Chancellor should cut benefits instead of taxing banks, says International Monetary Fund

Britain should cut the ballooning benefits bill rather than hit banks with higher taxes, according to the International Monetary Fund.

John Healey is facing a mounting backlash over plans to clobber lenders in the Budget while at the same time hailing them as ‘the jewel in the crown of the British economy’.

The Chancellor looks set to hike the surcharge banks pay on top of standard corporation tax from 3 per cent to as high as 8 per cent in the Budget this month – raising as much as £2billion.

But industry chiefs warned the move would push up interest rates on mortgages and corporate loans and reduce lending and investment – costing the economy £20billion over the next decade.

There are also concerns that a windfall tax could encourage international banks to shift their London and UK operations overseas.

And a senior IMF official said the UK should cut welfare spending to make the Budget numbers add up rather than hit banks with higher taxes.

IMF economist Helge Berger, deputy director in the IMF’s European department, said tax revenues were already ‘historically’ high after a barrage of hikes under Mr Healey’s predecessor Rachel Reeves.

‘Ultimately, there’s a moment where this becomes less productive,’ he said, adding that cutting spending rather than raising taxes ‘makes good sense’.

Mr Berger said ‘removing the triple lock’ on pensions and ‘better-targeting social benefits’ were among the options.

‘I think that’s where you would put the emphasis, rather than the tax that you mentioned,’ he said, when asked about increasing the levy on banks.

Mr Healey was also accused of ‘speaking out of both sides of his mouth’ having heaped praise on the banking industry while at the same time plotting a punishing tax raid.

Speaking at the IMF’s annual meetings in Bangkok on Thursday, the Chancellor described the sector as ‘the jewel in the British economic crown’ and ‘an important part of our business’.

But with the unions and Left-wing Labour MPs demanding action, Mr Healey is now poised to launch an attack on banks despite warnings it will damage the economy.

Shadow chancellor Andrew Griffith said: ‘John Healey is speaking out of both sides of his mouth.

‘Britain needs growth. But a raid on the financial services sector will stifle it. Labour should be backing businesses and wealth-creators, not making their lives even harder.

‘Instead of casting around for more businesses to tax, all John Healey’s efforts should be on the out-of-control welfare bill.’

Shares in Britain’s biggest banks fell yesterday, with Lloyds down as much as 2.7 per cent and NatWest 2.4 per cent, as investors baulked at the prospect of a tax raid.

Miles Celic, chief executive of TheCityUK, said: ‘Financial and related professional services in the UK already face a higher tax burden than our key international competitors.

‘At a time when other jurisdictions are reducing corporate taxation to strengthen their competitiveness, a decision to increase sector-specific taxes on our industry here in the UK sends a very different signal.

‘It would hit investor confidence, damage UK attractiveness and not necessarily generate the higher tax receipts expected if capital, people and business move elsewhere as a result.’

Reform UK Treasury spokesman Robert Jenrick said: ‘John Healey is speaking with a forked tongue. You cannot praise banks with your right hand while picking their pockets with your left. He’s tied himself in knots because he’s too weak to deliver the welfare reforms we desperately need.’

But Paul Nowak, general secretary of the Trades Union Congress (TUC), said: ‘Britain’s big four banks are making a billion pounds a week, while bonuses have hit a post-crash record. These are bumper profits, driven by high interest rates and households’ mortgage misery. It’s time to make sure banks pay their fair share.’

The bank surcharge – and supplementary 8 per cent levy on profits in addition to corporation tax – was introduced a decade ago.

It was cut to 3 per cent under Rishi Sunak at the same time that corporation tax was raised from 19 per cent to 25 per cent.

The changes meant the overall rate of corporation tax on banks increased from 27 per cent to 28 per cent in 2023.

It is thought returning the surcharge to 8 per cent could raise around £2billion a year with the TUC calling for an even bigger surcharge of 16 per cent that it says could raise £24billion over four years.

The industry has argued against such a move, suggesting it will push up the cost of doing business and in turn the cost of borrowing for millions of households and businesses.

JP Morgan Chase boss Jamie Dimon has said he could even scrap the US bank’s plans to build a £3billion headquarters in Canary Wharf.

In a letter to the Chancellor this week, UK Finance chief David Postings said higher taxes on banks would reduce lending to households and businesses by £17.5billion over the next decade.

‘The economic costs of raising the surcharge would accumulate over time, with around £6billion of UK output forgone over the five-year Budget forecast period, rising to nearly £20billion over ten years,’ he said.

UK Finance has warned that a fresh tax raid will make the UK even more of an international outlier, pointing out that UK banks are currently taxed at a rate of 46.5 per cent once employment levies and VAT are taken into account. That compares with 39.1 per cent in Frankfurt and 27.9 per cent in New York.