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Banks in the UK are bracing for tax rises, amid increased expectations that Sir Keir Starmer could soon be replaced by a more leftwing Labour prime minister.
The banking industry narrowly escaped a tax increase in the November Budget after chancellor Rachel Reeves sought reassurance that they would boost lending in the UK and publicly support her fiscal plans.
But the Peter Mandelson vetting scandal — and the increased perception that Starmer and Reeves will soon be ousted — has led banks to war-game a leftward shift.
The sector “should be worried”, said one senior executive at a large lender. Banks “had an astonishing escape” last year, and any chancellor other than Reeves “would have gone for the banks”, they added.
An executive at a large Wall Street bank said it was building financial models to examine the likely impact of a more leftwing Labour figure becoming UK prime minister and of Nigel Farage’s Reform UK party winning the next election.
“We don’t think Starmer will last long,” said the US bank executive. “Everybody would like to keep Rachel Reeves as chancellor, but the odds of that seem slim.”
In recent years banks have paid a levy on their balance sheets and a surcharge tax on profits, in addition to standard corporate taxes. A boost to profits among Britain’s biggest banks has led to calls from the Labour left to raise these levies.
Angela Rayner, the former deputy prime minister, who is among the favourites to succeed Starmer, last year proposed increasing “the bank surcharge to 5 per cent” to raise an estimated £1.5bn a year. The surcharge stood at 8 per cent when it was introduced in 2016 but was cut to 3 per cent in 2022.
A senior bank analyst said investors “will be increasingly [nervous] if Starmer is out”.
A weak fiscal outlook could prompt ministers to re-examine a bank tax increase, said another executive at a large UK bank.
Banks and regulators are also anxious about the potential for a bond market sell-off if a more leftwing government replaces Starmer. That could cause problems similar to the one caused by Tory prime minister Liz Truss’s disastrous mini-budget in 2022.
“The risk of a sovereign debt crisis is there,” said a senior UK financial regulator. “Banks need to be stress testing the interest rate risk in their balance sheets.”
Investor worries about the UK’s high debt levels and political uncertainty have pushed its borrowing costs to the highest among G7 rich nations, with 10-year gilt yields hovering close to 5 per cent.
That means Reeves herself may be forced once again to raise taxes. However, a third executive at a British bank argued that the case was weaker for a sector raid this time round as banks were increasing provisions because of macroeconomic uncertainty, and said that Reeves would fend off calls for tax hikes as long as she was in post.
In a note to clients this week, investment bank Jefferies wrote: “we previously argued that higher [bank] levies are self-defeating. But we accept this may hold less succour in today’s environment, and the risk of change could be amplified by any new leadership.”
Profits at Britain’s banks have increased recently, as higher interest rates boost margins. Over the past year, NatWest’s share price is up 24 per cent, Lloyds, 35 per cent and Barclays, 47 per cent.