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Shares of leading UK banks experienced a sharp decline following calls for the government to consider implementing a new tax on banking profits.
Investors and traders responded to suggestions that the government could potentially generate up to £8 billion annually through a windfall tax levied on the sector.
The proposal originates from the Institute for Public Policy Research (IPPR), a think tank that posits the tax as a means to recoup taxpayer funds currently allocated to supporting the banking industry.
While the Treasury refrained from commenting on speculation regarding tax policy decisions, it affirmed the government’s commitment to “cutting red tape” for the City of London and prioritizing financial services within its growth strategy.
Banks were among the hardest-hit entities on the UK share market on Friday, with NatWest and Lloyds experiencing share price drops exceeding 4% during morning trading.
By the day’s close, their values had partially recovered, but Natwest remained more than 4% lower, Lloyds declined over 3%, and Barclays decreased by more than 2%.
Charlie Nunn, the chief executive of Lloyds bank, has previously voiced opposition to potential tax increases for banks in the government’s upcoming Budget announcement this autumn.
He asserted that endeavors to stimulate the UK economy and cultivate a robust financial services sector “wouldn’t be consistent with tax rises”.
The IPPR, a left-leaning think tank, contends that a levy on bank profits is warranted due to the Bank of England’s quantitative easing (QE) program, which it claims is costing taxpayers £22 billion per year.
Following the financial crisis and in 2020, the Bank of England initiated bond purchases – essentially IOUs yielding a fixed interest rate – to bolster the financial sector and reduce long-term interest rates.
To facilitate these bond purchases, the Bank of England created new electronic money in the accounts of commercial banks holding funds with it.
While the Bank commenced reversing its QE strategy in 2022, it continues to incur losses on the program because the interest rate it pays on deposits has surged, while the rate the Bank of England receives from government bonds remains constant.
Furthermore, the Bank of England is experiencing losses from unwinding its QE program as it sells bonds at prices lower than their acquisition cost.
The IPPR asserts that the Bank of England is currently incurring substantial losses, characterizing them as “a government subsidy to commercial banks,” and emphasized that commercial bank profits have increased by $22 billion compared to pre-pandemic levels.
The tax proposal emerges as Chancellor Rachel Reeves confronts the challenging task of adhering to her self-imposed fiscal rules when outlining her Budget strategy for the next five years.
Carsten Jung, associate director for economic policy at IPPR and former Bank of England economist, stated that the Bank and Treasury had “bungled the implementation of quantitative easing”.
“Public money is flowing straight into commercial banks’ coffers because of a flawed policy design,” he said.
“While families struggle with rising costs, the government is effectively writing multi-billion-pound cheques to bank shareholders.”
Speaking on BBC’s Today program, Mr. Jung equated the £22 billion taxpayer loss to “the entire budget of the Home Office every year.”
“So we’re suggesting to fix this leak of taxpayer money, and the first step would be a targeted levy on commercial banks that claws back some of these losses,” he said.
A tax targeting the windfall profits linked to QE would still leave the banks with “substantially higher profits”, the IPPR report said, while saving the government up to £8 billion a year over the term of parliament.
However, financial services body UK Finance cautioned that an additional tax on banks would diminish Britain’s international competitiveness.
“Banks based here already pay both a corporation tax surcharge and a bank levy,” the trade association stated.
The corporation tax surcharge, introduced by the previous government in 2021, imposes an 8% levy on bank profits, in addition to the standard corporate tax rate.
The Bank levy, established in 2011, is another tax on banks’ business activities, but it is based on banks’ balance sheets, or the scale of their business, rather than profits.
UK Finance warned that a new tax on banking would “run counter to the government’s aim of supporting the financial services sector”.
Russ Mould, AJ Bell investment director, noted that the UK stock market had weakened following the suggestion, with investors questioning “if the era of bumper profits, dividends and buybacks is now under threat”.
A Treasury spokesperson affirmed the government’s actions to enhance the City’s competitiveness and position the UK as “the number one destination for financial services firms by 2035”.
“We are a pro-business government, and the chancellor has been clear that the financial services sector is at the heart of our plans to grow the economy,” they said.
The Chancellor has actively engaged with the City since Labour assumed power. In July, she announced her “Leeds Reforms” aimed at boosting investment. These reforms include easing regulations implemented after the financial crisis to mitigate risk in the financial sector, which banks have argued unduly restrict their operations.
However, she faces pressure to identify additional revenue sources leading up to her budget, following the government’s decision to water down its planned welfare savings and largely reverse winter fuel allowance cuts – decisions that narrowed her budget headroom.
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