George Osborne’s damaging bank tax changes are a blow to competition in the sector

Who is taxed, and by how much, is one of the best windows into the mind of any chancellor. Who does he want to help, who does he want to hit, and why? 

 

How you raise the money matters just as much as how you give it out. 

 

With that in mind, consider the government’s changes to bank taxation announced in the summer Budget. 

 

The chancellor was keen to skip over these moves in his speech, giving them just a few lines and presenting them as a series of technical changes. But the reality is that the new policy signals a worrying change in the government’s approach towards bank taxation.

 

The bank levy was brought in to make sure the banks made a fair contribution towards deficit reduction. 

 

 

The fact that the levy consistently failed to raise the projected revenue and had to be changed nine times in just five years shows it was far from perfect. But the principle that banks should be taxed according to economic risk was surely the right one.

 

The planned scaling down of the levy and its replacement with a new 8 per cent surcharge on bank profits will act as a tax rise for small challenger banks and building societies, who pose less risk to our economy, while the big international banks get a much better deal. It risks stifling competition and acting as a restraint on sensible lending.

 

You can see how odd this is. Everyone agrees that more competition – and support for challengers to take on the big banks – is the right thing for customers. 

 

Except now the chancellor, apparently, whose Budget was like a bucket of cold water for the ambitions of the challengers.

 

The unfairness of this approach is only dwarfed by its irresponsibility. 

 

 

A responsible government would be trying to promote more competition in the sector, and especially standing up for smaller building societies who operate more sustainable lending patterns mainly focused on mortgages.

 

But it is precisely these small mutuals who will be hit hardest by the new surcharge, with an estimated £630m of costs over the next five years. 

 

This is especially damaging for mutuals because profits are their main means for financing expansion and new lending. 

 

The consequences for the long-term health of the financial services sector and the wider economy could be seriously damaging.

 

Building societies feel particularly betrayed because the Tories have seemed to concede this point themselves, with a former Treasury minister even describing them as “the good guys”. 

 

They will be shocked at the rapid change in direction from the Treasury which has even left some Tory MPs uneasy.

 

The 2007 crash showed just how fragile our prosperity is and George Osborne must not put the short-term interests of a handful of global banks ahead of the long-term interests of the country. 

 

That is why Labour will be standing up for a competitive banking sector when the Finance Bill returns to Parliament. 

 

We believe a healthy and diverse financial services sector is vital to support families and companies as well as for the long-term sustainability of our economy.

 

Osborne is now in the spotlight. Freed from the shackles of coalition, it seems that his instincts are to appease the big banks rather than the wider economy. 

 

Despite his rhetoric, this isn’t a pro-business approach and it won’t help the economy in the long term. Labour are giving him a chance to rethink; he must now take it.