Creating a Banking Levy: A Fair Deal for the Taxpayer

The UK banks owe their very existence to the British taxpayer with the Governor of the Bank of England estimating that they have received the equivalent of £1 trillion in taxpayer support.

But it does not stop there. The banking industry is unique in having the taxpayer acting as a safety net. Until the banks can be successfully broken up, the Liberal Democrats believe that they should pay for the explicit guarantee that they receive.

Liberal Democrat Shadow Chancellor, Vince Cable has proposed creating a new levy on bank profits at a rate of 10%, with all the revenue raised (estimated next year to be around £2bn) going towards tackling the structural deficit.

Vince Cable said:

"One trillion pounds worth of taxpayer support has gone into keeping the British banking industry afloat. We must find a way to split the banks so that the British public no longer props up 'casino' banking.

"Meanwhile, it is only right for the taxpayer to get a fair deal for the guarantee that they provide to the banking industry. A 10% levy on bank profits would be used to pay down the structural deficit that they are partly responsible for creating.

"The Government should use next month's pre budget report to put forward this proposal so that banks recognise the explicit guarantee that they currently enjoy."

This levy would be supplementary to corporation tax. However, unlike corporation tax it would be payable on all profits made within the tax year, without the deduction of previous years' losses. Had this levy been in place prior to the financial crisis it would have raised approximately £4bn per year. Profitability has fallen since the crisis and we expect further write downs from some banks, making the current likely yield from this levy around £2bn next year.

Unlike windfall taxes, a banking levy of the kind we are proposing is not an arbitrary one as it is a direct recognition that banks have received beneficial and explicit taxpayer support. The revenue raised from this levy would be used to tackle the structural deficit, thus ensuring that the banking sector helps pay for the problems it has in part created.

All banks that are incorporated in the United Kingdom would pay the levy. The FSA publishes a list of these banks every month. Under the FSA definition, building societies are not banks and will not pay this levy. We wish to encourage building societies that are already struggling to meet high Financial Services Compensation Scheme payments.

We acknowledge that this proposal alone is not enough to tackle bonuses within the banking sector. However, we would expect this levy, as an additional cost to banks, to reduce the size of bonus pools and thus impact their capacity to pay out large bonuses. The Liberal Democrats will be coming forward with further proposals to tackle bonuses such as creating a fully open and transparent system whereby all those earning over £200,000 must have their bonuses published in their company's annual report.

Splitting up the banks remains our ultimate aim, as the Liberal Democrats do not believe that the taxpayer should underwrite high-risk casino banking which provides little social utility. We do however appreciate that separating these banking functions out from narrow high street banking is complex and will take time. Until such a time, the taxpayer will have to continue underwriting the banks and a levy would recognise the contribution that the taxpayer has made and continues to make to the banking industry.

When conditions allow for the banks to be adequately split up this levy would be scrapped. One of the key benefits of this proposal is that it creates a direct financial incentive for British banks to work with the Government in finding a viable mechanism for splitting their functions.