UK bank tax storm: Fiscal gap-filling and financial stability caught in a dilemma, the game between Chancellor Healey and Central Bank Governor Bailey escalates.

Title context: UK bank tax storm: Fiscal gap-filling and financial stability caught in a dilemma, the game between Chancellor Healey and Central Bank Governor Bailey escalates. Text: UK Chancellor John Healey plans to raise taxes on banks in the October 28 budget to fill a fiscal buffer that has shrunk sharply due to war-driven borrowing costs. However, the plan quickly triggered a public warning from Bank of England Governor Andrew Bailey and drew strong opposition from the banking industry, sending UK bank stocks lower on Friday. A policy battle over the bank tax is pushing the deep-seated contradictions between the UK Treasury, the central bank, and the City into the open. Fiscal pressure forces tax increase Since Prime Minister Andy Burnham took office in July and appointed Healey as chancellor, the bank tax has been hanging over the market. Rising borrowing costs related to the US-Iran war are estimated to have halved the 23.6 billion pound fiscal buffer Healey inherited from former Labour Chancellor Rachel Reeves. To maintain the deficit reduction plan, Healey needs to open up new sources of revenue. Market research estimates that fully reversing the Conservative government's 2023 move to cut the bank surcharge from 8% to 3% would raise 3 billion pounds ($4 billion). The Guardian reported on Friday that Healey has decided to raise taxes on banks in the budget, and analysts widely believe that increasing the 3% surcharge is one of the possible options. The market reacted quickly. Barclays, Lloyds, and NatWest all fell slightly in pre-market trading, then turned marginally higher, but still underperformed eurozone bank stocks, which rose 0.9%. Investors worry that the tax increase will erode UK banks' just-recovered profitability and capital returns. Central bank and Treasury in a "quiet war" Asked about the proposal on Friday while attending an Institute of International Finance conference in Bangkok, Bailey responded cautiously: "This is not for me. I am not involved. This is a matter for the Treasury." But he has repeatedly and clearly warned that any measure punishing lenders will only push up mortgage rates, reduce deposit interest, and threaten financial stability. Bailey believes that cutting the interest the central bank pays lenders on reserves is essentially equivalent to a bank tax. He told the House of Lords Economic Affairs Committee in June that if banks cannot generate returns, shareholders will not provide capital to support growth. After the financial crisis, UK banks failed to cover their cost of capital for more than a decade, only returning to health in the past three years. "If we don't have financial stability, we can't achieve growth." Bailey's position is in direct conflict with Healey's fiscal needs, and although the two were both in Bangkok this week, they showed a clear difference in policy temperature. Banking industry hits back: already heavily taxed, higher taxes weaken competitiveness The financial industry is equally strongly opposed to the tax increase. European Banking Federation CEO Wim Mijs said that taxing UK banks will simply be passed on, "ultimately landing somewhere in the economy," and is not an effective way to stimulate growth. UK Finance, citing House of Commons Library data, said that in 2024/25, banks already paid 8.8 billion pounds in corporation tax, 1 billion pounds in surcharge, and 1.3 billion pounds in bank tax, with employee payroll taxes contributing another 35.2 billion pounds. The association warned that further tax increases will weaken the UK's competitiveness, curb investment and employment, and run counter to the government's goal of "achieving growth in every region." Industry research shows that the UK's four largest banks - HSBC, Barclays, Lloyds, and NatWest - are expected to post combined pre-tax profits of about 60 billion pounds in 2027-2028. Critics call this "windfall profits," but the banking industry counters that the recovery in profitability stems from the high-interest-rate environment, and high interest rates themselves are the result of war-driven inflation, not a sustainable "windfall." JPMorgan CEO Jamie Dimon even hinted that the bank might abandon its plan to build a 10 billion pound European headquarters in Canary Wharf to protest the tax increase. The difficult balance between growth and stability In an interview in Bangkok on Thursday, Healey described the City of London as one of the "jewels" in the crown of the UK economy, while stressing the need for sound public finances. That statement aptly summed up his dilemma: on the one hand, the fiscal gap needs to be filled; on the other hand, excessive taxation could damage the City's competitiveness, curb growth, and ultimately backfire on the tax base. The October 28 budget will be a key moment. If Healey insists on raising taxes, it could intensify tensions with the central bank and the financial industry and trigger further volatility in bank stocks; if he backs down, he will need to find other sources of revenue, and the deficit reduction plan may struggle to meet its target. No matter the outcome, this bank tax dispute has clearly revealed that, at a time when war, inflation, and fiscal pressure are intertwined, the space for the UK to find a balance between "growth" and "stability" is becoming increasingly narrow.