ALEX BRUMMER: Squeezing the pips out of the banks look like an easy win for Labour but it'll be a huge own goal

I couldn’t quite believe what I was hearing. A Labour Chancellor, with a proud trade union background, was lavishing praise on the banks.We were at the International Monetary Fund (IMF) gathering in Bangkok 12 days ago and John Healey seemed to have undergone a Damascene conversion to free-market capitalism and the importance of good finance to the UK’s well-being.He described our High Street lenders as ‘part of the jewel in the British economic crown’. He added, for good measure, that they are ‘hardwired into the economic fabric of this country’.It seemed impossible that a political operative as experienced as Healey, who served as City minister in Gordon Brown’s Treasury, would speak so glowingly about the banks if he were about to clobber them in tomorrow’s Budget.Perhaps the loud campaign against new bank taxes by the world’s most powerful commercial banker, Jamie Dimon of JP Morgan, and the sotto voce lobbying by our more measured British bank bosses had cut through.Sadly not. Soon after Healey’s remarks, the Treasury was briefing that, despite the splendid rhetoric, the Government had to raise money from somewhere – and the banks were a target.A government that has brought businesses of all descriptions – particularly in hospitality and farming – to their knees by imposing £75billion of taxes since being elected in July 2024 still has no understanding of the damage that slapping on levies can do.The clear advice from the IMF to axe social spending rather than raise more business taxes looks to have fallen on deaf ears. And to raise them from banks right now is folly in the extreme. Prime Minister Andy Burnham meeting with Chancellor of the Exchequer John Healey at No11 Downing Street ahead of the Budget on Wednesday The banks, for all their faults, drive the economy. Tax them more heavily and you punish every corporation, every small and medium-sized enterprise in the country, writes Alex BrummerThe banks, for all their faults, drive the economy. Tax them more heavily and you punish every corporation, every small and medium-sized enterprise in the country.You punish ordinary folk, too, because bank taxes will make it harder and more expensive, as Shadow Chancellor AndrewGriffith argues, to get a mortgage or personal loan.More seriously, though, mauling the banks discourages lending for innovative industries such as artificial intelligence, technology and data centres, which the country needs if a growth agenda is to have any chance of working.The employers’ group the Confederation of British Industry warns higher bank taxes would be an ‘own goal’ for the economy.And the Bank of England is fearful that any such tax will blow up global investor confidence in British banks, whose stock market valuations are well below many of their foreign counterparts.Indeed, that falling investor confidence is already evident. Bank shares dropped sharply in the latest trading and short-sellers – the investors who make money from falling markets – have raised their bets on future declines in bank shares by a staggering 60 per cent.The importance of banks to a fully functioning economy cannot be overstated, even if there is no love lost between the British public and our biggest lenders.It is easy to see why Labour has chosen to punish banks.Customers have never forgiven them for the meltdown of the financial crisis of 2008, when the Treasury and Bank of England issued guarantees for bank debt and liquidity schemes of £1trillion to save us from a national bankruptcy that would have placed all bank deposits at risk.The banks were saved, but ballooning government borrowing, which began with that crisis, ushered in a period of austerity, crushed living standards and caused stagnation.Since then, the big High Street lenders HSBC, Lloyds, NatWest, Barclays and Santander have done little to win our favour.There have been about 7,000 branch closures in the past decade in a trend that has infuriated local firms and the elderly, who need banking services nearby, while delivering a severe blow to already desolate high streets.Just as exasperating is the banks’ obsession with driving us all online.In an age of the internet and AI this might seem obvious. Yet the moment a customer wants to do something more complex than pay a utility bill they are sucked into a maddening, labyrinthine cyber-journey. It is small wonder that many young people avoid traditional banks and have signed up to the array of online banks, including Revolut, Monzo and Starling. But none of these neophyte lenders have either the experience, knowledge, deposit or capital base yet to provide full banking services for commerce.Labour is also happy to hammer banks with higher taxes because they see them as profiteering giants – the ugly face of capitalism. This month, the High Street banks jointly are expected to report that they earned £29billion of profits between them for the first half of this year, 20 per cent up on the same period in 2025.Earning fat profits may seem easy for the banks. A chunk of their income comes from the ‘endowment’ effect – the interest which the banks can earn on cash simply sitting in current accounts. The big High Street lenders HSBC, Lloyds, NatWest, Barclays and Santander have done little to win our favour since the 2008 financial crisisAnother source of profits is the gap or margin that banks earn by paying depositors low rates and charging borrowers higher rates.But the fact is that accumulating profits in the good times is critical for British banks. They are required by their regulator, the Bank of England, to hold large amounts of capital to absorb the losses on loans that go wrong.Insolvencies happen every day. When a firm such as fancy department store Harvey Nichols or telecoms provider TalkTalk goes bust the banks take the loss.We all see that local businesses, whether they be pubs, garages, builder’s yards or corner shops, can get into trouble overnight.But this is the tip of the iceberg given that when larger enterprises collapse, larger bank loans are at risk. This was the case with Mayfair mortgage lender Market Financial Solutions, which went bust in February, putting £2.5billion of bank loans in danger.Our banks must also stay competitive to survive. Even before tomorrow’s Budget, British-based banks are paying an eye-watering 46.5 per cent of income on taxes, including a 3 per cent surcharge on what is defined as ‘windfall’ profits – large unexpected financial gains as a result of random circumstances or events.That is more than twice the effective 22 per cent tax-rate paid by US banks. If the surcharge is raised to 5 or even 8 per cent as feared, it would limit the ability of British banks to lend in the UK and compete on global markets.This, in turn, could undermine the City of London, the biggest banking centre in the world, with overseas banks cutting back operations or even leaving our shores.JP Morgan has said if taxes on its UK operations are raised, it would be inclined to rethink a £3billion European headquarters planned for Canary Wharf.Britain’s financial sector paid £43.3billion of taxes in the year to March 2025, already making it among the biggest contributors to the Exchequer.Squeezing the pips out of the banks looks like an easy win for a Labour Party reluctant to tackle bloated and out-of-control state spending.Yet using the banks as a cash cow to fund Andy Burnham’s pet welfare projects would be a huge own goal.It would reduce lending, increase the cost of borrowing, severely weaken the safety net that has to be there if we go through another crash thanks to an AI bubble or a bonds crisis – and have a devastating impact on the City, which has been the greatest engine of growth for decades.