Banks already play billions in tax. If John Healey really wants to Budget for growth, investment and predictability, he should keep taxes stable, says David Postings
Chancellor John Healey recently described banking as the “jewel” in the “British economic crown”. I completely agree.
I have worked in banking for decades. Born in Wolverhampton, I know the importance of focusing on growth in every postcode. My banking career started in a branch in Bletchley, and I have seen first-hand how banks provide good jobs and help households and businesses to invest and grow.
I was a trade union member, so I understand the argument being made by them for banks to make a substantial contribution to the public finances. They already do. But significantly increasing banks’ tax burden would have real world consequences in terms of lending, investment and growth that our country sorely needs. It would also notably affect lending and growth outside London.
That is why I believe the Chancellor should keep bank taxes stable at the Budget next week. Even then, banks would still be paying the bank corporation tax surcharge and the bank levy, on top of the taxes faced by other businesses across the economy.
Much of the current debate has focused on bank profitability, but what happens to those profits is often overlooked. Broadly, profits go towards tax, returns to shareholders and retained earnings which support lending.
Banks already make a substantial contribution to the public finances, paying billions across a range of different taxes. Much of the contribution comes from employment taxes generated by highly skilled jobs in places such as Belfast, Glasgow, Leeds, Birmingham, Manchester and Edinburgh, as well as London.
Shareholder returns benefit millions of people as bank shares are held by pension funds, insurance companies and investment funds, meaning dividends help support people’s savings and retirement incomes.
Retained profits are equally important. They strengthen banks’ capital and therefore their capacity to provide mortgages to first-time buyers, loans to growing businesses and finance for investment across the economy.
The right balance
There is consequently a balance to strike. Increasing taxes on banks may raise revenue in the short term, and that is an understandable objective. But it can also leave less capital available to support lending and make the UK less attractive to international firms deciding where to invest, deploy capital and expand.
We modelled the effect of increasing the bank corporation tax surcharge from three to eight per cent as some have called for. We found that it would reduce the lending available to support households and businesses, weaken international investment in the UK and thus the number of jobs created, and result in lost economic activity up and down the country.
The international context is also important. We operate in an increasingly competitive environment for investment, jobs and activity, and we can’t take our established strong position for granted.
A model bank operating in London already faces a substantially higher total tax rate than one operating in Frankfurt or New York
A model bank operating in London already faces a substantially higher total tax rate than one operating in Frankfurt or New York. The most recent comparison put London’s rate at 46 per cent, against 39 per cent in Frankfurt and 28 per cent in New York.
Tax is not the only consideration when firms decide where to invest or locate jobs. The UK’s deep markets, skilled workforce, legal system and international connections remain major strengths. But in a highly mobile sector, the total tax burden, the predictability of the framework and the direction of government policy all influence investment decisions.
The UK’s long-term economic priorities are clear: attracting investment, raising productivity and supporting households and businesses across the country. A strong and competitive banking sector has a central role to play in achieving all three and delivering growth in every postcode, while continuing to make a substantial contribution to the public finances.
David Postings is chief executive of UK Finance