It was Margaret Thatcher in 1981 who applied a special additional tax on the profits of banks that had experienced windfall gains during a period of excessively high interest rates. The Treasury has had similar thoughts in the run-up to the budget on 31 October. The idea is to revert to the former chancellor Rishi Sunak’s plans to raise corporation tax from 19% to 25% but drop Mr Sunak’s offsetting move to reduce the surcharge on bank profits to 3% from 8%. Banks complain that high taxes already undermine London’s competitiveness compared with rival European cities, with critics claiming it would be “ludicrous” to impose any more levies.
Yet there is a good argument to say that banks should face more taxation, not less. Interest rates have moved up two percentage points in less than a year – and the Bank of England says more rises are planned. This will mean juicy profits for high street names as the gap between the amount charged to borrowers and the interest paid on deposits widens. This windfall is down to high interest rates, not increased efficiency or better service to the customer. Ministers should tax such gains. Homeowners who face rapidly increasing mortgage costs will be furious to find banks’ profits doubling. Given that the public realm is about to be shredded, bankers should be ashamed to mention their bonuses in polite company.
Jeremy Hunt’s apparent endorsement of windfall taxes is not so much a Pauline conversion to leftwing policies as a necessary sop to placate the electorate. Banks have been lucky to get away so lightly, given that the sector was the cause of the financial crisis and ultimately its beneficiary through quantitative easing. Lenders are now receiving 2.25% on the reserves – up from 0.1% last year – that they have parked at the Bank of England since 2009. The New Economics Foundation thinktank calculates that, even if the Bank went ahead with its quantitative tightening plans, commercial banks would pick up around £29bn in 2023 alone, and would cumulatively benefit by £177bn by 2027 from the reserves they held at the central bank overnight.
The thinktank argues that, instead of looking for funding cuts across the public services, the government could force banks to hold the money at the Bank at a lower rate – or stop paying them interest altogether. This approach has been endorsed by a former Bank deputy governor, Paul Tucker. He thought QE was likely to “be deployed much more frequently than when the UK’s current monetary policy regime was established”, and therefore a new framework was necessary.
Banks may claim they have no choice but to hold the reserves – often at low rates – that QE pushed into the system. They might say it would make things worse to compel them to do it for nothing. This adds up to admitting that big finance is addicted to government handouts. Jean-Baptiste Colbert, finance minister to Louis XIV, said the art of taxation lay in “so plucking the goose as to obtain the largest possible amount of feathers with the least possible amount of hissing”. But some amount is inevitable. The Treasury should ignore the moaning, disregard the special pleading and press on with necessary work to stop profit-gouging.