Last week, the Financial Times reported that the Chancellor Rishi Sunak was planning on cutting the surcharge tax on bank profits by 60 percent in Wednesday’s Budget. At the same time, the government is increasing National Insurance contributions for ordinary workers, and has slashed Universal Credit by nearly a quarter. This tells us a lot about the government’s priorities: tax rises for key workers, tax cuts for the banks.
Introduced in 2016, the eight percent surcharge on banks profits over £25 million raised £1.4 billion in the 2020-21 tax year, even when bank earnings were hit by the Covid pandemic. In the previous year the surcharge raised around £2 billion, which means that the government’s plans to cut it from eight percent to three percent would mean a loss of £1.2 billion in tax revenue in a typical year. This is more than triple the £370 million it would cost to ensure free school meals are provided to children all year round, which the Chancellor doesn’t think we can afford. If feeding hungry children is ‘fiscally irresponsible’ in Rishi Sunak’s world, what about tax cuts for banks?
Banks aren’t just recovering from the pandemic—they are thriving. In the latest round of earnings, Barclays’ profits more than doubled, while HSBC enjoyed a 74 percent boost. This is a result not only of a booming property market, but also the fact that the government’s support measures during the Covid crisis, from the furlough scheme to loan guarantees, were designed in ways that prioritised lenders, ensuring that banks’ balance sheets were protected and that they continued to get streams of interest, even as the rest of the economy suffered.
With inflation on the rise and household bills set to surge, you’d hope that the government would want those with the broadest shoulders, such as the banks, to bear the heaviest weights. But instead the government seems intent on doing the opposite, slashing Universal Credit by £20 a week for the poorest households and raising National Insurance contributions for ordinary workers, while cutting taxes for bankers. Those key workers who made the greatest sacrifices in getting us through this crisis are being punished, while the banks that got away with crashing our economy over a decade ago are being rewarded yet again.
This is because despite the sloganeering of ‘building back better’, the government’s strategy is simply to double down on a broken model of finance-led growth. The reasoning behind Sunak’s tax cuts is all about increasing the ‘competitiveness’ of the UK as a financial sector post-Brexit.
‘Competitiveness’ may sound like a positive thing, but what it really translates to is tax cuts and deregulation to appease big finance at the cost of everyone else. This ‘competitiveness’ agenda is being pushed by the influential financial lobby, and has manifested itself in Rishi Sunak talking about ‘Big Bang 2.0’—a reference to the 1980s ‘Big Bang’ which accelerated the financialisation of the UK economy and saw the City of London become further detached from the rest of the country.
The plans to cut taxes for banks while ordinary workers have their incomes squeezed is symbolic of not only where the government’s priorities lie, but also of their economic strategy more broadly. Governments of both colours have come to see the City of London as a ‘golden goose’, seduced by the massaged figures coming from banking lobbyists of the sectors ‘contributions’ to the economy. But a more extensive analysis reveals how an oversized financial sector actually hurts the economy, with researchers estimating that such a ‘finance curse’ may have cost the UK £4.5 trillion between 1995 and 2015, as the City of London extracts wealth and resources from the rest of society.
While Rishi Sunak tells those struggling to feed their children or heat their home that ‘the answer to their hopes and dreams’ isn’t just to increase their benefits, when ultra-wealthy bankers ask for more support, the answer from the government is always yes. The financial sector is one of the UK’s most pampered industries, with banks’ profits deriving from huge implicit subsidies. If the Rishi Sunak goes ahead with tax cuts for banks and benefit cuts for ordinary households, it will be hard to take the government’s claims about ‘levelling up’ seriously.
If the government really wants to ‘level up’, they will need to make sure finance is the servant of society, not the master. A place to start would be adopting so-called ‘credit guidance’, in which the government directs finance towards productive sectors of the economy. Behind every ’economic miracle’, from the post-war ‘golden age’ of Western capitalism to China’s rise to become a global superpower, has been this credit guidance, with policymakers harnessing banks’ credit-creating powers to finance industry and other strategic priorities, while pulling funding away from speculative and damaging activities.
Rather than being at bankers’ beck and call with tax cuts and deregulation, the only way we are going to truly ‘build back better’ and fight the climate emergency is if the government gets finance in line. Positive Money’s recent report with the New Economics Foundation, ‘Greening Finance to Build Back Better’, has plenty of ideas for Rishi Sunak to get started with at this week’s Budget.