Rachel Reeves is considering imposing a tax hike on bank profits as she seeks to fill a multi-billion-pound black hole in the public finances at the next Budget.
The Chancellor has been fiercely lobbied to increase the existing bank surcharge or introduce an entirely new levy in order to raise at least £2bn from the finance sector.
Those who support a tax increase cite higher profits enjoyed by banks since interest rates began to rise from their historic lows a few years ago.
Multiple sources told The i Paper that the proposal is being actively considered by the Treasury ahead of next month’s Budget, which is widely expected to see a raft of tax rises in response to a deterioration in economic forecasts.
The Treasury refused to confirm or deny that the tax will be implemented, but Reeves has previously insisted she will not do anything to damage economic growth. Final decisions are likely to be taken closer to the date of the Budget on 26 November.
Last week, the Office for Budget Responsibility (OBR) delivered the confidential first draft of its updated forecast for the economy and public finances, which will determine whether or not the Chancellor is on track to meet her self-imposed fiscal rules that state she will not borrow to pay for day-to-day spending.
Independent economists believe that since the fiscal watchdog’s last projections published at the Spring Statement, the outlook for the public finances has deteriorated by at least £20-30bn, with one forecast putting the shortfall as high as £38bn. The bulk of the difference is likely to be made up of higher taxes, although Reeves says she is sticking to her promise not to increase income tax, VAT or national insurance.
The Trades Union Congress (TUC), which is closely allied to Labour, has been pushing for the Treasury to increase the bank surcharge, a levy on banks’ profits that comes on top of corporation tax.
The tax currently stands at 3 per cent after the Conservatives cut it from its previous level of 8 per cent in April 2023, which came at the same time as an increase in the general level of corporation tax. Restoring it to 8 per cent would raise £2bn a year, according to the TUC, and substantially higher sums could be brought in with a larger surcharge.
The IPPR think-tank, which is also close to Labour, has proposed a different mechanism for taxing banks which would see the Government claw back some of the losses incurred by the Bank of England’s purchase and sale of assets. Bank shares fell significantly after the IPPR published a paper making this argument in August.
Bank profits have risen significantly in recent years as interest rates were hiked from 0.1 per cent in 2021 to a peak of 5.25 per cent last year, before falling to their current level of 4 per cent. Higher rates from the Bank of England tend to result in a faster increase in the interest rates paid by mortgage borrowers than in the rates offered to savers, boosting the overall profits of firms offering both loans and deposits.
Treasury officials are understood to have been receptive to the idea of increasing taxes on banks, which would raise money without necessarily affecting households directly and without breaking a manifesto pledge not to raise the level of corporation tax.
UK Finance has written to the Chancellor urging her not to risk economic growth by taxing the sector more. In a letter sent last month, chief executive David Postings said: “Efforts to boost the UK economy and foster a strong financial services sector would not be consistent with further tax rises on the sector, which already makes a substantial contribution to the public finances. The emphasis should be on continuing to implement an agenda of regulatory reform that allows for an appropriate adjustment in risk appetite.”
He claimed that financial firms already contribute nearly 5 per cent of all the Government’s tax receipts and warned that increasing the burdens on them would risk sending firms to other centres such as New York, Amsterdam and Dublin. There is also a possibility that banks would seek to claw back profits by offering less generous terms to savers or charging borrowers more.
The Treasury refused to comment. In a recent speech to investors, Reeves insisted she was committed to a fiscal policy which encourages growth – saying: “If you can grow the economy, you can make these decisions around tax and spend so much easier.
“One of the reasons why taxes have risen to such a high level is that we’ve had such poor growth in such low levels of investment and such a deterioration in our productivity performance, both compared to the past, but also compared with other countries. I am determined to drive those things up, and that is why growth continues to be the number one mission of this government. And tax policy also needs to reflect that mission.”
The Chancellor has also asked the OBR to consider upgrading its forecasts of economic growth based on Government policies including the signing of international trade deals, further planning reforms and business deregulation.
