UK banks will be the top target as Rachel Reeves looks to drum up cash in the Autumn Budget, a top economist has said.
Chatter around a cash grab directed at banks has escalated over the last week after left-wing think tank the Institute for Public Policy Research (IPPR) proposed that the Chancellor raid the quantitative easing (QE) earnings of the UK’s biggest lenders.
Ruth Gregory, deputy chief UK economist at Capital Economics, said if Reeves was to stay in line with her “iron clad” fiscal rules, she would need to make a tax grab between £18-£28bn.
She added: “We suspect households and banks will bear the brunt of higher taxes”.
Capital Economics ranked a hike to the bank’s surcharge and a quantitative easing levy as the two most likely tax rises in the Autumn Budget.
Gregor argued both options would be “politically palatable” and not break the government’s promise of raising taxes on “working people”.
Whilst falling in line with the manifesto pledge, any raid on City banks would spark significant backlash after Reeves had reiterated intentions to put financial services “at the heart” of economic growth plans.
An increase in the surcharge to eight per cent, which sits on top of corporation tax, is expected to raise £1.5bn for the public purse. Meanwhile, changes to (QE) takings could help the Treasury pocket another £5bn.
“The problem is that if the Chancellor wants to raise large amounts of cash, she won’t get it by taxing banks,” Gregor said. Instead, she said Reeves may look to “combine several smaller tax increases” including taxes on banks, inheritance, ‘sin,’ environmental and stealth raids.
Natwest and Lloyds vulnerable to tax hit
Benjamin Toms, equity analyst at RBC, estimated Natwest and Lloyds would be most vulnerable to a shift in the surcharge.
For every one per cent increase in the charge, it would hit each of the banks’ profits before tax by one per cent. Meanwhile, Barclays would be hit 0.4 per cent and HSBC 0.2 per cent.
But Toms added: “The government was elected on a pro-growth agenda, and the banks are a key synapse of that objective.
“We continue to believe that the Chancellor understands that any additional taxes on banks would represent a headwind to this ambition”.
UK banking stocks wiped off £8bn in market value last Friday as speculation of a bank tax ramped up.
Natwest topped the FTSE 100’s fallers, losing over five per cent. Lloyds was down nearly four per cent, Barclays just over two per cent, whilst HSBC and Standard Chartered were down one per cent.