The market was on edge Friday as investors contemplated the chancellor’s narrowing budget options, with a new proposal to tax banks highlighting the difficult choices ahead. The suggestion, which promptly wiped £6.4 billion off the value of the banking sector, has intensified the debate over how the government will fill its £40 billion fiscal gap.
The proposal, put forward by the IPPR thinktank, presents a tempting option for the chancellor, Rachel Reeves. It offers a way to raise significant revenue by targeting the £22 billion annual “windfall” that banks are said to be receiving from the quantitative easing (QE) program.
However, the market’s violent reaction shows the potential cost of this option. The nosedive in the share prices of NatWest, Lloyds, and Barclays signals that a new bank tax would be met with extreme hostility from the City, potentially damaging investor confidence in the UK more broadly.
This leaves the chancellor walking a fiscal tightrope. With options for spending cuts or broad-based tax rises politically difficult, a targeted levy on a single industry might seem attractive. Yet, as Friday’s market performance demonstrated, such a move could easily backfire by undermining the very economic growth the budget is supposed to support.