After unceremoniously announcing a landmark rise in corporation tax to 25% back in March, Rishi Sunak will have been wary of incurring the wrath of the City for a second successive Budget. This looks like mission accomplished. The Chancellor’s speech proved to be an uncharacteristically low-key fiscal event for the financial services sector, with major announcements fairly thin on the ground.
To Sunak’s relief, no doubt, what has been announced has broadly been well received. This is despite some hope that the corporation tax bump may be reversed as a result of the OBR’s rosier than expected outlook for the UK economy. This optimism proved to be unfounded, with Sunak seemingly hoping to use this extra windfall to finance his generous public spending pledges.
The headline announcement for the City was a relaxation of the bank surcharge from 2023, down to 3% from 8%, which Sunak says will save the sector £4 billion over five years. This will be viewed as a success for the banking lobby who have vociferously opposed the charge since it was introduced in 2015. Nonetheless, the industry has been quick to remind Sunak that the big banks’ overall tax bill will still increase from 2023 to 28% and that the likes of Frankfurt and Amsterdam continue to pose very real threats to the City’s crown as Europe’s most attractive and prosperous financial centre.
Sunak is aware of how the financial goalposts have been moved since Brexit. He was keen to emphasise the importance of competitiveness in the UK banking sector during his speech. If this was part of the reasoning behind the surcharge cut, then the move to exempt banks with less than £100m profits from the tax, up from £25m, certainly was. This will have been music to the ears of the UK’s growing swathe of challenger banks and will keep the larger players honest.
The Budget has also largely been met with approval from the business community. The £1.4bn Global Britain Investment Fund will provide a timely boost for businesses across all sectors as they seek to lure overseas talent post-Brexit. Confirmation of an extra £1.6bn for the British Business Bank will go some way to help the business community access the most suitable forms of debt and equity finance from providers across the sector. The extension of the Covid Recovery Loan Scheme is also welcomed, particularly amid recent jitters that the UK will be forced to re-enter certain Covid-19 related restrictions during the winter months. And in resisting calls to scrap the current business rates system, Sunak said he was focused on making the system “fairer”, announcing a total cut in rates worth £7bn.
Universal approval has not been forthcoming, however. With COP26 on the horizon, there were hopes that this Budget’s “rabbit” – widely viewed to have been the cut to the Universal Credit taper rate – may have involved some form of sustainable finance pledge. Instead, it was light on such initiatives. A new investment relief encouraging businesses to adopt green technologies and trumpeting of the previously announced green savings bond were what Sunak had to offer. The apparent decision to trust the private sector to lead the UK’s green finance transition may be one the Government comes to regret.
The Chancellor has largely left the City alone in this Budget. His piecemeal, sensible reforms will likely put him firmly back in the sector’s good books after an uneasy few months. However, should the OBR’s optimistic growth predictions be realised, Sunak should expect the banking lobby to push him to reconsider the wisdom behind the net tax increase.