No one loves bankers – but here’s why Rachel Reeves should

Can it only be three months since Rachel Reeves said: “There’s no need to have a tax on banks. I don’t believe that doing that would help us achieve what we want to achieve, which is growing the economy”?
Now, if the Westminster rumour mill is to be believed, Reeves is readying to do just that.
The new chancellor is preparing her first Budget, due next month, and speculation is growing that banks will be in the firing line.
The calculation goes that bankers have few friends, so there is little political fallout. Indeed, the banks continue to provoke opposition by making record profits. Britain’s six biggest lenders – Barclays, Lloyds, HSBC, NatWest, Nationwide and Santander – have seen their profits surge 39 per cent to a highest-ever combined £48bn.
This was thanks in part to higher interest rates. It also coincided with a cost of living crisis. So, while the rest of us paid more to borrow and to eat and heat our homes, the banks were in clover. Meanwhile, they carry on closing high street branches and force us to travel further to the next one or to use online.
The banks have heard the chat and they’ve met Reeves and her team. They are bracing themselves to be slapped. That does not mean they are not annoyed.
After all, it was not that long ago, in the run-up to the election, that Labour could not get enough of them, wooing them, holding breakfasts, lunches, and dinners galore with their leaders. Then, Sir Keir Starmer and Reeves were keen for the banks’ seal of approval, anxious to be held up as trusted guardians of the nation’s money.
Labour also wished to push an economic growth strategy and again it wanted the banks’ say-so, needing their number-crunchers to give the thumbs up to its plans. When that agenda was implemented, it required the banks’ cooperation. It’s their loans and counsel that will help businesses to develop and expand.
Since then, Labour has come to power with a bigger-than-expected majority. Starmer is less in need of public support than he was.
There’s been another development: Labour claims to have found a £22bn black hole in the country’s finances, something the previous chancellor Sir Jeremy Hunt, hotly disputes. Whether it’s a fabrication or real, it’s given Labour the excuse to raise taxes. Probably it was going to put them up regardless but suddenly, the way it is presented, filling that void is a priority.
In increasing taxes, Reeves has options. She could target those that bring in the most revenue: income tax, VAT, and employee national insurance. These though are taxes paid by ordinary people, by Labour voters. She could alight on corporation tax but that would harm all businesses, including the small ones that are the backbone of the economy and at the heart of communities. It could no longer claim to be on the side of the little man.
Any of this, and Labour would alienate its core. The positive feelgood effect of returning to office would quickly disappear. Goodwill would vanish.
So, banks are fearing the worst. If they are right, it’s short-sighted, lazy politics from Starmer and Reeves. They’re a soft and easy hit and they don’t help themselves.
But think on. The amount they contribute already in taxes to the UK Exchequer is huge. They’re major employers of skilled workers the breadth of the country. Woe betides a government, a Labour one at that, which gave them a reason to examine tax-saving schemes and to cut their workforces.
Reducing their services, scaling back on their always risky start-up business, making it tougher to open new business accounts, not advancing loans to the less financially secure as they are doing increasingly at present, shutting more outlets – these and more could be their justifiable response to fiscal attack.
It’s often supposed, in the way they are portrayed, that rich bankers own the banks. What’s never mentioned is the identities of the shareholders. Those that hold the majority of the shares are institutions, they’re pension funds that are investing for your future and mine. Reeves strikes, bank stocks fall and with them the value of our pensions. By going after banks, the government will be pursuing us.
Then there’s the wider message to consider. This is an administration that professes to wish to grow the economy. The sad fact, and Labour in particular may find this difficult to swallow, is that the UK does not make things any more.
Heavy manufacturing and engineering, once the bedrock of our industry and the greatest mass employer and birthplace of the trade unions and Labour movement, has all but vanished. Ours is now a service economy. A whopping 82 per cent of GDP is contributed from the service sector. And the biggest success story in that new-look landscape is the City.
Chase the banks and you chase the City. This is the City in its widest sense, covering all manner of financial and professional services, from accountancy to insurance to law to investment banking to trading shares and commodities to fund management and private equity.
Only New York can rival us in this regard. It’s a huge source of foreign investment, the sort of capital that Starmer and Reeves are so desperate to attract. When they did their romancing, the Labour duo did not confine themselves to banks, they toured all the major City players convincing their bosses that they were serious and that they knew how to boost the economy.
Key to that was the notion that under Labour, Britain would be open for business – they wished theirs to be seen internationally as a welcoming, positive environment, one that was on the side of capitalism and wealth generation, that would offer a healthy return to anyone investing and creating jobs. That ceases if they are seen to single out banks. By going after them, they are going after the City’s own.
Starmer and Reeves may well regret what could turn out to be a short-sighted, damaging measure.