Britain’s banking giants find themselves under scrutiny once more as Rachel Reeves confronts fresh pressure to increase levies on financial institutions.
The self-proclaimed “iron Chancellor” has been urged to emulate Margaret Thatcher’s approach through implementing a new charge on banks that could deliver the Treasury as much as £8bn annually.
This proposed levy – put forward by the left-leaning Institute for Public Policy Research (IPPR) – would target profits derived from 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 saw the Bank of England purchasing substantial quantities of government bonds from commercial lenders to reduce interest rates and boost economic activity, as reported by City AM.
To finance these bond purchases, the Bank of England generated fresh central bank reserves for the commercial banks, paying interest on them at its official rate.
When interest rates rose to a post-financial crisis peak of 5.25 per cent last year, the central bank found itself paying lenders more interest on the reserves than it received from the bonds. The IPPR estimates losses on these bonds – funded by the Treasury – will exceed £22bn per year.
The think tank has advocated for a levy similar to 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.
While it might offer relief to the beleaguered Chancellor, who faces a potential £50bn deficit in the Autumn Budget, such a proposal would trigger strong opposition from an already heavily-taxed sector.
A representative for banking trade body UK Finance commented: “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 levy imposed on Britain’s financial institutions significantly exceeds that of international counterparts, a situation that has persistently questioned the nation’s appeal.
Research presented by UK Finance prior to the budget showed the sector faced a combined tax burden of 45.8 per cent in London during 2024.
This substantially exceeded European competitors including Amsterdam (42 per cent), Frankfurt (38.6 per cent) and Dublin (28.8 per cent).
Banking leaders condemn proposed tax increases.
The chief executives of Britain’s Big Four lenders – Natwest, Lloyds, HSBC and Barclays – warned of the growth implications of additional banking taxes during the half-year results period. Lloyds’ chief Charlie Nunn has also declared that raising taxes on lenders “wouldn’t be consistent” with supporting economic growth.
Meanwhile, Natwest chief Paul Thwaite argued that “strong economies need strong banks” as he contended he would prefer to deploy the bank’s capital for lending to drive expansion “for the good of the country”.
IPPR’s recommendations also advocate for the Bank of England to decelerate quantitative tightening – a mechanism whereby the bank offloads government bonds it possesses from the QE programme or permits them to mature without replacement.
The think tank contends the bank disposing of the bonds at a reduced price compared to their purchase cost is generating an average loss exceeding £12bn annually.
Through the combination of the additional tax levy and reducing bond sales, the IPPR calculates the government could spare taxpayers more than £100bn throughout this parliamentary term.
Responding to the report, the Bank of England stated: “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.”
