On Friday, UK bank stocks plummeted significantly due to a double blow: a think tank's call for new taxes on British banks and media reports suggesting that banking industry insiders are concerned about the UK government's plans to target the sector for taxation to boost fiscal revenue.
The Institute for Public Policy Research (IPPR) recommended that Chancellor Rachel Reeves should impose taxes on banks regarding the billions of pounds in interest that the Bank of England pays on reserves held by banks in her autumn budget. The think tank stated that banks receive approximately £22 billion ($29.7 billion) annually in interest income thanks to the Bank of England's bond-buying program, which essentially amounts to a subsidy for banks.
The IPPR echoed calls from other commentators in recent years, arguing that imposing new taxes on this interest income would provide Reeves with greater room to fulfill her fiscal rules. Widespread expectations suggest that Reeves will raise taxes again. She already increased employer taxes in her first budget last year, and with the UK's weak economic growth prospects and rising borrowing costs further intensifying public finance pressures, the likelihood of tax increases has grown.
Carsten Jung, Deputy Director of Economic Policy at IPPR, stated: "This program, originally designed to boost the economy, has now become a massive burden draining taxpayer funds."
Additionally, reports indicate that banking industry concerns are mounting over Reeves potentially targeting banks for taxation. Following these reports, UK bank stocks became the worst-performing sector in the European STOXX 600 index.
NatWest (NWG.US) and Lloyds (LYG.US) shares fell approximately 5%, while Barclays (BCS.US) dropped 4%. During the same period, the UK's FTSE 100 index declined only 0.3%.
Notably, since the beginning of 2024, these banks' share prices had surged significantly due to rising interest rates boosting profitability.
Exane analysts told clients: "Over the past few years, the Chancellor has maintained a protective stance toward the banking industry, avoiding tax increases on the sector. However, current public finances may require more funding, and pressure within the Labour Party for bank taxation appears to be rising."
A Treasury spokesperson stated that the best way to strengthen public finances is to accelerate economic growth. The spokesperson noted: "Adjusting tax and spending policies is not the only way to achieve this goal, as evidenced by our planning reforms."
**Tax Options Under Consideration**
Recently, UK media have reported various tax increase options that Reeves might consider, including: new taxes on property sales, higher taxes for landlords, freezing personal income tax thresholds, and adjusting pension tax relief policies.
UK banks hold hundreds of billions of pounds in reserves with the Bank of England, primarily stemming from the quantitative easing (bond-buying) program launched during the 2008-2009 global financial crisis, which is currently in a gradual exit phase.
The Bank of England pays interest on banks' reserves at the base rate, which is currently higher than during the quantitative easing program implementation period. The Bank of England's losses are borne by the Treasury and ultimately paid for by taxpayers.
Bank of England Governor Bailey has emphasized that this system is crucial for transmitting official interest rates to the economy. In June this year, facing questions from some politicians about the program's costs, Bailey again defended the system.
In May, Bailey and Reeves suggested that the central bank might achieve profitability through a new bank reserve system, following massive losses from the bond-buying program.
UK Finance, the banking industry organization, stated that UK banks paid nearly £45 billion in taxes last year. A spokesperson for the organization noted that imposing additional new taxes "would reduce the UK's international competitiveness and run counter to the government's goal of promoting economic growth by supporting financial services."
Calls to revisit this reserve interest system have persisted for years. Former Bank of England Deputy Governor Paul Tucker suggested in 2022 that the government should review this system.
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