Everyone is familiar with the banks’ plea: raising taxes on them amounts to taxing the nation’s growth. If you increase how much banks pay, goes the argument, less interest will be paid on deposits and loans will cost slightly more, meaning we’ll all be worse off eventually. In terms of economic theory, it’s coherent, it should be said: in an ideal world, a chancellor would strive to lower costs of capital at every opportunity.
In the real world, however, John Healey faces multiple competing demands, even from within a business lobby that extends well beyond the banks. As this newspaper revealed last week, the chancellor is likely to increase bank taxes in his budget next week. In the current climate of trying to “stay the course” on the fiscal rules by finding some money from somewhere, tapping the banks is a reasonable policy.
Or, at least, better than most alternatives. First, today’s conditions for banks are plainly gentle: defaults are historically low and interest rates are high. Banks’ returns on tangible equity – a better guide to how they are doing than pure profitability – are heading towards 20%.
Most non-financial firms would love such a number. Provided Healey doesn’t go overboard, the flow of capital is not going to be seriously undermined when the starting point for banks’ returns is so good. Second, all the indications suggest Healey will indeed opt only for tweaks.
If the mechanism is the surcharge that banks pay on top of corporation tax at 25%, then an increase to 8%, from 3%, would amount to £2bn-ish extra from across the sector. He may not even go that far. Analysts at UBS calculate that a doubling of the surcharge to 6% would reduce UK banks’ profits only by about 2% on average, with a roughly 3%-4% impact for the domestic-focused banks, meaning NatWest and Lloyds.
That cannot be called a violent change in the operating climate, or a devastating blow for the shareholders or the equity-incentivised executives. Dividends or share buybacks may be trimmed a bit, but the share prices for both banks are up by a fifth in the past year. Third, we’ll have to wait to see whether any move by Healey is part of a wider financial services package that could include bank-pleasing elements.
Extract — continue reading at the source.
