Has the IPPR thinktank opened Pandora’s box by proposing a new bank tax? Friday’s market chaos, which saw £6.4 billion wiped from the sector’s value, suggests that the fallout from this idea could be far more chaotic and unpredictable than its proponents imagine.
The proposal itself—to tax the £22 billion “windfall” banks receive from the QE program—seems simple on the surface. However, its introduction into the political arena has unleashed a host of negative forces, starting with investor panic.
The unpredictable fallout was immediately visible in the tumbling share prices of NatWest and Lloyds. But analysts warn this could be just the beginning. The second- and third-order effects could include a credit squeeze as banks become more cautious, a decline in international investment as the UK is seen as less stable, and damage to the pension funds that are major holders of bank shares.
Like Pandora’s box, once the idea of a punitive, targeted tax is released, it is very difficult to contain the consequences. The government must now decide whether to try and force the lid shut by rejecting the proposal, or risk dealing with the unpredictable swarm of economic problems that could fly out.