LONDON: George Osborne must be patting himself on the back. Faced with deteriorating public finances, Britain's Chancellor of the Exchequer has quietly extracted an extra 280 million pounds a year from the banking sector.
A 17 percent increase in the levy on UK banks' balance sheets may seem like a clever way of bashing an unpopular industry. But it is wrong on three counts.
The levy doesn't look very large. After the increased rate takes effect in January, banks will pay an annual charge of just 0.088 percent on their liabilities, excluding capital and insured deposits. Moreover, the charge on long-term wholesale funding is lower.
However, this is the third time that Osborne has tinkered with the scheme in the 18 months since it was introduced. First, he agreed to cap the proceeds at 2.5 billion pounds.
Then, in February 2011, he brought forward by a year the date on which the full charge was introduced. In this context, the latest tweak will reinforce the growing belief that the government sees banks as cash cows to be milked at any point.
That will undermine confidence in the industry and in the UK's reputation for maintaining a predictable tax regime.
The government's decision to aim for a fixed amount of revenue from the tax also looks mistaken.
One of the good things about the bank levy is that it penalises lenders which rely on short-term wholesale funding, and gives them an incentive to make themselves less risky.
In other words, reduced tax proceeds should be seen as a sign of success, not failure.
Besides, banks hardly need another incentive to shrink their balance sheets further given economic turmoil and demands for higher capital ratios.
The third flaw comes in the government's calculations. Despite the projected revenue shortfall, the UK Treasury is assuming that increasing the levy will not have any impact on how banks behave. This looks optimistic
If, as seems likely, banks respond by further reducing their dependence on wholesale funding, the proceeds from the levy will again turn out lower than expected. Then Osborne will have to decide whether to increase the rate again next year.
The UK government is set to increase the levy on banks' balance sheets by 17 percent from January 2012, George Osborne, chancellor of the exchequer, said on Nov. 29.
The levy, which was previously set at 0.075 percent of banks' wholesale liabilities, will be raised to 0.088 percent. Osborne said the increase was a response to a shortfall in projected revenue from the levy, which was supposed to raise around 2.5 billion pounds a year.
The levy is currently forecast to raise 2.1 billion pounds in the 2012-13 fiscal year rising to 2.7 billion pounds the following year.
The UK Treasury estimates that the increase will bring in an extra 280 million pounds in the 2012-13 fiscal year and 310 million pounds in the following year.
The Treasury figures assume that banks will not make any further changes in their behaviour as a result of the increase in the levy.
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