An uneasy alliance between the government and the City of London was tested on Friday, as talk of a new bank tax created a direct clash with the government’s own pro-growth agenda. The £6.4 billion market sell-off was a clear sign that the financial sector sees these two things—a windfall tax and a pro-growth strategy—as fundamentally incompatible.
The government’s stated agenda is to foster economic growth, with the City seen as a key engine for this ambition. However, the proposal from the IPPR thinktank for a new levy on banks runs directly counter to this. As analyst Neil Wilson of Saxo Markets asked, how can you have a pro-growth agenda if you “constrain their ability to create new [money] by lending?”
This clash of ideas spooked investors, who see a government at war with itself. The plunge in banking stocks was a vote for the side of caution, with the market betting that a government with a £40 billion deficit might prioritise the immediate need for cash over its long-term growth strategy.
To repair the alliance, the chancellor must now clarify her priorities. Is the primary goal to raise revenue by any means necessary, or is it to create a stable environment for investment and growth? Friday’s market reaction suggests she cannot have both.