Good morning from New Economy Brief.
Last week the Italian government announced a windfall tax on the country’s bank profits, before, rather chaotically, changing course and watering down the policy the next day, seemingly because of falling share prices of the banks.
This episode isn’t a wonderful advert for policy-making- but the question of whether bank profits should be taxed more highly is a serious one. Campaigners in the UK argue that banks are reaping windfall profits due to rising interest rates, and that taxing them could raise billions to support public services or cost of living support.
This week’s New Economy Brief examines why banks are making huge profits, and the case for taxing them.
Banking the rewards. The fact that UK banks are making record profits is not contested, but the scale of these profits is eye-popping. According to think tank Positive Money, UK banks made record profits of £33bn in 2022, and are set to blow that figure out of the water in 2023. In the first half of 2023, the Big Four UK high street banks (Barclays, Lloyds, HSBC and NatWest) alone made pre-tax profits of over £28bn, an 80% increase from last year and 725% up on 2020.
So is this a windfall? Campaigners argue that, just as energy companies are benefiting from high global gas prices, banks are profiting from high interest rates despite not doing anything to ‘earn’ these profits in terms of productivity gains or being rewarded for risks that they have taken. The point about the central bank reserves is that they are risk-free for the banks, and now they are effectively being given a huge reward for holding them.
To tax or not to tax. For some campaigners this is a slam dunk case. Positive Money, for example, is arguing that this is clearly the case of a windfall that should be taxed. They say the simplest way to do this would be to raise the Bank surcharge from 3% to 35% (the same as the energy windfall tax) and estimate this would raise around £20bn this year from the Big Four banks alone that could be spent on public services or cost of living support. This would still leave banks incredibly profitable by historical standards. The windfall tax idea has gained support from ex Bank of England Deputy Governor Sir Charlie Bean, who has argued that it could raise tens of billions of much-needed revenue for the exchequer.
Social enterprise. The social enterprise sector now makes up 5% of UK GDP, exceeding a turnover of £100 billion for the first time according to new analysis by the Beautiful Enterprise Policy Lab. The report suggests that “social enterprise is not only growing but also growing faster than the rest of the private sector” and calls for more research into the nature of this growth so that investment in the sector can be better directed.
Feminist macroeconomics. Despite having no market value, unpaid care and domestic work play vital economic roles and should be included in economic frameworks, argues a new briefing by the Women’s Budget Group. It also argues that a “feminist approach to macroeconomics” includes “investment in social infrastructure” in which sectors such as health, care and education services are seen as a public investment rather than current expenditure.
Effective tax rates. Taxes for those on the lowest incomes are effectively rising under the current government, argues the New Economics Foundation’s Dominic Caddick. Because the tax free allowance was frozen at £12,570 in 2021, which by next year would be worth £15,260 if it rose in line with inflation, those paying income tax are effectively having “an extra £540 taken out of their pay check”.
A national conversation on tax. The TUC has published new analysis showing that a modest wealth tax on the richest 140,000 individuals, around 0.3% of the UK population, could deliver a £10.4 billion boost for the public purse. The wealth tax would only be applied to wealth above £3 million with a marginal tax rate of 1.7%, rising to a rate of 2.1% on wealth above £5 million and to 3.5% on wealth above £10 million. This would mean that someone with £3 million wealth would pay nothing, someone with £4 million wealth would pay £17,000 and someone with £9 million would pay £118,000.
Basic income as a public health measure. A new report by Basic Income Conversation, Autonomy and Compass, funded by the National Institute for Health and Social Care Research (NIHR), has found that a Basic Income scheme could potentially save the NHS tens of billions of pounds. It estimates that a basic income could reduce working age poverty by between 29% and 75% and prevent or postpone between 125,000 and 1 million cases of depressive disorders.