IMF Advises UK to Target Pensions and Welfare, Not Banks, for Budget Savings

The International Monetary Fund has urged John Healey to seek savings on pensions and welfare rather than tax Britain's banks at the budget later this month. Healey plans to raise additional revenue from the banking sector. Helge Berger, deputy director of the IMF's European department, addressed bank taxes in Bangkok, where the IMF held annual meetings this week.

Berger said Britain's tax-to-GDP ratio, at roughly 40%, was historically high and argued for greater emphasis on spending cuts. Berger said property tax or VAT reform might be a good starting point if additional tax revenue were needed. Berger highlighted the pensions triple lock and better targeting of social benefits as alternatives to a bank tax. Labour has already said Labour will reform the pensions triple lock.

City lobbyists warned that higher bank taxes could reduce lending, damage the economy and force some lenders to move jobs and operations abroad. UK Finance chief executive David Postings shared research commissioned by the lobby group in a letter to Healey on 12 October. Postings copied the letter to Prime Minister Andy Burnham days before news of the planned tax increase emerged. The research suggested that reversing Conservative cuts to the bank surcharge, raising the rate from 3% to 8%, would lower annual real UK GDP by £1.2 billion by 2029-30 compared with leaving the rate unchanged. Postings said business lending and mortgages would likely be £10.4 billion lower in 2029-2030 than under a 3% surcharge. Postings argued that the budget should avoid bank-specific tax increases because such increases risked constraining banks' ability to lend and invest.

However, TUC analysis of HMRC corporate tax receipts found that the Treasury had lost £6 billion over the three years since the surcharge cut took effect in 2023. Banks have reported strong profits, largely because of high interest rates. Bank bosses have subsequently increased bonus pools and distributed billions of pounds to shareholders. HSBC, NatWest, Barclays and Lloyds, Britain's four largest lenders, collectively reported £29.2 billion in profits during the first six months of the year. Those banks pledged almost half that amount, £13.7 billion, to investors through dividends and share buybacks. Those banks generated £200 billion in pre-tax profits over the past five years.

Author and former banker Philip Augur said banks were enjoying exceptionally favorable conditions, partly because of good management and partly because of economic circumstances beyond banks' control. Augur said a moderate tax increase could raise about £2 billion to £3 billion a year. Augur told the BBC's Today programme on Friday that the prime minister wanted taxation to fall on those most able to pay. Augur argued that few sectors currently had greater capacity to pay than banking. Augur said banks could not expect benefits from interest rates to continue forever. Augur argued that banks, including lenders rescued during the 2008 financial crisis, expected taxpayer support during severe difficulties but special treatment during profitable periods. Augur argued that banks could not be considered both too big to fail and too big to tax.

Some banks have threatened to withdraw investment and potentially jobs from Britain if taxes rise. Lobby groups have pointed to lower overall tax charges in rival financial centers including Frankfurt, Dublin and Amsterdam. Jamie Dimon, head of JP Morgan, the largest US bank, said in May that Dimon could scrap plans for a new £3 billion London headquarters if Britain's government became hostile toward banks.

However, Augur urged the government to look beyond banks' threats. Augur said there appeared to have been a coordinated campaign by major international banks operating in Britain, including JP Morgan, Citigroup, Santander and HSBC. Augur said banks frequently threatened to relocate but rarely did. Augur argued that banking business would remain in Britain if the chancellor correctly calibrated a moderate tax increase or another way of raising money from banks.