A windfall tax on bank profits would raise anywhere between £3.5 billion and £14 billion from the big four UK banks alone this year, depending on its ambition, according to our new analysis.
With the Spring Budget on the horizon, and rumours of further austerity on the cards, we are claiming that taxing the record profit banks are making from higher interest rates would hand the government billions of pounds for public spending.
Based on the £44.3bn pre-tax profits HSBC, Barclays, Lloyds and NatWest reported for 2023, we have calculated that an additional £14bn could be raised this year by increasing the existing surcharge on bank profits from 3 to 35 per cent, in line with the government’s windfall tax on energy companies.
The annual profits announced for 2023 are more than four times higher than those the banks reported in 2020, when interest rates hadn’t yet begun rising. These profits can be considered unearned windfalls from higher interest rates, and momentum has grown for them to be taxed to help support households through the cost of living crisis.
We can point to our polling from September, which found the majority of people supported a windfall tax on banks, as evidence of this.
Although the government itself introduced the surcharge on bank profits in 2015 in recognition of the need for banks to make a fair contribution in respect to the risks their activities pose to the wider economy, Chancellor Jeremy Hunt cut the surcharge by 60 per cent in his 2022 Autumn Statement, from 8 to 3 per cent.
Alternatively, replicating the Thatcher government’s 2.5 per cent levy on banks’ non-interest bearing deposits, introduced in 1981, would raise around £10.5 billion, we estimate.
The Italian government made headlines last year with the announcement of a 40 per cent windfall tax on banks. Though the plan was subsequently watered down, Positive Money estimates that emulating it in the UK could still be expected to raise nearly £8bn from the 2023 profits of the big four banks alone.
The government has thus far resisted calls for a windfall tax. When Caroline Lucas asked about a windfall tax on banks in September, Andrew Griffith – then Economic Secretary to the Treasury – simply said that the sector provides millions of UK jobs.
We argue that the thousands of jobs lost to the sweeping branch closures rolled out by banks over the last few years illustrates that banks are happy to cut jobs if it means cutting costs. They also claim that the cutting back of in-person services, and access to cash for customers that branch closures entail, means these profits are especially unearned.
In November 2023, Unite the Union called Barclays ‘disgraceful’ for announcing 900 UK job cuts in the lead-up to Christmas. Last month, Lloyds Bank announced 1,600 UK job cuts. Which? magazine found that 3 million people will be left without a local bank branch because of more than 5,800 closures since 2015.
There’s nothing radical about a windfall tax on bank profits – even Margaret Thatcher understood that banks can and should bear the burden of fairer taxes when they’ve profited from higher rates. With talk of further austerity ahead of the budget, we point to a windfall tax on bank profits as a clear and popular source of revenue for public investment.
Higher interest rates mean that the Bank of England is also expected to pay an estimated £75bn of interest on banks’ risk-free reserves over 2023 and 2024, with a total of around £150bn due to be paid out between 2022 and 2028. Positive Money is petitioning for this windfall to be taxed.
Calls for a windfall tax on banks have been echoed by MPs, including Angela Eagle, John McDonnell, Clive Lewis, Diane Abbott and Richard Burgon.
Given that these record profits have come from the higher interest payments piled on a public already struggling under the weight of the cost of living, a windfall tax is not just the sensible choice – it’s the fairest one.
One-off windfall taxes on the banks’ super-normal profits is an excellent idea. It worked a treat for Gordon Brown post-the 2008 GFC. Better still would be to beef up the 2014 Permanent Bank Levy. Credited to George Osborne, it was really a Coalition device. The banks have wriggled away at this. What was once a small impost, is now a tiny one. Power of SIGs! Much better longer-term to increase the Bank Levy substantially.