David Prosser: A pyrrhic victory in the Chancellor's battle with the banks


Outlook That's told them. Those naughty banks, still refusing to sign up to new lending targets despite their role in plunging Britain into recession, now know who is boss. The punishment for their failure to agree to the Project Merlin deal on lending is another £800m of bank levy tax.

Let's say this for George Osborne. Politically speaking, his tactics yesterday were spot on. He got the headlines he wanted – talk of a "raid on the banks" and so on – and had some useful ammunition for his first confrontation in the Commons with Ed Balls (what a coincidence that the bank levy was raised just hours before Treasury questions).

There will, however, be a price to pay for the short-term political gain. Not so much in retribution from the banks' negotiators at the Merlin talks – there will almost certainly still be a deal on lending targets and funding for SMEs, though don't expect it to transform their finances – but in the context of the Chancellor's relationship with business.

It is not the £800m of extra tax that most angered bankers yesterday. They can well afford to pay (you'll notice that the banks' share prices all finished up). No, what has caused most disquiet is the realisation Mr Osborne is willing to change tax policy on a whim, according to which way he senses the political wind is blowing.

Within reason, banks – and most other businesses for that matter – don't get mad about the size of their tax bills. What they do want, however, is certainty about what those bills are going to be. For example, the row under the last Labour government, when a string of companies threatened to move their tax domiciles to places such as Ireland, was prompted by uncertainty about a review of the tax system for multinationals, not a specific proposal to increase what they should pay.

There is a good reason why Chancellors publish their tax policies once a year in the Budget: it allows all those affected to plan ahead in the knowledge that the rules are set in stone. Yesterday's unexpected increase in the bank levy undermines that principle.

Should Mr Osborne have set the levy higher in the first place? Absolutely, especially given the generosity he is showing on corporation tax. Was he wrong to offer a cut-price version of the tax in year one? Indeed he was: it was clear months ago that the big banks were enjoying a profitable year.

What the Chancellor should not have done, however, is suddenly changed direction. Even if you believe his explanation that he is making the change because the banks are doing better than expected – rather than, as everyone thinks, because he is taking a pasting for not being tough enough on the City – this would be a poor justification. You can't change the rules of a game at half-time just because one side is miles ahead.

This is an awful precedent. Mr Osborne often remarks on how important it is to ensure Britain remains competitive in a world where plenty of other countries would welcome any company contributing crucial tax revenue. But if you want to make corporations think about decamping elsewhere, this is how you do it.

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