A windfall tax on banks is a bad idea
IT is now clear that the Tories have it in for the banks. I wrote in this space yesterday about their interest in reviving a version of Lord Howe’s 1981 windfall tax on high street banks; we now know in much more detail one of the ideas they are working on, courtesy of revelations in today’s Spectator magazine. Any bank that has received state aid would not be able to write off cumulative losses against future tax, thus tearing up a long-established principle of tax law. The Tories are also trying to boost tax bills by making it harder to put international losses through the UK.
In theory, this doesn’t sound like much (and plenty of voters will love the idea); in practice, it is likely merely to be the thin end of the wedge and herald a much larger raid on the banks, with damaging consequences for the City and jobs. And just as the Tories decision to attack non-doms allowed Labour to jump on that bandwagon with a much more damaging proposal, there must be a real danger that Labour will now follow suit with a much more drastic tax.
There are other problems. It isn’t clear what is meant by bailed-out banks. Osborne has previously claimed that even Barclays fits into that category because it accessed Bank of England liquidity schemes, a deeply unfair assessment. So would all UK banks be subjected to a windfall tax? Or are we really just talking about Lloyds, RBS and Northern Rock? What about Spanish-owned Santander – and for that matter, foreign investment banks? And how could the Tories introduce a revolutionary change in accounting rules only for three firms?
Remarkably, they seem convinced that the old arguments against taxing banks – that they will up sticks and relocate to a more pleasant climes – no longer apply. The reason? Because, say the Tories, all giant financial institutions need a giant government to bail them out in case of a crisis, which means that they will never leave the UK if they are hit with more taxes. And it is true Iceland was unable to cope with banks with balance sheets much greater than its GDP going bust.
But there are many biggish countries that could cope with at least one large bank – even if the US turns out to be as anti-bank as the UK, which would be a very risky assumption for a British government to make. The Obama administration is making a central distinction between banks that are on the government’s payroll – such as Citigroup – and those that aren’t – such as Goldman Sachs.
The Australian government could accommodate the likes of Barclays, were it ever to wish to relocate; the Chinese certainly could accommodate several institutions the size of HSBC. So yes, Britain’s banks couldn’t flee to Switzerland or Dubai; but there are plenty of other places they could relocate to. We can forget about the G20 acting as a cartel: we are talking about policies for which there is no global consensus. Part of the problem is loose terminology. Global rules to make banks hold more capital are not a tax; neither is forcing banks to pay an explicit bail-out insurance premium. This is different.
The Tories want their own Clause Four moment, named after Labour’s historic decision to ditch their historic commitment to total socialism. But yet another attack on the City would finally kill off the UK’s remaining attractiveness to global investors. Osborne must think again.