Bank Profits: Windfall Tax

Bim Afolami Excerpts

Wednesday 6th December 2023 Commons Chamber

[The Economic Secretary to the Treasury (Bim Afolami)]

I congratulate the hon. Member for Leeds East (Richard Burgon) on securing this debate. He is an assiduous attender in the House, he cares a lot about these issues and I respect him deeply. In particular, I love his conversion, like that of his very good friend the Leader of the Opposition, to quoting and loving Margaret Thatcher. I cannot wait to hear the reports of how that goes down when he visits his local Labour party at the end of the week.

I am pleased that this debate provides me with an opportunity to set out the measures that the Government have already taken to ensure that banks make a fair and sustainable tax contribution, but before I get on to that, I cannot resist dealing with some of the points that the hon. Gentleman made about the economic context in which this country finds itself. He mentioned economic growth. It is important that he recognises that when they assessed the autumn statement that the Chancellor recently delivered to the House, the Office for Budget Responsibility and independent forecasters said that the pro-growth measures it contained represented the largest boost to economic growth over the forecast period of any fiscal event in a generation.

I think the hon. Gentleman said that austerity and public sector cuts were somehow inevitable, and that somehow the Treasury, Chancellor and Government felt that that was a good thing. We completely reject that characterisation. All I would say is that borrowing an extra £28 billion, as proposed by his Front-Bench team and the shadow Chancellor—I do not know whether it is the hon. Gentleman’s idea or proposal—will end up raising inflation and raising interest rates, which is what makes austerity and cuts more likely.

Let me deal with the real substance of the hon. Gentleman’s remarks on the banks and a windfall tax. First, it is important to highlight that financial and related professional services are a vital part of the UK economy. They employ nearly 2.5 million people, two thirds of them outside London. Indeed, I am sure that the hon. Gentleman has many members of Leeds’ thriving financial and professional services sector in his constituency.

As I laid out to TheCityUK’s national conference earlier this month, I am committed to delivering the Chancellor’s vision for a financial services sector that is open, sustainable, innovative and competitive, while also acting—this is very important—in the interests of communities, people and citizens all across our four nations. I urge the hon. Gentleman to consider my view and the Government’s view that such ambitions do not contradict each other; rather, it is the UK’s globally competitive financial services sector that supports jobs throughout this country and underpins access to finance—for individuals if they want to buy a home, for households, for businesses that need to borrow to expand and invest, and for consumers throughout the country.

Before we consider the potential merits of a bank windfall tax, I want to reflect on some of the bigger picture in respect of the health of the UK banking sector as a whole. We should be encouraged to see a strong, well-capitalised and competitive banking sector in the UK, in no small part owing to the significant regulatory and market reforms that have been implemented since the global financial crisis. Banks are the most important source of credit, providing individuals and businesses with the financial resources to succeed. For example, in 2022 banks lent a total of £65.1 billion to small and medium-sized businesses, which make up the majority of businesses in our country, and helped 370,000 first-time buyers on to the property ladder. That illustrates that these institutions are not in the pockets of fat cats; they serve the nation. They serve ordinary working people and early-stage entrepreneurs and businesspeople.

In addition, the retail savings market currently offers a range of competitive options to savers, who can now access the highest rates in recent years on a variety of instant-access and fixed-term products. The hon. Members for Strangford (Jim Shannon) and for Leeds East brought up the issue of bank branches, and I share their view that we need to maintain access to cash for rural communities. Indeed, the hon. Member for Leeds East will see from me and this Government that we believe we should speed up and spread banking hubs throughout as many of our communities as possible.

[Richard Foord]

I opened one of those banking hubs a fortnight ago in Axminster. I agree with the Minister that it is fantastic to see those facilities and I know my constituents are very grateful. When will we see the opening of the next tranche, such as a banking hub for Sidmouth?

[Bim Afolami]

This is a rolling programme. We are trying to speed it up and in due course there will, of course, be changes and updates to it.

It is equally important that banks make an equitable and sustainable tax contribution, and the Government have taken significant steps since 2010 to ensure that. First, as the hon. Member for Leeds East knows, we introduced the bank levy in the wake of the financial crisis. It was designed to encourage banks to move away from risky funding models and ensure that they make a fair contribution. The levy has raised vital revenue to help fund the public services we all rely on—over £28 billion so far—and, long after the financial crisis, it continues to bring in over £1 billion a year.

Secondly, in 2016 we introduced the bank corporation tax surcharge. Banks currently pay an additional 3% rate of tax on their profits, which, when combined with standard corporation tax, means that banks pay more tax on their profits—we would not know it from the hon. Gentleman’s speech—than most other businesses, and a higher overall rate than when the surcharge was at 8%. The surcharge has raised over £13 billion and continues to bring in over £1.3 billion a year. We have also taken action to prevent banks from claiming tax relief on losses incurred during the financial crisis or on compensation payments for payment protection insurance and other cases of misconduct.

This money is the public’s money. These measures help to support the needs and ambitions of our country’s citizens when it is appropriate for the state to do so. I know that that is why the hon. Gentleman is so keen to see a windfall tax introduced. I share his concern for supporting the interests of his fellow citizens, but the measures I have outlined demonstrate how the Government already ensure that banks make a fair and sustainable tax contribution.

Having outlined how our current approach has generated significant tax revenue for the UK, I want to conclude by turning to how deviating from the approach I have set out—for example, by adopting a windfall tax as the hon. Gentleman suggests—would carry significant risk for the health and competitiveness of our banking sector, which in and of itself would be a significant risk for the health and competitiveness of our economy.

A jurisdiction’s overall tax burden clearly informs decisions made by internationally active banks about where to operate. It is also clear that other international financial centres, which are our competitors, recognise that too. I want to be very clear that a higher level of bank taxation in the UK would significantly worsen our competitive position in relation to key global financial hubs in the US, Asia and Europe. It would have a threefold negative impact. First, it would put existing jobs at risk. Secondly, it would damage the chances of future jobs being created through new activity being set up. Finally, rather than raising significant yield for the Exchequer, I fear that it would have the opposite effect; it would jeopardise the considerable tax revenue that is already generated by the banking sector.

The banking sector’s contribution to the UK’s economy should not be underestimated. The amount of tax paid by banks is rightly proportionate to that contribution. Let me be clear: the Government still maintain that the sector should continue to make a fair and sustainable tax contribution. We have taken steps since 2010 to ensure that. It is no contradiction to say that we need a strong and competitive banking sector that supports individuals, households and businesses, because that has foundational importance to our economy.

Question put and agreed to.