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August 30 2025 - 8:00am
In her seemingly never-ending quest for new sources of tax revenue to make her sums add up, Chancellor Rachel Reeves now appears to be setting her sights on the banks. A report in the Financial Times that she’s now considering a windfall tax sent bank stocks tumbling in Friday trading, with Barclays and Lloyds down by 2% and 3% respectively, and NatWest over 4%.
As with so many things this government does, the decision seems to be driven by political calculation rather than economic strategy. The Chancellor needs money to plug the widening gap in the Treasury’s finances, and the banks are an easy target. As one senior banker put it to the FT, “no one likes banks.”
There’s also an economic rationale for clawing back some of the profits the banks have made. A new report from the Labour-adjacent Institute for Public Policy Research makes a compelling case that banks scored a windfall from the Bank of England’s ultra-loose monetary policies, and that the public are entitled to demand some of it back.
The BoE’s policy of virtually handing the banks money to save the economy after the 2008 financial crisis, and again during the Covid pandemic, was always a dubious one, though in its defense the Bank could always say someone needed to pump money into the economy because George Osborne’s austerity took it out. But the effect was to inflate bank profits with windfalls which are now costing the taxpayer: quantitative easing involved buying bonds at inflated prices, while the quantitative tightening now underway involves selling them back at a loss, leaving the banks to pocket the difference.
So while it might have made sense as an economic strategy, the political legacy was always bound to be toxic. Reeves can’t be blamed for policy choices made long before she took office, and so she could have made the case on last year’s campaign trail that there was a lot of cleaning up that needed doing. She didn’t, though, and it seems a bit late to do it now.
Because she is constantly running around looking for new tax pots, having ruled out most available ones in a quest to help secure an election victory last year, Reeves is doing little to help stimulate the investment needed to fire up the economy. A recent OECD study found that Britain had one of the weakest investment rates in the developed world, and attributed it in large measure (as for all OECD countries) to uncertainty in the policy environment. The 2008 financial crisis and the Covid pandemic both set investment back sharply, and now trade uncertainty and a volatile geopolitical environment have made things worse. In the midst of all this, the last thing British business needs is a government constantly trying new things to stay solvent.
Back in 1963, Harold Wilson delivered a visionary speech to the Labour Party conference that called for the party to commit itself to the “white heat” of the technological revolution that could transform Britain’s economy. It formed the basis of Labour’s pitch in the following year’s general election, asking for a mandate to profoundly reorder the country.
Reeves and Keir Starmer could have made such speeches before last year’s election, calling for mandates to reshape the tax system, completely reorder public services, and change Treasury orthodoxy. They didn’t. Instead, they chose to play it safe with pledges crafted to offend nobody, condemning themselves to a seemingly endless cycle of crisis management.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).
jarapley