Ministers are considering reversing a Tory-era tax cut on banks as the Chancellor searches for billions to shore up the public finances, prompting warnings that a fresh levy could hit investment and competitiveness.
Labour is weighing a multibillion-pound tax raid on Britain’s banks as the government scrambles to rebuild its depleted fiscal headroom ahead of the Budget, reopening a politically charged battle over how much the financial services sector should contribute to the public finances.
The proposed move would reverse a reduction introduced by former Conservative chancellor Jeremy Hunt to the surcharge banks pay on their profits. Raising the levy to 8 per cent could generate an estimated £2.25bn a year, according to figures cited by supporters of the plan, giving the Treasury additional revenue as it seeks to keep borrowing under control.
But union leaders are pressing ministers to go considerably further. Paul Nowak, general secretary of the Trades Union Congress, has urged the Chancellor to increase the surcharge to 16 per cent, which the organisation estimates could raise £24bn over four years.
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The debate underscores the pressure facing the government as it attempts to balance its spending ambitions against fiscal rules that limit its room for manoeuvre. With the Chancellor’s financial buffer under strain, banks are emerging as a potential target for ministers seeking revenue without announcing broader tax increases.
The Institute for Public Policy Research, a think-tank with links to Labour’s policy debate, this week proposed a temporary surcharge on commercial banks’ windfall profits that it estimated could raise £1bn. The measure formed part of a package designed to generate an additional £16bn to support struggling households.
The IPPR argued that the package could help restore the Chancellor’s fiscal headroom, which it estimated had fallen by as much as £15bn since the spring.
The attraction for ministers is clear: the banking sector remains highly profitable, and a targeted levy could be presented as asking financial institutions to shoulder a greater share of the burden at a time when households and public services face competing demands.
Yet the prospect of another tax increase has already drawn warnings from business groups and Conservatives, who argue that the City is central to Britain’s investment, growth and international competitiveness.
Louise Hellem, chief economist at the Confederation of British Industry, said the government needed to avoid measures that “undermine competitiveness or weaken incentives to invest”.
Andrew Griffith, the shadow chancellor, said a raid on the sector risked undermining the very economic growth the government says it wants to encourage.
“Britain needs growth. But a raid on the financial services sector will stifle it,” he said. “Labour should be backing businesses and wealth-creators, not making their lives even harder.”
The dispute reflects a wider dilemma for the Treasury. A higher bank surcharge could deliver additional receipts relatively quickly, but the ultimate economic impact would depend on how lenders responded — including whether they absorbed the cost, passed some of it on to customers or adjusted their investment and lending decisions.
Banks have previously argued that the overall tax burden on the sector matters when international institutions decide where to locate capital, jobs and operations. Supporters of higher levies counter that the government must find a fairer balance between corporate profits and the pressure on public finances.
For Labour, the political calculation is delicate. Taxing banks may appeal to voters concerned about household finances and public services, while a significant increase could invite accusations that ministers are making Britain a less attractive place to do business.
The Chancellor’s challenge is to find enough revenue to restore confidence in the public finances without damaging the investment needed to strengthen the economy.
With the Budget approaching, the question is whether a bank tax raid can provide the Treasury with much-needed breathing space — or whether the short-term revenue would come at a longer-term cost to growth.
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