A Modest Bank Tax Rise Is Not the End of the World for Lenders

By Olivia Hart

Chancellor John Healey is likely to increase taxes on banks in his budget next week, according to a report the Guardian revealed on October 15. The move, argued veteran finance columnist Nils Pratley, "is a reasonable policy. Or, at least, better than most alternatives."

The banking lobby has already settled on its counterattack: raising taxes on banks amounts to taxing the nation's growth. The argument holds that higher bank levies mean less interest paid on deposits and slightly costlier loans, leaving everyone worse off over time.

Pratley conceded the theory is coherent. "In an ideal world, a chancellor would strive to lower costs of capital at every opportunity," he wrote in his October 20 column.

Why is Healey turning to the banks?

The chancellor faces competing demands on the public finances, including pressure from a business lobby that extends well beyond the banks. Healey is trying to "stay the course" on his fiscal rules, as the Guardian reported on October 13 amid IMF growth forecast discussions, and must find money from somewhere.

Tapping the banks, in Pratley's assessment, is a defensible way to do it. The caveat matters as much as the endorsement: he supports only a modest increase, not an aggressive one.

What is the banks' core objection?

The industry's plea is familiar. Tax the banks more, the argument runs, and the cost lands on everyone else through lower deposit rates and more expensive credit.

That is standard economic theory, and Pratley did not dispute it in principle. His objection is to its use as an absolute shield against any tax rise at all.

How much of an increase can lenders absorb?

Pratley's central claim is measured: "As long as Healey doesn't go overboard, a small turn on surcharge dial will not seriously undermine flow of capital."

That sentence carries the column's real verdict. A small adjustment to the bank surcharge is survivable for lenders; a large one, by implication, is not. Pratley offered no specific threshold for what counts as "overboard," and that gap is worth watching when the budget lands.

The stakes are straightforward for bank shareholders and customers alike. A modest surcharge increase would trim sector profits without, on Pratley's reading, materially changing how much capital flows to UK businesses and households. A larger hike could push the cost back onto depositors and borrowers through the channel the banks describe.

The column did not specify figures for the proposed increase, the surcharge's current level, or expected revenue. Until the budget next week, the argument rests on direction rather than scale.

What happens at the budget?

Healey's budget next week will show whether he takes Pratley's condition seriously — a small turn of the dial, not a wrench. The test for markets will be whether the rise stays modest enough that the banks' growth warning remains theoretical rather than a price customers actually pay.