British Bank Stocks Drop Amid Concerns Over Potential New Tax
British Bank Shares Decline Amid Taxation Concerns
New Levy Proposal: The Institute for Public Policy Research (IPPR) has suggested that Finance Minister Rachel Reeves should introduce a new tax on banks, targeting the £22 billion ($29.7 billion) they receive annually from the Bank of England's bond-buying program. This amount is viewed as a subsidy to the banks.
Impact on Bank Shares: Following the IPPR's recommendations and concerns about potential government actions, British bank shares experienced significant declines. NatWest shares fell by 5.1%, Lloyds by 4.9%, and Barclays by 4%, making them the worst performers in the STOXX 600 index.
Economic Context and Government Response
Fiscal Pressure: The UK is facing a subdued growth outlook and rising borrowing costs, prompting expectations that Reeves will increase taxes further. This follows her previous tax hikes on employers in her first budget last year.
Government's Stance: A spokesperson for the finance ministry emphasized that enhancing public finances could be achieved through economic growth rather than solely through tax increases. They mentioned ongoing planning reforms as an alternative approach.
Broader Taxation Discussions
Potential Tax Increases: Recent media reports have speculated on various tax increase options for Reeves, including a new levy on home sales, increased taxes on landlords, and adjustments to income tax thresholds and pension tax relief.
Banking Sector's Tax Contributions: The banking sector contributed nearly £45 billion in taxes last year. Industry representatives argue that imposing additional taxes could undermine the UK's competitiveness in the financial services sector.
Historical Context of Bank Reserves
Quantitative Easing Legacy: British banks currently hold substantial reserves at the Bank of England, a result of the quantitative easing initiated during the 2008-09 financial crisis. The interest paid on these reserves is now higher than during the QE period.
BoE's Position: Bank of England Governor Andrew Bailey has defended the current system, stating it is crucial for transmitting changes in interest rates to the economy. However, the program has faced criticism for its financial burden on taxpayers.
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