IMF advises UK to target welfare spending rather than raising bank taxes

The International Monetary Fund has advised the British government to prioritise reductions in pension and welfare spending over increasing taxes on the banking sector. Helge Berger, the deputy director of the IMF’s European department, made these remarks while speaking in Bangkok during the organisation’s annual meetings. He stated that given the United Kingdom’s currently high tax-to-GDP ratio, it would be more prudent to place emphasis on fiscal spending cuts rather than introducing new levies on financial institutions.

Berger noted that with UK taxes currently standing at approximately 40 per cent of GDP, a historically high level for the country, balancing measures on the spending side makes good sense. He suggested that if additional revenue were required, reforms to property taxes or value added tax might be more appropriate starting points. Specifically, he highlighted the pensions triple lock, which the Labour government has already indicated it intends to reform, and the better targeting of social benefits as areas where the government should focus its efforts. He argued that these measures should take precedence over the specific bank taxes that have been reported as under consideration.

This guidance comes as Chancellor John Healey is reportedly poised to raise taxes on banks in the upcoming budget. The suggestion to tax the sector emerged after the Guardian revealed plans to tap the industry for additional revenue. In response, city lobbyists have intensified their campaign, warning that higher taxes could force banks to restrict lending, thereby damaging the wider economy. Some lenders have even threatened to relocate jobs and operations abroad if the tax burden increases.

David Postings, chief executive of the trade body UK Finance, sent a letter to Healey and Prime Minister Andy Burnham on 12 October, days before the news of the planned tax hike became public. The letter included research commissioned by the lobby group, which suggested that reversing the Conservative government’s cuts to the bank surcharge would have a negative impact on economic growth. The analysis indicated that returning the surcharge from its current three per cent to eight per cent would leave annual UK gross domestic product 1.2 billion pounds lower in real terms by 2029 and 2030. Postings argued that this change would also result in fewer business loans and mortgages being issued, with lending likely to be 10.4 billion pounds lower in that period compared to if the surcharge remained at three per cent.

However, critics of the banking sector point to the industry’s recent financial performance. Analysis by the Trades Union Congress of HMRC corporate tax receipts shows that the Treasury has lost out on six billion pounds over the three years since the surcharge cut came into force in 2023. During this same period, banks have reported strong profits, largely driven by high interest rates. These earnings have allowed bank bosses to increase bonus pots and distribute billions of pounds to shareholders. The four largest UK lenders, HSBC, NatWest, Barclays and Lloyds, reported 29.2 billion pounds in profits over the first six months of the year. Of this amount, 13.7 billion pounds was pledged to investors through dividends and share buybacks. Over the past five years, these institutions have accumulated 200 billion pounds in pre-tax profits.

Philip Augar, an author and former banker, has argued that the banking sector is enjoying boom conditions and has the capacity to pay more. He suggested that a moderate increase in taxation could raise between two and three billion pounds a year. Augar contended that the burden of taxation should fall on those with broader shoulders, and that it is difficult to identify a sector with broader shoulders than banking. He noted that while banking is cyclical, the industry expects taxpayer bailouts during difficult times but special treatment during prosperous periods. He warned that banks cannot be both too big to fail and too big to tax.

Despite threats from some banks to pull investment and jobs from the UK, Augar suggested that the government should view these warnings with scepticism. He described what appeared to be a coordinated campaign by major international banks, including JP Morgan, Citigroup, Santander and HSBC, but noted that such institutions rarely follow through on threats to leave. He concluded that if the chancellor judges the situation correctly and implements a moderate increase in taxation, the business will likely remain in the UK.