Banks feel the brunt of the Budget

Dr Dimitris Andriosopoulos, senior lecturer in Accounting and Finance, shares his views on the budget announcement.

Chancellor George Osborne announced arguably the most important budget of his career on Wednesday – the Conservative’s last budget before the 2015 General Election.  Osborne enthusiastically introduced the announcement which he believed signalled a thriving Britain.  He opened with a number of national achievements.  In the last year the UK has grown faster than any major economy in the world.  More people are employed in Britain than ever before.  Osborne stated Britain was walking tall once again and did we wish for that to continue or did we want to return to ‘the chaos of the past?’  The media has been frantically covering what appears to be a seemingly generous budget for the public.  However, where is the money coming from and is it too good to be true?

The banking industry was hit hard by new tax legislation.  Osborne stated the financial sector was one of the most important and successful in the UK, responsible for a lot of job creation.  However, due to this progress banks would now have to contribute more to the wider economic recovery.  They had been supported during the financial crisis, now, according to Osborne, it is their time to support the public.  Although this may sound promising to consumers who have lost trust in the banking sector, we must consider if harsh tax changes are going to realistically have a positive economic impact.

The bank levy was introduced in 2011 in light of the financial crisis to raise money and discourage banks from risky borrowing.  The levy is an annual tax on the value of all the debts in UK banks and has been raised nine times since it was introduced at a level of 0.05%.  This week, Osborne announced an increase from 0.156% to 0.21%, believing the measure will generate £900m a year.  This additional revenue will likely contribute to many of the voters’ perks announced such as alcohol duty being cut and to some of the long-term pledges like the increase of personal tax-free allowance from £10,000 to £10,800.

However, the government must ask itself if this optimistic increase is realistic.  Lenders currently have fragile capital needs and are under tighter regulations than they have been in the past such as Basel III, a regulatory framework based on bank capital adequacy, stress testing and market liquidity risk.  Banks are still struggling to deliver a robust balance sheet and get back on track with healthy profitability.  The funds for the range of attractive promises from Osborne’s budget have to come from somewhere but at this point the banks may not be a stable enough source.  Additionally, there may be some resistance on this increase by other players in the financial services sector especially when there is increasing competition from other international financial centres aspiring to replace London.  Concerns have already been voiced by industry professionals believing the move is anti-competitive, could damage the industry and may drive more jobs overseas.  Banking industry body BBA said the increase may deter international banks from investing in the UK.

It seems that banks are being targeted as the losers of the newly announced measures.  However, in the run-up to the General Election, giving the public a common enemy can divert attention from the government’s own shortcomings.  I believe it will take some time for us to see the real benefits and outcomes of this announcement and whether any of the pledges were fuelled by political agenda.

What elements of the budget do you think will have a long-term positive economic impact for Britain?  Share your comments below.

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