The government’s decision to cut the banking surcharge is costing the public purse £29 million a week, according to a new report published by the Trades Union Congress (TUC) on Saturday 18 November.
Tories cutting taxes for bankers
The report estimates that the Treasury will lose “at least” £1.5bn annually over the next four years as result of the change introduced by Rishi Sunak when he was Chancellor.
Earlier this year, the surcharge was cut from 8% to 3%. This lower tax rate has allowed banks to make huge profits from rising interest rates and cushioned them from the increase in corporation tax rates that came in this year.
While other businesses have seen their corporation tax rates rise by up to 6%, banks have seen an extremely modest rise of 1% thanks to the cut in the surcharge.
As a result banks are paying a lower rate of corporation tax than before the financial crisis.
Huge loss in tax revenue via the bank surcharge
The TUC branded the decision to cut the surcharge as a “Tory tax break” for banks that will “starve the public finances of much-needed funds”.
The union body says the estimated loss in tax revenue over this year alone could be more than £2.5bn.
The UK’s four biggest banks – HSBC, Barclays, Lloyds and Natwest – have reported combined pre-tax profits of more than £41bn for the first three quarters of 2023, as a result of rising interest rates.
This is a nearly 400% increase on the same period in 2020, before rates started rising, and suggests the big four could be on track to make record annual profits of around £50bn this year.
Taxing excess profits
The report lays out options for taxing excess profits in the banking sector. These include:Reversing the cuts to the bank surcharge. This would set the surcharge at 8% and the overall corporation tax rate at 33%. This would raise £6-6.5bn over four years.
Raising the bank surcharge to 10% to create an overall tax rate on bank profits of 35%. This would raise £7.5bn-£8.1bn over four years.
A windfall tax bank surcharge of 35% to match the levy on energy companies. This would create a total corporation tax rate of 60%. This would raise £26bn-£28bn over four years.
Reversing cuts to the Bank Surcharge and Bank Levy so that they collect the same total revenue in real terms as they did in 2016/17. This would raise £15bn over four years.
The TUC says a national conversation is needed about taxing wealth and excess profits more fairly in the UK.
Britain’s tax system: no longer fit for purpose
The TUC says Britain’s tax system is no longer fit for purpose. TUC polling published in September revealed huge support across the board for windfall taxes :Three quarters (75%) of the public support a windfall tax on banks’ excess profits – including 76% of Conservative 2019 voters.
4 in 5 (80%) support a windfall tax on energy companies’ profits – including 81% of Conservative 2019 voters.
7 in 10 (69%) support a windfall tax on large online retailers’ excess profits (like Amazon).
The TUC has already called on the government to equalise capital gains tax with income tax which could raise over £10bn – and it has supported a bigger windfall tax on energy companies.
Political choices
Commenting on the report, TUC General Secretary Paul Nowak said:
At a time when our schools and hospitals are crumbling Rishi Sunak has given a huge tax break to banks.
Banks have enjoyed eye-watering profits over the last year – and this tax cut means they have cashed in on soaring interest rates and families’ mortgage misery
The Prime Minister’s decision to reduce the surcharge has starved our public finances and our public services of much-needed funds at the worst possible time.
This boils down to political choices. Whether its slashing taxes for banks or gifting bankers unlimited bonuses – this is a government more interested in rewarding excess wealth than in governing for the public good.
Simon Youel, Head of Policy and Advocacy at Positive Money, said:
There’s never a justification for handing tax cuts to banks whilst the public endures a cost of living crisis. But this move is particularly hard to swallow when banks are reaping windfall profits from the same higher interest rates pushing households to the brink of destitution.
The reason special taxes on banks were introduced after the financial crash was to reflect the greater risks they pose to our economic stability than other corporations. That risk hasn’t gone away.
We wholeheartedly support the TUC’s calls for reversing cuts to the bank surcharge and bank levy to redress the unequal impacts of interest rate increases.
THE CANARY, UK
THE UK government could save £55 billion over the next five years if it limits the amount of money the Bank of England pays interest on to commercial banks, according to analysis from the New Economics Foundation.
The Treasury will pay out over £150 billion to the Bank of England to fund its payments to the banking sector by 2028, on top of the £30 billion already paid out in 2023. This is a result of the Bank of England paying interest on all central bank reserves, including the £875 billion created through quantitative easing (QE).
Instead, the analysis finds that the Bank of England could pay interest on a smaller portion of reserves by requiring commercial banks to hold 10 per cent of their liquid assets in reserves that pay no interest. This would save the government £55 billion over the next five years.
This 10 per cent ‘reserve requirement’ is lower than requirements used by central banks in China and Brazil in recent years and the UK in the 1970s. The European Central Bank has recently announced a policy to stop paying interest on these reserves, and the application of this in the UK has been discussed by former deputy governor of the Bank of England, Sir Paul Tucker.
The Bank of England holds money for commercial banks in reserves and currently pays interest on all of this. The level of interest is set by the Bank’s own interest rates. The Treasury is responsible for funding any gap between the interest the Bank of England receives on bonds bought via quantitative easing and the interest it pays out, along with any losses the Bank makes from active sales.
The analysis shows that the government could save billions by implementing a tiered reserves policy which would reduce the proportion of central bank reserves on which the Bank of England pays interest to the banking sector.
The analysis finds that, over the next five years:
- A one per cent reserve requirement, equal to the policy implemented at the European Central Bank would save the government £1.3 billion a year.
- A 2.5 per cent reserve requirement would save the government £3.3 billion a year, enough to fund a mass insulation programme for 7 million homes over five years. Such reserve requirements are common place in Switzerland.
- A five per cent reserve requirement would save the government £6.6 billion a year, enough to fund repairs for crumbling schools and hospitals over the next five years. Such reserve requirements are lower than those used by China this summer.
- A 10 per cent reserve requirement would save the government £11.5 billion a year, enough to implement all the above policies. Such reserve requirements would be lower than in the UK in the 1970s.
Dominic Caddick, economist at the New Economics Foundation, said: “At a time when millions are struggling with rising mortgage and debt costs, the Treasury are set to pay out billions in public money to fund transfers to commercial banks. The policy of the Bank of England paying interest on reserves was introduced in response to the financial crisis, but now we’re 15 years on and in a different economic context, the government needs to change its approach. Public money should be spent supporting people through the cost of living crisis, not giving banks a huge bonus.”
* Source: New Economics Foundation
Autumn Statement must tackle ‘inequality crisis’ – Plaid Cymru
Ahead of Wednesday’s Autumn Statement, Plaid Cymru Treasury spokesperson, Ben Lake MP has today (Sunday 19 November) urged the Chancellor to use the opportunity to tackle the ‘inequality crisis’ by cracking down on ‘corporate greed’.
The Ceredigion MP used the example of major fuel retailers, who he accused of failing to pass their wholesale savings onto customers. He called on the Chancellor to “pressure the largest fuel retailers to reduce prices when wholesale costs fall”.
A Competition and Markets Authority investigation found that some supermarket fuel retailers failed to pass on reductions in wholesale costs last year, charging drivers 6p more per litre for fuel. This amounted to £900 million in extra costs in 2022 alone.
Mr Lake also renewed his party’s call for the Rural Fuel Duty Relief Scheme to be extended to Wales. The current scheme currently covers 17 areas of England and Scotland, including parts of the Highlands, Argyll and Bute, Northumberland, Cumbria, Devon and North Yorkshire, but none in Wales. It allows retailers to claim duty relief on unleaded petrol and diesel, and pass on the savings to customers.
Also among Plaid Cymru’s calls for the Autumn Statement is a call to end the “severe geographic disparity in energy bill standing charges”. Mr Lake pointed to the fact that residents in north Wales, for instance, pay over £80 annually more than Londoners in standing charges.
He also called on the UK Government to match fund the £40 million ‘Help to Stay’ scheme introduced by Plaid Cymru and the Welsh Government to help people struggling to meet their mortgage repayments.
Inequality crisis
Plaid Cymru Treasury spokesperson, Ben Lake MP said: “The ‘cost-of-living crisis’ has become so firmly embedded in daily news bulletins and political commentary that it no longer provokes action or the sense of urgency that it demands. It is an inequality crisis compounded by a lack of government leadership. This Autumn Statement is the UK Government’s last chance ahead of the General Election to demonstrate that it is serious about supporting hard working families this winter by ensuring they get a fair deal from large corporations.
“Currently, major supermarket fuel retailers are enjoying record profit margins by overcharging at the pumps despite reduced wholesale fuel prices. The Chancellor must act to ensure greater transparency in the way in which pump prices are set so that households get a fair deal, and pressure the largest fuel retailers to reduce prices when wholesale costs fall.
“Additionally, extending the Rural Fuel Duty Relief Scheme, which currently gives a 5p relief to rural areas in England and Scotland, to Wales, would help people in rural areas who are sadly reliant on cars due to poor public transport.
“The Statement should also address the severe geographic disparity in energy bill standing charges. Residents in north Wales, for instance, pay over £80 annually more than Londoners. This stark inequality requires urgent action by the Treasury, and further underlines the need for a fairer energy pricing system, including the development of Social Tariff.
“Housing costs are hugely worrying. The mortgage market has been volatile since the Conservative’s chaotic mini Budget – and there is no safety net for homeowners or renters. Plaid Cymru is proud to have introduced the ‘Help to Stay’ scheme through the Agreement with the Welsh Government to help mitigate the harm of the mini Budget.
“It is now time for the UK Government to match that £40 million funding, bringing the scheme’s total funding to £80m. Increasing the Housing Allowance is also crucial to help low-income renters.
“Together, these interventions would go some way in addressing the crisis that is making life difficult for so many people in Wales. Plaid Cymru stands with struggling families; it is time for the UK Government to show it cares too.”
Jeremy Hunt Refuses To Rule Out Cutting Benefits In Autumn Statement
By Ned Simons
19/11/2023
Jeremy Hunt
BBC
Jeremy Hunt has refused to rule out increasing benefits by a smaller amount than usual by changing how the figure is calculated.
Benefits are usually “uprated” each April in line with the inflation rate of the previous September.
But according to Bloomberg News, the chancellor is considering pegging the increase to October’s inflation rate instead, and increase of 4.6% rather than 6.7%.
Speaking to the BBC’s Sunday with Laura Kuenssberg, Hunt did not commit to increasing benefits using the traditional method.
“I am not going to say this morning what I going to announce to parliament on Wednesday,” he said.
The interview came ahead next week’s Autumn Statement, which will see him set out his tax and spending plans ahead of next year’s general election.
As well as potentially squeezing benefits, it has also been reported Hunt could cut inheritance tax as well as some income taxes or national insurance.
Rachel Reeves, the shadow chancellor, told the same programme Labour would increase benefits by the standard amount.
“In government I will use the inflation rate that is traditional, the September inflation,” she said.
“If you pick and choose from year to year which inflation number is the cheapest thing to do then what you see is the gradual erosion of people’s incomes.”
According to the Institute for Fiscal Studies (IFS) picking the October rate rather than September would cut working-age benefits spending by about £3 billion.
It would reduce the money given to for the 8 million working-age households receiving means-tested or disability benefits.
The respected economics think-tank said real benefit levels would not just take several years to regain their pre-pandemic level but “would never get back to where they were without subsequent changes in policy”.
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The Resolution Foundation also said the effect of benefit cuts under the Conservatives since 2010 was “already staggering”.
Torsten Bell, the think-tank’s director, said: “The poorest fifth are around £2,700 a year worse off as a result. And that’s just the average. When people wonder why so many families are struggling today, this is a key part of the answer,”
Chancellor expected to squeeze benefits despite cost of living crisis
UK Chancellor Jeremy Hunt is considering cutting inheritance and business taxes while squeezing benefits payments by billions in his autumn statement.
Mr Hunt said on Friday that there is a need to ‘reform our welfare system’ while adding that the ‘priority’ for Wednesday’s financial announcement is helping firms.
But he is also considering slashing inheritance tax, which would be likely to draw criticism for supporting the wealthy while others struggle with the high cost of living.
Conservative former chancellor Lord Clarke said the move may please MPs on the Tory right who are clamouring for tax cuts, but others would find it ‘appalling’.
Typically ministers use the September figure for inflation when uprating working-age benefits, which would mean a 6.7% hike.
But Mr Hunt has not ruled out using October’s far lower figure of 4.6%.
Asked about the possible move in an interview with the BBC, the Chancellor said: ‘We will always be a compassionate Conservative government but part of how we make our economy successful is by making sure companies like this company can find the staff they need.
‘Nearly a million vacancies across the economy, so we do need to reform our welfare system.’
Sources said a decision on the figures is yet to be made.
Ministers have already announced a fresh welfare crackdown amid efforts to get people back into work under a toughened sanctions scheme.
Free prescriptions and legal aid will be cut off for benefit claimants who are deemed fit to work and do not seek employment.
There are hopes the final forecasts from the Office for Budget Responsibility will give Mr Hunt more ‘fiscal headroom’ than expected to make tax cuts when he receives them on Friday.
The Chancellor said he wants firms to be the focus of any tax cut he may offer, during a visit to the ITM Power manufacturer in Sheffield.
‘In terms of tax cuts you’ll have to wait and see but I will say the priority is helping businesses like this to succeed,’ he told the BBC.
The options for cutting inheritance tax – which is charged at 40% on estates of more than £325,000, with an extra £175,000 towards a main residence passed to direct descendants – include reducing it by 50%, 30% or 20%, according to The Times.
The Tories are said to then be considering making abolishing it entirely an election manifesto pledge next year, which could cost £7 billion a year in the short term.
However, the Institute for Fiscal Studies forecast that the amount that the tax raises could rise to more than £15 billion by 2033.
Lord Clarke told Times Radio: ‘Well, it’s not the tax cut I would choose. Indeed, I’m not sure he’s got any room for tax cuts.
‘And choosing inheritance tax at the present time might appeal to the Conservative right, but it leaves them open to the most appalling criticisms when inflation and the state of affairs is making poorer people in this country very vulnerable indeed, giving tax relief to those families that are lucky enough to have members of it with capital above the limit through inheritance tax and pay any significant amount of tax on the inheritance.
‘And I’m not sure that the economic and financial state of the country justifies it.”
Labour leader Sir Keir Starmer said he would wait to see what is in the autumn statement before commenting on any plan to cut inheritance tax.
‘We’ll have to wait to see what the Government says in its autumn statement. What I want to see is a serious plan for growth,’ he told broadcasters during a visit to Scotland.
Meanwhile, Mr Hunt also said he would ‘love’ to see a Tesla factory opened in the UK and has spoken to Elon Musk about the prospect.
Mr Hunt pointed to £2 billion from a new £4.5 billion fund for manufacturers being earmarked for the automotive industry.
‘I spoke to Elon Musk about this and he said it’s not about the support. It’s about the environment and he loves London because there’s so much tech going on and Tesla is essentially a tech company, so let’s see what happens,’ he added.
