Private Beefs With Public – Reeves’ Taxation Conundrum

Over the past few days, this blog and other business articles have focused heavily on which sector Reeves will pull the plug on. Will it be banking or will it be public?

Barclays Chief Executive, CS Venkatakrishnan, spoke on his concerns about taxing the banking sector as a way to fill the fiscal deficit. His argument states that the banking industry will become uncompetitive compared to other countries that have lower tax levies. A higher tax level will squeeze profit margins, potentially leading to more redundancies and higher fees for clients.

With higher interest rates, the banking industry has enjoyed greater profits compared to the periods of rates near 0%. This highlights the competitive nature of banking, and retaining staff is important for London than for businesses.

Venkatakrishnan argues that the public sector has experienced significant pay rises, notably, civil servants. But do we want another strike like TFL, where London was halted to a stop? This type of debate is a dilemma for Reeves to solve.

What does it mean for you?

There is a medium probability that Reeves will tap into the banking industry to fill the deficit of £16.3 billion. This will certainly squeeze the banking industry further, which is already reducing staff as a response to the higher payroll tax.

Naturally, an outflow of talent is bad for the economy, especially in the financial sector. London, known for its competitiveness in financial services, is key to the UK economy. Ever since Brexit, many firms have relocated their headquarters to Europe, such as Germany. Therefore, a higher tax can lead to lower growth, which will be a substantial hit to the economy.

Straining the banking industry means lower product options for households and businesses. Lenders may respond but hiking the rates on their products and services. With sticky inflation, households will experience tightness in their finances. This may contract discretionary spending due to lower disposable income. Consequently, businesses may hold off on investments and wait for a clearer outlook. All in all, the decisions to squeeze the banking industry are very dim for the UK economy.

Eyes and ears must be kept open over the coming days – this Autumn’s budget is a make-or-break for many.