From City AM:
BRITAIN’S lenders face having to pay the bank levy forever, as the chancellor yesterday revealed that the crisis-era tax was here to stay...
“I think the bank levy is going to be here to stay. It is perfectly reasonable as a society to ask the banking sector to make a contribution,” the chancellor told MPs on the treasury select committee.
Hooray.
“I was very clear in 2010 when I replaced the bonus tax with the bank levy, that the bank levy was a more effective way of getting the banking sector to make contributions.”
It is and it does.
Osborne hiked the levy for the ninth time in his Budget last week, increasing it to 0.21 per cent of UK banks’ global balance sheets. The initial plan was to set it at just 0.05 per cent of the balance sheet.
Osborne had targeted revenues of £2.5bn from the tax, hiking the rate as banks shrank in order to maintain that level of revenue. But under the latest plan, it will increase to take £3.7bn per year.
That's part of the point; to get banks to "shrink their balance sheets"; in other words to stop making the very low margin but high risk loans to land price speculators. So to keep revenues constant, the headline rate has to increase.
It's still only a paltry 0.21% though, which barely nibbles into banks' overall lending margin of 2% (i.e. mortgage interest average 3%, deposit interest average 1%, or whatever).
Analysts fear that such a large loss from the banking system will have larger ramifications for the wider economy.
"Large loss"? Get a grip. Banks hand out £10 billion a year in bonuses; the financial sector boasts that it pays over £50 billion a year in tax (mainly PAYE plus corporation tax and other bits and pieces). UK gross bank balance sheets are in the many trillions; if you net off inter-bank lending and other pure accounting entries, they are about £1,800 billion. Check: £1,800 billion x 0.21% = £3.8 billion.
“If that £3.7bn was capital that banks levered up into lending, that is easily £75bn of lending that could have been provided to the economy,” said analyst Joseph Dickerson from Jefferies. “I’m not sure it makes a lot of economic sense. It is like a sin tax, like on cigarettes, and governments usually like to have more taxes.”
Nope.
Loans create deposits (especially in a land price fueled bubble system). The constraint is what people are willing to borrow; once they've 'borrowed' that freshly printed money, it goes straight back into the banking system as a deposit.
The mechanism by which the bank asset tax depresses lending volumes is because the very, very low margin loans are no longer profitable; hence and why the sensible medium term policy would be to hike the bank asset tax to 1% or even 2% of assets (there are plenty of other bad taxes we could get rid of, like Stamp Duty or the 45% income tax rate, just to make it fair all round and fiscally neutral).