The chancellor’s decision to raise taxes on Britain’s banking sector in the 28 October budget has moved from speculation to near-certainty, and the question now facing the Treasury is not whether the levy will rise, but by how much and under what justification. According to the Guardian’s reporting, John Healey has settled on tapping the financial sector for additional revenue as he seeks to repair damage to the public finances attributed to the war in the Middle East.
The leading option under discussion is a reversal of cuts to the bank surcharge introduced under former chancellor Jeremy Hunt. That reversal would raise upwards of £2bn a year, and industry figures expect it would probably mean lifting the surcharge back to 8%, from its current 3%. The stated purpose is to bolster the government’s fiscal headroom, the buffer for meeting its borrowing rules, which has been eroded by the jump in borrowing costs this year.
The timing has drawn attention to the consistency of the government’s messaging. Hours before news of the looming tax increase emerged, Healey had praised the banks as crucial to supporting economic growth, telling reporters: “People too often see them as big, distant financial institutions, when they are hardwired into the economic fabric of this country and our future prospects.” He had earlier described the sector as part of the jewel in the UK economic crown.
That juxtaposition has not gone unremarked. Will Howlett, financials analyst at Quilter Cheviot, said the government appears to be giving the banking sector mixed messages, calling banks a jewel in the crown of the economy while briefings suggest a fresh increase in the levy on their profits. He noted that banks escaped such measures last year, but that with higher interest rates now expected for longer, the government may judge this the moment to act, particularly if it wants to limit the number of personal taxes it targets at the budget.
The response from the sector’s representative bodies has been pointed. UK Finance, the banking trade body, warned that further increases in bank taxes would weaken competitiveness, discourage investment and job creation, and work against the government’s ambition to deliver growth in every postcode. Senior banking executives have told the BBC they expect the sector to be “on the menu” at the budget, and while their tone suggests resignation, there is little enthusiasm for the outcome.
The Confederation of British Industry has weighed in with a broader argument about tax policy. Louise Hellem, the CBI’s chief economist, urged the chancellor to avoid further sector-specific taxation, noting that the business tax contribution is already at a record share of receipts and that the banking sector already faces a higher tax rate than competing international financial centres. She argued the autumn budget should instead set the agenda for a competitive and predictable environment, building on the government’s Financial Services Growth and Competitiveness Strategy and the Leeds Reforms.
Markets, meanwhile, have begun pricing in the accountability question. Shares in UK banks dropped at the start of trading after the Guardian’s report, with Lloyds Banking Group the top faller on the FTSE 100, down around 1.9%, and NatWest down 1.6%. Angeline Ong, senior technical analyst at IG, said a UK bank tax is now a base case, and that if confirmed on 28 October, the size and timing will be key. She noted that Lloyds and NatWest, almost entirely exposed to the UK, would likely be impacted most, with Barclays partly exposed and HSBC least exposed. Howlett argued the reaction has been relatively muted because much of the bad news is already priced in, with UK domestic banks trading at a discount to European peers, and because banks can absorb the hit thanks to profits boosted by higher interest rates. RBC also cut its target price for Lloyds, citing increased competition in the UK deposit market.
For the chancellor, the fiscal arithmetic is straightforward. The policy test is whether a sector-specific levy can be squared with the government’s own growth commitments. Sterling touched its highest level against the US dollar in over three weeks at $1.3335, as traders expect a Bank of England rate rise in November and weigh whether Healey can maintain the UK’s fiscal headroom.