Having already signalled that oil companies would have to pay more via a new supplementary tax, he turned his attention to the banks. And, as he put it: “Apart from oil, one other business sector has largely been protected from the effects of the recession, and that is banking. Indeed, bank profits in recent years have increased sharply, both absolutely and by contrast with the experience of most other businesses. A substantial part of these profits is the direct consequence of high interest rates in recent years: this applies in particular to the so-called “endowment profit” on current accounts on which no interest is paid.”
The result was a windfall tax on the banks and, as you will have guessed by now, we are talking about the events of more than 40 years ago, the 1981 Budget of Sir Geoffrey Howe, Margaret Thatcher’s first chancellor, not Jeremy Hunt or Kwasi Kwarteng. The sums involved seem small by today’s standards, £400 million over a single year, 1981-82, but at the time were regarded as significant.
History does repeat itself. The 1981 Budget was famous for the fact that 364 economists signed a letter condemning it, though not because of the bank windfall tax. Professor Patrick Minford defended the government and was thanked by Thatcher for doing do. More recently he was the last man standing in defending the Liz Truss/Kwarteng mini budget.
Thatcher, however, was unrepentant, writing later in her memoirs: “Naturally, the banks strongly opposed this; but the fact remained that they had made their large profits as a result of our policy of high interest rates rather than because of increased efficiency or better service to the customer.”
Could history have repeated itself in another respect? Windfall taxes are back in vogue. In the run-up to the Autumn Statement on November 17, there was widespread speculation that the banks, once more, would be in a chancellor’s sights. On October 19, London’s Evening Standard reported a slide in bank share prices after reports that Hunt was contemplating a windfall tax on the banks. The idea of the tax was dismissed as “ludicrous” by Michael Hewson, markets analysts at CMC Markets, who warned that it would deter international investment in the UK economy. The rumours, however, continued to run.
You will know by now that we did have windfall tax in the Autumn Statement, or at least an extension of an existing one, but on oil. The energy profit levy, introduced by Rishi Sunak when he was chancellor, was increased from 25% to 35% and extended from 2026 to 2028. That raises the question of how to define a windfall tax, which in the past was regarded as a quick revenue hit, as in 1981 for the banks, and former nationalised industries when Gordon Brown became chancellor in 1997. His windfall tax on them lasted for two years.
Hunt also announced a 45% levy on excess profits made by low-carbon electricity generators. Both moves brought protests from affected businesses, warning that the additional tax, set to raise a total of £41.6 billion from oil and gas companies, and £14.1 billion from electricity generators, would inevitably hit investment.
Hunt, in announcing the taxes, said: “I have no objection to windfall taxes if they are genuinely about windfall profits caused by unexpected increases in energy prices. But any such tax should be temporary, not deter investment and recognise the cyclical nature of energy businesses.” We will see in coming years whether his judgment was right.
Banks know all about levies The bank levy was introduced in 2011, in the wake of the financial crisis, though since 2016 it has taken second place to the banking surcharge, introduced in 2016.
Most speculation before the Autumn Statement centred on the surcharge. In October 2021, Sunak had said that when the main rate of corporation went up from 19% to 25% in April 2023, the banking surcharge would be reduced from 8% to 3%. However, during Kwasi Kwarteng’s brief tenure as chancellor, when he scrapped the increase in corporation tax, he also said the surcharge would stay at 8%.
The question was whether, in restoring the corporation tax increase, Hunt would also keep the surcharge at 8%, giving banks a corporation tax rate of 33%. As it turned out, however, this was a dog that did not bark. To the banks’ relief, the reduction to 3% for the surcharge stayed,
“The UK banking sector will be reassured that there’s now clarity around the banking surcharge and that the rate will stay at the enacted 3% when corporation tax increases to 25% next April,” said Richard Milnes, UK banking tax partner at EY. “The sector will be particularly relieved there won’t be a further tax burden placed on it which could have detrimental effects to UK banking competitiveness on the global stage.”
Are banks off the hook? Maybe. Some people’s attention is turning to the fact that the Bank of England’s quantitative easing programme is set to cost the taxpayer a lot of money as it is wound down, and the Treasury indemnifies the Bank against losses on the scheme. The Treasury is due to transfer a massive £133 billion to the Bank over the next few years because of that.
That cost would be greatly reduced if the banks were no longer paid interest at Bank Rate on the reserves they have at the Bank which were created as part of QE. Many argue for a lower rate or a tiered rate on those reserves. That could be the next battle the banks have to fight.