Is a new tax raid on UK banks looming? A recent report by the IPPR has sent shares tumbling, with major lenders like NatWest and Lloyds seeing significant drops. Will Chancellor Rachel Reeves impose a windfall tax to boost public funds, or will it stifle economic growth? The debate is heating up!
UK bank shares experienced a significant downturn as City traders reacted nervously to an influential report proposing a substantial windfall tax on lenders. This potential fiscal measure, aimed at bolstering public finances, has sparked considerable debate and market uncertainty.
The Institute for Public Policy Research (IPPR) unveiled a detailed proposal suggesting that Chancellor Rachel Reeves could generate billions for the public purse by imposing a new levy on the profits of British banking giants. The report has fueled speculation that banks might be a key target in the Chancellor’s forthcoming autumn budget.
Following the release of the IPPR’s recommendations, major UK banks saw their share prices tumble dramatically. NatWest and Lloyds registered drops exceeding 4%, while Barclays shares declined by over 3% on Friday morning, marking them among the biggest fallers on the FTSE 100 index.
The IPPR’s rationale centers on recovering taxpayer money spent on compensating losses from the Bank of England’s quantitative easing (QE) programme. The think tank argued that hiking a levy on bank profits could raise up to £8 billion annually, asserting that the UK is an anomaly in having its Treasury cover these central bank losses.
However, the banking sector has voiced strong opposition, with leading chief executives cautioning against such tax increases. Lloyds chief Charlie Nunn and Barclays chief CS Venkatakrishnan both emphasized that further taxes could impede economic growth and be inconsistent with efforts to foster a strong financial services sector, noting banks are already significant taxpayers.
The IPPR specifically recommended a “QE reserves income levy,” drawing parallels to the 2.5% deposit tax introduced under Margaret Thatcher in 1981. This proposed tax is designed to be temporary, falling to zero once QE-related gilts are off the Bank of England’s balance sheet or when the bank rate reaches 2%, and small banks would be exempt.
Conversely, Bank of England Governor Andrew Bailey has previously stated that interest paid on reserves is not “free money” for banks, as much of it is passed to customers as deposit interest. He warned that cutting this income could lead to lower savings rates or increased borrowing costs for consumers, creating a complex economic trade-off.
The current warning from the IPPR arrives amidst broader economic warnings that tax rises are likely necessary to address a significant deficit in public finances. This ongoing speculation has intensified discussions about which sectors the Chancellor might target, placing the spotlight firmly on the profitability of financial institutions.
