Shares fall on tax speculation

UK bank shares fell on 16 October after reports that Chancellor John Healey may raise taxes on the sector in his first Budget, due on 28 October. Lloyds and NatWest were down 2% or more in early trading, and Barclays also slipped. The moves followed a Guardian report that Healey is considering reversing former chancellor Jeremy Hunt's cut to the surcharge banks pay on their profits, from 8% to 3%. The report did not say whether a final decision had been made.

Why banks are in the frame

Healey is looking for ways to raise revenue and keep the deficit under control while government borrowing costs have climbed sharply. The surcharge currently raises just over £1bn (€1.18bn) a year. Analysts covering British banks have said an increase is likely, with a return to 8% and a smaller rise of two or three percentage points both seen as options. Two British bank chief executives told Reuters they did not expect any increase, arguing that such a rise could curb lending.

Healey's remarks in Bangkok

Healey spoke to reporters on Thursday, 15 October, in Bangkok, at the IMF's yearly meeting. He said he had budget decisions to take and would take them, and he insisted his comments were not a steer on any tax changes. Asked whether higher bank taxes could be offset by lower capital requirements, he declined to be drawn into budget speculation. In a Bloomberg Television interview he described banks as a part of the jewel in the British economic crown.

He argued that the public misreads the sector.

“My observation on the banks is that people too often see them as big, distant financial institutions”

Unions, think tanks and industry respond

Paul Nowak, general secretary of the Trades Union Congress, backed reversing the cut and calculated that it would raise £2.25bn a year. He attributed the sector's profits to high interest rates and pressure on households' mortgages.

“Britain's big four banks are making a billion pounds a week, while bonuses have hit a post-crash record.”

The TUC wants the surcharge raised to 16%, which it says could bring in £24bn over four years, and it claims the Treasury has lost £6bn through the previous bank tax cut. The Institute for Public Policy Research recommended £1bn from a temporary surcharge on banks' windfall profits, within a package of £16bn to help struggling households. It estimates the Chancellor's fiscal buffer has dropped by up to £15bn since the spring.

TUC: reverse cut to 8% (a year)2.25

IPPR: temporary windfall surcharge1

IPPR: wider package for households16

TUC: reverse cut to 8% (a year)

2.25 £bn

IPPR: temporary windfall surcharge

1 £bn

IPPR: wider package for households

16 £bn

Data from the article text

On the other side, UK Finance, the banking trade body, said an increase would weaken the UK's competitiveness and discourage investment and job creation. Andrew Griffith, the Conservative shadow chancellor, said a raid on financial services would stifle growth. Louise Hellem, chief economist at the Confederation of British Industry, urged the Budget to avoid sector-specific taxation, noting that business tax already makes up a record share of receipts.

What comes next

Healey's remarks in Bangkok came first, on 15 October, and the share falls followed on 16 October. The Guardian report landed in the same window, without a confirmed decision. Healey has said he will take decisions in the Budget, which is set for 28 October. Until then the surcharge options stay open, from a return to 8% to the 16% the TUC wants.