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Roula Khalaf, the well-respected Editor of the Financial Times, offers her top picks of stories in her weekly newsletter. This week’s focus is on the financial health of banks in the United Kingdom, a topic of interest to investors and policymakers alike. The original article can be found here.
The Current State of UK Banks
The UK’s banking sector is experiencing a period of strong health. Financial powerhouses like NatWest and Barclays have reported promising third-quarter results, prompting them to raise their forecasts. Lloyds Bank reported a stronger-than-expected underlying performance, further cementing this positive trend. Bank shares are currently at their highest levels since the 2008 financial crisis, signifying a restoration of investor confidence in the sector.
The Potential Impact on Public Finances
This robust financial health of banks is seen as an opportunity by UK chancellor Rachel Reeves. Under pressure to fill the UK’s fiscal hole with the upcoming November budget, the profitable banking sector seems ripe for a potential tax increase. Given the current bumper profitability of these institutions, it may seem like they can afford to contribute more to public finances.
Most bankers, like Barclays Chief CS Venkatakrishnan, argue that banks are already thoroughly taxed, considering their unique role in the economy. However, any potential tax increase should be manageable. Some analysts, such as those at Deutsche Bank, suggest a likely increase to the surcharge banks pay on top of corporation tax. A rise from 3% back to its previous level of 8% could raise about £2bn in the first year, with the potential to grow over time.
Looking Ahead
Bankers may not openly support the idea of a tax increase, but some privately acknowledge that the government’s options are limited. Instead of resisting any potential tax increase, they may turn their focus to lobbying efforts aimed at mitigating the negative impacts. This could involve seeking a guarantee that any surcharge they pay won’t change again for the rest of this parliament, or petitioning for other regulatory changes.
Extra bank taxes were introduced in the aftermath of the 2008 financial crisis when bankers were widely perceived as villains. However, perceptions have changed over time. If their robust profits make banks look like an appealing target to a tax-hungry chancellor, they should probably view it as a compliment. Banks will likely hope that Reeves can be satisfied with a small, manageable tax increase.
For more insightful stories from the world of finance and beyond, keep an eye out for Roula Khalaf’s weekly selections in the free Editor’s Digest.
