Banks groan as Osborne hikes levy by £800m

The Government's bank levy will now raise £2.5bn, rather than £1.7bn. Though it's clearly a political move, not a financial one.

by Emma Haslett
Last Updated: 22 Feb 2011
Don’t be surprised if you hear heavy sighs coming from the direction of the City today: Chancellor George Osborne said this morning that he’s going to increase this year's bank levy to £2.5bn, £800m more than originally proposed, on the grounds that the banks must 'make a fair contribution to closing the budget deficit'. But since this extra £800m is not really going to shift the needle massively in that regard, this looks a lot like a political move ahead of bonus season. Not that there's necessarily anything wrong with that...

Ordinarily, this would be an unusual time to make changes to tax rules, given that the Budget is only a month off. But Osborne argues that the banks need fair warning ahead of bonus season, so they know what kind of budgets they have to play with. This makes sense, in some ways - but it also seems likely that the Government is trying to convey a harder line towards the City, in the face of ongoing criticism. The Project Merlin talks about issues like lending, transparency and pay appear to have stalled for the time being, so the Chancellor needed to reclaim a bit of initiative ahead of bonus time.

The levy was supposed to have been phased in gradually - so £1.7bn this year, £2.5bn next year and £2.6bn the year after that. But Osborne says that because the banks are in much better health than expected (and despite protestations, they are planning to shell out around £6bn in bonuses), they should be able to swallow this extra tax without much of a problem. Which is probably true.

Handily, it also means that the Government will bring in more revenue from this levy than the £2.3bn Labour generated from its one-off bonus tax last year - which would otherwise have given the Opposition an easy stick with which to beat it. Would it be cynical to suspect that this was a factor in the Chancellor's decision?

Nonetheless, for an industry that’s expected to announce profits of £20bn this year, an extra £800m is hardly punishing. And it’s not going to fix the deficit at a stroke, either – according to the BBC’s Robert Peston, that £800m will knock ‘considerably less’ than 0.1% off the UK’s 10% annual fiscal deficit. So not exactly the game-changer some have been demanding (and the banks had been fearing) - although Peston reckons they are, nonetheless, 'livid' about this sudden and apparently arbitrary imposition.

As he says, the significance of this move is largely symbolic - a sign that the Government isn’t chumming up to the City, honest. And perhaps this rise is a reasonable compromise - big enough to hurt, but not too big that it will make the likes of HSBC relocate to foreign shores. However much City bonuses are likely to stick in the craw this year, that's not what our stuttering economy needs at the moment.

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