are for the Government, not the Bank. We remain 100 per cent focused on making sure that inflation returns all the way to the two per cent target, because low and stable inflation is the foundation of a healthy economy.”