Making the banks pay

The news that the Government is set to increase the banking levy to £2.5bn, raising an additional £800m for the Treasury, can be interpreted in a number of different ways.

The early announcement of this move, which should have been detailed in the Budget on 23rd March, has been justified on the basis that the banks need to know about it before announcing their bonus payments in the next few weeks.

One interpretation of the announcement is that the banks are in a much healthier financial position than previously thought.

The combination of taxpayer-funded bailouts and restrictive lending practices have clearly helped to repair balance sheets.

The Government remains in talks with the banks about lending to small businesses and capping bank bonus payments. It would be easy to speculate that the higher bank levy is part of the negotiation strategy – bend our way or we can make you suffer.

This seems to be the most likely explanation for a higher bank levy.

If banks are still pushing ahead with their plans to pay over £6bn in bonuses this year, they are clearly in good financial health and can afford to make a larger contribution towards repairing the economy.

The levy on bank balance sheets is considered to be a better way of raising money than the one-off bank bonus tax used by the previous Chancellor, Alistair Darling. This is because a bank bonus tax must also take account of reducing income tax and corporation tax receipts.

It will be interesting to see if George Osborne decides to make any further tax announcements before the Budget next month.

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