Banks in the UK are bracing for potential tax raises, as expectations that Keir Starmer could soon be replaced by a more leftwing Labour politician continue to grow.
The banking sector narrowly evaded a tax increase in last year’s Autumn Budget after chancellor Rachel Reeves sought reassurance that they would boost lending in the UK and publicly support her fiscal plans.
But the ongoing Mandelson vetting scandal and the increased awareness that both Starmer and Reeves could soon be ousted has left banks fearful.
One senior executive at a large lender told the Financial Times that the industry “should be worried”, in particular after their “astonishing escape” last year.
An executive at Wall Street bank said it was building financial models to examine the likely impact of a more left leaning Labour figure becoming prime minister, alongside Reform UK winning the next election.
The executive said: “We don’t think Starmer will last long.
“Everybody would like to keep Rachel Reeves as chancellor, but the odds of that seem slim.”
Paying a levy
In recent years banks have paid a levy on their balance sheets and a surcharge tax on profits, in addition to standard corporate taxes.
A boost to profits among some of the UK’s biggest banks has led to calls from the Labour left to raise these levies.
Former deputy prime minister Angela Rayner, who is among the favourites to succeed Starmer, has long been part of these calls.
Last year she proposed increased the “bank surcharge to five per cent” in a bid to raise an estimated £1.5bn a year.
When the surcharge was introduced in 2016 it stood at eight per cent, but was cut to three per cent in 2022.
A weak fiscal outlook could prompt ministers to re-examine a bank tax increase, according to one executive at a UK bank.
Bond market chaos
Banks and regulators are also anxious about the potential of a bond market sell-off which could cause problems mirroring the one caused by Coservative prime minister Liz Truss’ mini budget in 2022.
One senior UK financial regulator said: “The risk of a sovereign debt crisis is there.
“Banks need to be stress testing the interest rate risk in their balance sheets.”
Investors concerns surrounding the UK’s high debt levels and wider political uncertainty have pushed borrowing costs to the highest among G7 nations, with ten year gilt yields hovering close to five per cent.
This means Reeves may once more be forced to raise taxes, but another banking executive argued that case for a sector raid this time was weaker as banks were increasing provisions.
They went on to claim Reeves would fend off calls for tax hikes as long as she remained in her role as chancellor.
Profits at Britain’s banks have increased recently, as higher interest rates boost margins.
Over the past year, NatWest’s share price is up 24 per cent, while Barclays has shot up 47 per cent.
