After an initially positive start for European markets in early trade, those gains seem to be slowly slipping away, with UK banks on the back foot, on reports that the new chancellor of the exchequer, Jeremy Hunt, is weighing a further windfall tax on banks and energy companies to help plug a £40bn hole in the public finances.
For the banking sector, this would be on top of a corporation tax rate that is due to rise to 25% next year, as well as an 8% bank surcharge, while oil companies have an effective tax rate of 65% on their UK profits. This comes across as hugely short-sighted, as well as completely self-defeating, at a time when the government should be looking to encourage investment into the UK economy.
It is true that banks look set to make higher profits from the rise in interest rates, as well as reserves from overnight deposits held at the Bank of England, but they are also likely to have to make further provision for impairments as the UK economy deteriorates over the next 12 months.
It seems ludicrous to double down on windfall taxes on a sector that dares to make too much in the way of profit. It’s also an odd way to encourage longer-term investment into the UK economy, which is crying out for inward investment.
As far as oil companies are concerned, it’s all very well tendering new licences in the North Sea for oil and gas extraction to deal with soaring energy prices, but if you’re then going to hammer those same companies on any profits they make, why on earth would the oil companies put in the investment to extract that resource? With an effective tax rate of 65% already, the margins for doing so are already slim.
Among the biggest fallers are Lloyds and NatWest, given that most of their profits come from UK operations. The banks are due to report their Q3 numbers next week.
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