UK bank tax would fall on shrinking shoulders
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, Sept 11 (Reuters Breakingviews) -Asked why he robbed banks, outlaw Willie Sutton is supposed to have replied, “because that’s where the money is”. British finance ministers have often displayed a similar attitude towards lenders when it comes to tax policy. Yet if Rachel Reeves is eyeing the sector for a raid of her own next month, she’ll find that it’s less flush than it seems.
The new Labour government, whose first budget Reeves will deliver on Oct. 30, is on the lookout for “broad shoulders” to help plug a 22 billion pound ($29 billion) fiscal “black hole”. Reeves hasn’t mentioned banks, but Britain’s lenders are already stepping up their lobbying efforts against a possible tax raid, Reuters reported last week.
It’s easy to see why Reeves might target NatWest NWG.L, Lloyds Banking Group LLOY.L, HSBC HSBA.L, 0005.HK and Barclays BARC.L. The average 2023 return on tangible equity across the quartet was 14%, compared with a probable cost of equity of around 10%. High central-bank interest rates turbocharged their income, while the banks paid relatively little of the boost away to customers in the form of higher deposit rates. Worse, from a political perspective, is the fact that is that the banks are coining it in even as the Bank of England, which is ultimately funded by the public purse, is racking up losses because of the high rate it pays lenders on their reserves.
One option is a windfall tax. There’s a precedent: the Conservative government of Margaret Thatcher introduced a one-off 2.5% levy on banks’ non-interest-bearing deposits in 1981, citing the need for lenders to make a “special fiscal contribution” after high interest rates supercharged their profits. That raised 400 million pounds, or 1.5 billion pounds in today’s money. Meanwhile, Spain and Italy have been among the many European governments to introduce bank windfall taxes following the recent bout of rate hikes.
The problem for Reeves is that her budget hole mostly relates to recurring overspending bequeathed by the last government, which makes a one-off windfall tax a poor fix. Another, more radical, option would be to reduce the number of bank reserves that qualify for central-bank interest payments, ultimately saving the Bank of England and Treasury money. Yet Reeves herself has squashed the idea, while BoE Governor Andrew Bailey warned that it could complicate his quest to control inflation.
That leaves a couple of niche taxes. First is the bank levy, which Conservative finance minister George Osborne applied from 2011 ostensibly as a tax on flighty wholesale funding, with a target of raising 2.5 billion pounds within a few years. The rate kept going up, often without a clear justification, until in 2015 when Osborne announced a gradual reduction in the levels and the introduction of a new, simpler levy: an 8% corporation-tax surcharge for banks. In 2021, Rishi Sunak cut that to 3% when he ran the Treasury, to soften the blow of broader corporate tax hikes.
Reversing that most recent cut, which would effectively give banks a headline corporate tax rate of 33% compared with 25% for a typical company, could raise 1.5 billion pounds a year, the Trades Union Congress reckons. Simultaneously taking the bank levy back up to 2015 levels would boost the annual haul to 3.8 billion pounds a year, according to the same organisation.
The question for Reeves is whether big banks are really the broad-shouldered targets she is looking for. With rate cuts now coming, some of the super-normal earnings should ebb away. Analysts reckon NatWest, Lloyds, HSBC and Barclays’s average return on tangible equity will fall by one percentage point this year to 13%.
Bank valuations suggest returns will decline further in the coming years. NatWest, Lloyds and HSBC trade roughly in line with their expected tangible book value in a year’s time, based on analysts’ forecasts, which implies that their long-term returns will be barely match their cost of equity. Barclays rating, at 0.6 times tangible book, suggests its earnings will be nowhere near enough to clear shareholders’ typical return requirements over the long term.
The upshot is that banks’ current stellar performance is probably an exceptional windfall, rather than an argument for the permanent tax hikes of the kind that Reeves is looking for. She may well go ahead regardless, but the logic of such a move would be closer to the bank robber Sutton’s thinking than she might like to admit.
Follow @Breakingviews on X
CONTEXT NEWS
Banks in Britain are intensifying their lobbying against possible tax hikes in the new Labour government's first budget next month, Reuters reported on Sept. 4 citing senior industry sources.
The sources, who declined to be named because of the sensitivity of the matter, said they anticipate the Treasury will seek to raise an existing surcharge that banks already pay.
Reuters reported that a spokesperson for the Treasury said it would not comment on "speculation about tax changes outside of a fiscal event". Britain’s budget announcement is scheduled for Oct. 30.
UK banks' returns may already have peaked https://reut.rs/3MCRiFO
UK banks' are barely trading at book value https://reut.rs/3z2bmOK
Editing by Neil Unmack and Streisand Neto
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