Yesterday, the shadow chancellor outlined Labour’s approach to dealing with the enormous fiscal deficit. He said that 60% spending cuts to 40% tax rises were “about the right balance” to halve the deficit over the term of this parliament. In doing so he conceded that something must be done to fix the nation’s finances, and that cutting the size of government is the most urgent priority. Importantly, he mentioned clawing much of his tax increases from the bankers and not from “ordinary people”.
Much of this is influenced by Mr Darling’s one-off bank levy on bank bonuses, which raised £3.5 billion. The current government is continuing with a reduced version of the levy, while Johnson wants banks to contribute an extra £7.5 billion. His proposal is flawed. For banks to deal with a consistently greater tax burden, they only have options that will be harmful to the economy.
Firstly, and most easily, many investment banks could relocate away from Britain, taking with them one of the most profitable sectors of the economy and therefore many billions in lost tax receipts. This would compound the fiscal problem. Secondly, banks could increase their prices, making credit more expensive for the essential small and medium size businesses that the recovery depends on. Higher borrowing rates are also painful for the poor, making mortgage repayments and credit bills harder to repay. Thirdly, banks could cut bonuses, but in doing so lose talent to overseas companies free of the levy and reducing the strength of the country’s financial sector. All three of these options hurt the poor and are destructive to the economy, yet are somehow sold by Johnson as “pro-growth”.
His words came on the same day that key business leaders gave support for the government’s approach to cuts, emphasising the importance of eliminating the deficit. Their argument is straightforward: the deficit must be dealt with swiftly, to avoid a collossal debt bill hanging over us for the coming years. Tax rises on banks will weaken a key part of the private sector and should be avoided at all costs.