UK bank shares have dropped after an influential think tank said Rachel Reeves could raise billions of pounds for the public purse by imposing a windfall tax on lenders.
City traders were reacting to a report from the Institute for Public Policy Research (IPPR) which raised fears that banks could be targeted at the Chancellor’s upcoming autumn budget.
NatWest and Lloyds share prices were tumbling by more than 4%, and Barclays was dropping by more than 3% on Friday morning, leading the biggest fallers on the UK’s FTSE 100.
HSBC and Standard Chartered shares were down by about 1.5%.
The IPPR said Ms Reeves should tax bank windfalls to recover taxpayer money spent on compensating losses from the Bank of England’s cash-printing drive.
Hiking a levy on the profits of British banking giants could raise up to £8 billion a year for public services, the IPPR said.
The think tank argued the UK is an international outlier in having its Treasury pay for central Bank losses on its bond-buying quantitative easing (QE) programme.
After a period of making profits on this programme, the Bank of England is facing record losses, estimated to cost the taxpayer £22 billion a year, as interest rates have risen since 2021, it warned.
This money is then partly being funnelled to bank shareholders due to a “flawed” policy design, boosting profits while millions across Britain continue to face cost-of-living pressures, the report said.
It recommended the Treasury introduce a “QE reserves income levy”, similar to the 2.5% deposit tax imposed on banks under Margaret Thatcher in 1981, to rebalance the existing set-up.
The leading think tank, which worked closely with the Government on its industrial strategy, also called on the Bank of England to slow down its sale of bonds – so-called quantitative tightening (QT) – to save more than £12 billion a year.
These two policies together could save more than £100 billion over this Parliament, opening up much needed fiscal headroom for the Chancellor, it said.
Under the proposals, the receipts from the banks levy would be used to support “households and growth” and would fall to zero once all QE-related gilts are off the Bank of England’s balance sheet, or when the bank rate reaches 2%, meaning the tax would be temporary.
Given the “targeted” nature of the tax, it should only have a “small impact, if any” on UK banks’ competitiveness and smaller banks should be exempted from the measure, the think tank said.
The warning came amid warnings from economists that tax rises in the autumn budget are likely needed to plug a hole in the public finances, prompting speculation about which areas the Chancellor might target.
A Treasury spokesperson said: “As set out in the plan for change, the best way to strengthen public finances is by growing the economy – which is our focus.
“Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8 billion and cut borrowing by £3.4 billion.
“The Monetary Policy Committee (MPC) has operational independence to set monetary policy, including how it approaches asset sales, which is essential for the effective delivery of monetary policy.”
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