Labour's financial shortcomings might be addressed through a tax levy on the banking sector, as proposed by Rachel Reeves.
The Autumn Budget is expected to see an increase in taxes, with the government's fiscal headroom reduced to £9.9bn due to policy changes. One of the potential measures to fill a £20-30 billion fiscal shortfall is a new or increased tax on UK banks, known as the proposed bank levy.
Currently, UK banks already face a comparatively high tax burden. They are subject to a 25% corporation tax, a 3% bank surcharge, and a 0.1% bank levy on balance sheets. A proposed bank levy would target net income from domestic retail banking above £800m, similar to the government's energy profits tax.
However, the banking sector strongly opposes further tax hikes. Banking chiefs have warned about the implications of a sector tax hike, with HSBC’s boss, Georges Elhedery, expressing concerns that a bank tax could hinder growth and potentially erode investment capacity. Charlie Nunn, the chief of Lloyds, stated that a tax wouldn't be consistent with the government's growth agenda, while Barclays’ CEO Venkatakrishnan cautioned that more tax on banks could sabotage the UK’s growth push.
UK Finance, an industry body, has advocated abolishing the bank corporation tax surcharge to make the country more competitive. In contrast, Rachel Reeves may propose an increase in the bank corporation tax surcharge from three per cent to five per cent, generating £700m in annual revenue for the Treasury.
Economists have warned that if Rachel Reeves maintains her "iron clad" fiscal rules, further tax rises would be inevitable to maintain the budget. Yael Selfin, chief economist at KPMG UK, stated that if growth is to fall in line with forecasts, a top-up of around £20bn would be required.
The economy has already shown signs of strain, with the economy shrinking by 0.1% in May and 0.3% in April, following Reeves' 2024 budget tax hikes coming into effect. The proposed bank levy is a contentious issue, with its potential impact on economic growth and investment being a major concern for the banking sector.
[1] The Guardian - "UK banks face new tax as Labour seeks to plug welfare spending black hole" [2] BBC News - "Rachel Reeves: Labour would raise taxes to restore fiscal buffer" [3] The Telegraph - "Bank chiefs warn against tax hike in Autumn Budget" [4] The Times - "Labour mulls bank levy to fund welfare U-turn" [5] Positive Money - "Labour's welfare policy U-turn could be covered by bank tax"
- A new tax on UK banks, known as the proposed bank levy, is being considered to fill a substantial fiscal shortfall, with an amount between £20-30 billion needed.
- Economists and banking chiefs have expressed concerns about the potential implications of a sector tax hike on economic growth and investment, as UK banks already face a high tax burden.
- If growth does not align with projections, an additional £20bn may be required to maintain the budget, according to economists. This is based on the assumption that Rachel Reeves will stick to her "iron clad" fiscal rules.
- In response to the fiscal challenge, UK Finance, an industry body, has suggested abolishing the bank corporation tax surcharge, while Rachel Reeves may propose increasing it from three per cent to five per cent, generating £700m in annual revenue for the Treasury.
- The Autumn Budget is expected to see an increase in taxes, with the government's fiscal headroom reduced, and the ongoing debate about a potential bank levy has sparked in the realm of general news, politics, finance, business, and insurance.
