A £6.4 Billion Reality Check for a Cash-Strapped Government

Friday’s £6.4 billion market rout served as a stark reality check for the cash-strapped UK government: any attempt to solve its fiscal problems by targeting the banking sector will come at a very high price. The immediate and severe investor backlash against a proposed windfall tax has laid bare the potential economic consequences of such a move.
The proposal, from the IPPR thinktank, offered what might have seemed like an easy solution to the government’s £40 billion deficit. It identified a £22 billion annual “windfall” from the QE program and suggested a tax to claw it back.
However, the market provided an instant reality check. The plunge in the share values of NatWest, Lloyds, and Barclays was a powerful demonstration of how such a policy would be received. It signals a loss of confidence that could lead to capital flight, reduced investment, and a higher cost of borrowing for the entire country.
This reality check forces the government to confront a difficult truth. While the idea of a bank tax may be politically appealing, the economic reality is that it could destabilise a cornerstone of the economy. The £6.4 billion loss is a down payment on the potential costs of ignoring that reality.