The Midday Market report is a new newsletter from City AM, giving you fresh analysis on the biggest stories in the City straight into your inbox every lunchtime. Today, Ali Lyon, chews over the government’s plans for a windfall tax on banks. Sign up to the City AM News Updates newsletter here.
It was, in the immortal, viral words of former Manchester United footballer Gary Neville, “the banker”. It was “the no-brainer – the one that couldn’t fail, the one that’s never failed”.
The England right-back was talking about his former club’s 2016 decision to appoint Jose Mourinho as head coach. The Portuguese firebrand would, top brass had hoped, put right a years-long spell of underperformance and vanquish the ghost of their totemic manager, Sir Alex Ferguson, once and for all. In the end, though, it wasn’t to be, and after just two and a half years in charge – with no league titles to show for it – Mourinho was given his marching orders.
But Neville’s remarks could – with a bit of imagination – just as easily apply to the frenzied speculation in the run-up to this month’s Budget.
Unlike his kite-flying, pitch-rolling predecessor, John Healey has remained notably tight-lipped on the composition of his maiden fiscal event. What little information industrious reporters have teased out of the Treasury has been patchwork-like and bit-part, leaving captains of industry, investors and even lobbyists firmly in the dark.
But the one tax hike that has looked nailed on ever since the Rotherham MP named the date of his Budget – the “banker”, if you will – has been a windfall tax of one form or another on the City’s eminent banking sector.
If reports out last night are to be believed, that “no brainer” bet that Labour will squeeze billions of pounds out of the UK’s lenders is starting to pay out. Healey is still, says The Guardian, weighing his options. One move under consideration is to reverse Jeremy Hunt’s reduction of the bank surcharge. Also rumoured is an overhaul of the way the Treasury treats the Bank of England’s interest payments on commercial bank reserves. But where and how the axe falls is just window dressing. The reality is: the banks are going to get it.
Lobbying efforts come up short
It is – despite an intensive and relentless rearguard action from banking execs – a fate to which many in the sector were resigned. High street lenders and their investment counterparts have, for the best part of three years now, been churning out record profits off the back of consecutive geopolitical shocks that have kept interest rates higher for longer. The industry was also on the chopping block at both of Rachel Reeves’ ill-fated fiscal events, before the former Chancellor eventually yielded to their warnings that a windfall tax would impact her “number-one mission” to grow the economy.
In his first few months in No. 11, Healey, however, has appeared far less concerned with trifling matters like ‘growth’ and ‘prosperity’. And after squeezing other parts of the business ecosystem at other tax-raising Budgets (carried interest was raised in 2024, employer Nics mostly impacted low-skilled industries and business rates hit those with a heavy bricks and mortar presence), a sense of foreboding had spread through Canary Wharf and the Square Mile.
As a result, lenders’ shares have not moved as much as you might think this morning. The two most susceptible to the whims of UK lawmakers – Lloyds and Natwest – are down just 2.1 and 2.0 per cent respectively. Meanwhile HSBC and Standard Chartered, which boast a far more international footprint, are actually in the green.
But just because every man and their dog expected Healey to go after banks’ profits, does not make it good policy. As the chart above shows, lenders in Blighty are taxed the most of any major European finance hub – a fact that JP Morgan’s Jamie Dimon has said, obviously, plays into investment and expansion decisions. And – as the sector’s indefatigable industry bodies have warned – it will also eat into the price and volumes loans banks can afford to issue to capital-starved SMEs, choking off growth in the engine room of the UK economy.
Above all, though, is what it signifies about the mindset that UK policymakers increasingly have towards the success of cyclical businesses. Are you an energy company doing well because of unusually high oil prices? Expect a windfall tax. Are you an airline pumping out profits because of the opposite? What’s not to say there might be one coming down the line for you too?
When Manchester United made the widely expected decision to fire Jose Mourinho in 2018, it did so after he had won the Europa League and League Cup, and secured second place in the Premier League. In the eight years since, the once-great football dynasty has given its fans just one trophy to celebrate and is currently 13th in the league. As in the case of Gary Neville’s former club, Healey’s approach to Britain’s banking industry, risks being less “no-brainer” and more hare-brained.