Blairite think tank urges Reeves to copy Thatcher and impose bank tax

Margaret Thatcher’s administration imposed a levy on banks in the 1981 Budget - Hulton Archive/Getty Images

Rachel Reeves should copy Margaret Thatcher and impose a new tax on banks, copying a levy in the 1980s when rising interest rates gave lenders a windfall.

The Institute of Public Policy Research, a Blairite think tank, said Ms Reeves could rake in £8bn a year by introducing a new tax on reserves held at the Bank of England (BoE) by the likes of Barclays, HSBC, Lloyds and Natwest.

Such a tax would inspired by Thatcher’s 1981 deposit tax on banks, which took a cut of windfall profits made by lenders, the IPPR said.

In addition, Chancellor could recoup a further £12bn by pushing the BoE to stop selling bonds at a loss under its controversial quantitative tightening (QT) scheme.

In total, the Left-leaning think tank said the £20bn annual haul would be a vital boost to the public purse. By some estimates, the Chancellor needs to raise as much as £50bn to get the finances back on track.

Carsten Jung, from the IPPR, said the BoE money printing scheme used to buy £895bn of bonds – known as quantitative easing (QE) – was “bungled” at the taxpayers’ expense.

That is because the BoE pays the base rate of interest to high street banks on the reserves they hold at the central bank. Those reserves ballooned in the past 15 years because of QE.

Cashflows from the Bank of England to commercial banks were of little consequence when the base rate was as low as 0.1pc in the pandemic. But when the base rate shot up to 5.25pc, it became a major financial burden on the public sector.

On top of that, the Bank is selling bonds under QT for less than it paid to buy them under QE, making a loss.

It means a scheme which initially made a profit for the Bank - which was passed on to the Treasury - is now forecast to make a loss of more than £130bn, to be covered by the Government.

Mr Jung said: “What started as a programme to boost the economy is now a massive drain on taxpayer money. Public money is flowing straight into commercial banks’ coffers because of a flawed policy design.

“While families struggle with rising costs, the government is effectively writing multi-billion-pound cheques to bank shareholders.

“This is not how QE was meant to work – and no other major economy does it this way.”

The IPPR is highly influential in Labour circles. Carys Roberts, formerly the think tank’s executive director, is now a special adviser to Sir Keir Starmer.

A raid on bank reserves held at the BoE has united Left and Right. Last year Reform UK called for the Bank to cease paying interest on reserves, arguing it could save as much as £35bn.

Andrew Bailey has disputed this estimate, arguing the move would not be that lucrative.

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In a letter to Richard Tice, Reform’s deputy leader, the Governor also said that any step to reduce rates “is akin to a tax on banks”.

A Bank of England spokesman said: “Tax and spending decisions are for the Government, not the Bank. We remain 100pc focused on making sure that inflation returns all the way to the 2pc target, because low and stable inflation is the foundation of a healthy economy.”

The banking industry said it would add to the burden already paid by the sector, making Britain a less competitive place to do business.

“The banking sector is very important to UK tax revenues, making a total tax contribution of almost £45bn last year,” said a spokesman for UK Finance.

“Banks based here already pay both a corporation tax surcharge and a bank levy. Adding another tax would make the UK less internationally competitive and run counter to the government’s aim of supporting the financial services sector to help drive growth and investment in the wider economy.”

The Government said it is focused on boosting the finances by growing the economy.

“Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn,” said a Treasury spokesman.

“The MPC has operational independence to set monetary policy, including how it approaches asset sales, which is essential for the effective delivery of monetary policy.”

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