Analysis: The great bank levy escape?
Don’t mention the levy, the bankers are whispering. They might have got away with it.
Three weeks have passed since George Osborne’s emergency Budget turned grim foreboding into bitter reality. The chancellor announced to an uneasy Commons his plans to slash departmental budgets by at least a quarter.
Now Whitehall is busy with 40% cutting contingency plans and the summer fever of a comprehensive spending review.
But while the rest of the nation reels at the sheer extent of the austerity agenda, the City’s great financial institutions are quietly breathing a sigh of relief.
Bankers knew they had to pay a price for their misdemeanours – the sheer greed of the financial system was, after all, what got us into this mess in the first place.
“I think it’s an outrage,” Nick Clegg told politics.co.uk before the general election, “a complete economic and moral outrage the way the greed of the bankers of the City of London has basically held a gun to the head of the rest of the British economy”.
That sort of rhetoric clashed with the Conservatives’ instinctive sympathy towards bankers. Which attitude would prevail in the new coalition government? In practical terms, the question became: how big is the banking levy going to be?
The Budget gave us our first indication. “The government believes that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy,” the red book stated.
“The levy will result in a rebalancing of the burden of taxation between banking and other sectors.”
Not as much of a rebalancing as might have been the case. Under Treasury plans published three weeks ago the bank levy, introduced from January 2011, will raise £1.15 billion in 2011/12, £2.32 billion in 2012/13, £2.5 billion in 2013/14 and £2.4 billion in 2014/15.
“It could have been anything from nothing to twice as much,” John Whiting, the tax policy director of the Chartered Institute of Taxation, says.
“There’s a strong element of relief. It could have been a lot worse.”
Even the compromise levy promised by Osborne appears up for grabs. The precise details of the levy remain on the table. A consultation will take place before the final details are announced later this year.
An exemplary organisation when it comes to effective lobbying of the government is the Confederation of British Industry, whose outgoing director-general Richard Lambert demonstrated the subtle means through which influence can still be exerted.
“Banks recognise the need to contribute to the restoration of the public finances,” he explains carefully.
“But in choosing to impose the levy on balance sheets rather than profits, the government must take great care over the detailed implementation so as not to inhibit the ability of banks to finance the recovery.”
Putting the recovery at risk: it’s the grounds on which the general election was fought and remains extremely potent in political terms. With the CBI opening the door for future lobbying, it seems all is still to play for.
Analyst Jan Randolph of IHS Global Insight adds another reason for bankers to have a spring in their step.
“There’s a lot of popular anguish, [Osborne] needs to be seen to be doing something,” he acknowledges. Yet the way the levy is structured, he argues, means it tacitly avoids penalising the big retail deposit banks like Halifax, RBS and Lloyd’s. Instead it’s the larger foreign banks like HSBC and Barclay’s which bear the brunt.
Here’s one final thought which dampens the impact of the bank levy. As with everything in tax, nothing is quite so simple. The corporation tax rate is being cut by a penny every year for the next four years, cutting it to 24%. Banks, of course, are among those benefiting.
“When people say, ‘they should be taxed more heavily’, let’s not lose sight of the fact the banks are paying a lot of other taxes,” Whiting adds.
“There is an interesting little point to make – which is the banks will be benefiting from the corporation tax rate reductions in years to come. So there is an element of ‘here is this levy making sure there’s a certain amount of clawback’.”
That ‘certain amount’ is, already, less than many in the City feared. It is not hitting Britain’s banks as hard as it could have done. And there is now the chance the levy’s total impact could be diminished still further. If a City banker walks past in the street with a faint smile on his face, you’ll have an idea why.
