29 August 2025

Could a bank tax rescue the public finances?

A proposed scheme could raise £32bn.

Illustration by Dom McKenzie / Ikon Images

In April 2013, at Christie’s auction house in New York, a letter written 60 years earlier by the scientist Francis Crick to his then 12-year-old son, Michael, describing Crick’s discovery of DNA was sold for $6m. This remains the highest price paid for a letter at auction. It is far from the most expensive letter ever written, however. A better candidate might be the letter written on 9 November 2012 by George Osborne (then chancellor) to Mervyn King (then governor of the Bank of England), in which George asked Mervyn to hand over his “excess cash”.

This was money the Bank had made as a result of quantitative easing, in which it created very large sums of money which it used to buy government bonds. When QE was devised, the Treasury and the Bank agreed that when the Bank made profits from the coupon payments (the interest, effectively) on these bonds, the profit would be funnelled to the Treasury. But as Osborne’s glibly confirmed, it also meant that “at some stage” the Bank would probably make a loss on the bonds, and the money would flow the other way. The Treasury would take the hit, and a future Chancellor would have to find the money.

The subsidy Osborne claimed lasted until 2022, when interest rates finally rose from their long slumber. As the bonds became loss-making, the Treasury began paying huge sums back to the Bank. This year, the OBR estimated that the net lifetime cost of having made George Osborne seem more fiscally competent than he really was – the bill for his 2012 letter – would come to £135bn.

This is a problem for which a number of fixes have been suggested, by people across the political spectrum. There’s the idea of paying “tiered interest” on BoE reserves, which the New Economics Foundation has suggested could halve the £22bn-a-year bill for the QE hangover. Others, such as Liz Truss and Nigel Farage, have suggested simply reneging on the deal and leaving the Bank to sort it out. The latest suggestion, published this morning by the IPPR think tank, is probably the most likely to happen.

The IPPR approach is to recognise that our central bank isn’t just taking £22bn a year from Rachel Reeves and burying it. The money is going to commercial banks, as the interest on the reserves they hold with the Bank of England. IPPR describes this as a “windfall”, a bit like the windfall profits made by oil and gas companies following Russia’s invasion of Ukraine, and suggests it could be taxed in the same way, raising £32.3bn over the course of the parliament.

It is fair to say that commercial banks have done rather well out of rising interest rates in recent years. The net interest income (the money they make from charging you more to borrow than they pay you to save) made by NatWest, for example, has improved by nearly 50 per cent since 2021. IPPR points out that the share prices of some commercial banks has doubled over the same period. A chunk of these profits are made from the interest-rate losses now being experienced by the Bank of England (and therefore, thanks to the indemnity agreement, the taxpayer). IPPR is not the first to describe this as a “subsidy” to commercial banks at a time when they are already doing very well for themselves.

The think tank’s suggestion seems very reasonable compared to previous plans. The tax would apply only to the “windfall element” of those returns commercial banks make from their “QE-related reserves”. This is even more reasonable when we recall that QE was a response to a financial crisis for which some commercial banks held a good deal of responsibility. The general principle of taxing banks has support within Labour; Angela Rayner has already suggested a higher level of corporation tax for the financial sector.

IPPR also points out that its idea is basically Thatcherite. In 1981, the Prime Minister explained that she was imposing a windfall tax on banks because the increased profits they were then enjoying were not the result of being great at banking – they were the result of monetary policy.

It will not come as a surprise to learn that banks are not keen on the idea. The heads of Lloyds, NatWest and Barclays have warned that a more aggressively taxed financial sector would slow down one of the UK’s most important industries, limiting the space for economic growth. Others have previously argued that changing the rules on QE now would make it harder to use when the next crisis arrives.

It’s also interesting to note that while most things probably are George Osborne’s fault, the Chancellor who originally agreed to indemnify the Bank of England against losses from QE was Alistair Darling. His special advisor at the time was Torsten Bell, who is now playing a central role in helping Rachel Reeves write her November Budget (as George Eaton revealed earlier this week).

Whether a bank tax makes its way into the Budget will probably be less a question of tidying up old decisions, however, and more a question of scraping together whatever can be found – see also plans for a gambling levy and national insurance contributions for landlords – in order to repair the public finances without breaking Labour’s big (and in my view, self-defeating) promise not to raise the three main taxes.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here