LONDON, Sept 11 (Askume Breakingviews) – When gangster Willie Sutton was asked why he robbed banks, he should have replied, “Because that’s where the money is.” When it comes to tax policy, Britain’s finance minister has often shown a similar attitude towards lenders. However, if Rachel Reeves thinks of moving into the industry next month, she may discover it’s not as thriving as it seems.
Reeves, who will deliver the new Labour government’s first budget on Oct. 30, is looking for ” broad shoulders” to help plug a £22 billion ($29 billion) fiscal ” black hole .” Reeves did not mention banks, but UK banks have stepped up lobbying efforts against potential tax raids, as Askume reported last week .
It’s easy to see why Reeves might target National Westminster (NWG.L) , Lloyds Banking Group (LLOY.L) , HSBC (HSBA.L) and Barclays (BARC.L) . Sifang’s average return on tangible equity in 2023 is 14%, while the cost of equity is likely to be around 10%. The central bank’s higher interest rates boost their revenue significantly, while the banks pay relatively little to their customers in the form of higher interest rates on deposits. From a political perspective, what’s even worse is that the banks are making it while the Bank of England, which is ultimately funded by public money, suffers from the excessively high interest rates it pays lenders on reserves.
One option is a windfall profits tax. There is a precedent: Margaret Thatcher’s Conservative government imposed a one-off 2.5% tax on interest-free bank deposits in 1981, arguing that lenders needed to make a profit after higher interest rates . The fund raised £400 million. In other words, a “special financial contribution”.£1.5 billion today . Meanwhile, Spain and Italy are among a number of European governments to impose bank windfall taxes following the latest round of interest rate hikes.
The problem for Reeves is that his budget shortfalls are mostly related to recurring overspending left over from the previous administration, making a one-off windfall tax a poor solution. A more radical option would be to reduce the amount of bank reserves eligible for central bank interest payments, ultimately saving the Bank of England and the Treasury money. However, Reeves himself has rejected the idea , while Bank of England Governor Andrew Bailey has warned that it could complicate his efforts to control inflation.
He leaves out some specific taxes. The first was the bank levy , introduced in 2011 by Conservative finance minister George Osborne , a tax on frivolous wholesale financing ostensibly aimed at raising £2.5 billion over a few years . Rates continued to rise, often for no apparent reason, until 2015 when Osborne announced a gradual reduction in rates and the introduction of a new, simpler levy : an 8% corporation tax surcharge on banks. Rishi Sunak reduced this rate to 3% in 2021 to soften the blow of a wider corporate tax rise when he was finance minister.
The TUC believes that reversing the recent cuts would effectively bring the overall corporate tax rate of banks to 33%, while the general corporate tax rate is 25%, raising £1.5 billion a year. At the same time, restoring the bank tax to 2015 levels would increase annual tax collections by £3.8 billion, according to the same group.
The question for Reeves is whether big banks are really the broad targets she’s looking for. With interest rate cuts on the horizon , some of those extraordinary gains should disappear. Analysts expect the average return on tangible equity at NatWest, Lloyds, HSBC and Barclays to fall 1 percentage point this year to 13%.
Bank valuations point to a further decline in returns over the next few years. According to analysts’ forecasts, NatWest, Lloyds and HSBC trade in line with their expected tangible book value a year from now, meaning their long-term returns will barely be in line with their cost of equity. Barclays’ rating of 0.6 times tangible book value suggests its earnings are not sufficient to meet shareholders’ long-term return requirements.
As a result, the banks’ current outperformance may be an unintended consequence, rather than a cause, of the permanent tax hike Reeves seeks. She will likely proceed regardless, but the logic of the move may be closer to bank robber Sutton’s logic than she would like to admit.
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The British banking industry is stepping up lobbying to oppose the possibility of tax rises in the new Labour government’s first budget next month, Askume reported on September 4, citing senior industry sources.
The sources, who declined to be named because of the sensitivity of the matter, said they expected the Treasury to seek an increase on the existing surcharge already paid by banks.
A Treasury Department spokesman said he would not comment on “fiscal events other than speculation on tax changes,” Askume reported. Britain is due to announce its budget on October 30.
