The most tempting budget targets are always the worst

P oor John Healey. All he wants to do is deliver a fiscally disciplined budget that puts Britain on the path to growth. Instead, he finds himself in the back of a neon-lit Bangkok tuk-tuk, force-feeding a variety of Thai snacks to Ed Miliband, all in the service of making an incredibly laboured point about the need for international co-operation. Chancellors traditionally accompany their budgets with a glass of whisky. This was enough to have anyone reaching for the full bottle. But it’s not just the insatiable demands of the government’s media advisers that are causing problems for the chancellor. The bigger issue is that he’s run out of people to tax. Most commented 1 Starlink deliberately slowed in Ukraine, says Zelensky Russia-Ukraine war 1,130 comments 2 Katie Zacharia departs as Trump’s press secretary after less than a week US politics 699 comments 3 Hundreds of British troops to rehearse Ukraine mission Politics 317 comments 4 Scotland plane crash: boy, 16, and flight instructor, 80, killed Scotland 53 comments 5 All Blacks leave Australia chasing shadows in dazzling first half Rugby union 31 comments In ten days’ time, Healey will deliver the first budget of his, and Andy Burnham’s, tenure. After two summers in which all manner of tax rises were floated via the media — causing economic confidence to plunge into the deep freeze — the chancellor has done a pretty good job of damping down speculation. In particular, he has ruled out two tax hikes that many on the left had called for: extending the scope of the new “mansion tax” from properties worth £2m to £1.5m, and equalising capital gains and income tax. Treasury sources, speaking anonymously but entirely accurately, labelled the latter proposal “batshit crazy”. Top stories 1 US inflation hotter than expected as Iran war stokes fuel costs Economics But Healey does still need money. Rather a lot of it. So, like so many chancellors before him, he seems to have decided to take it from the least popular people he can find: the bankers. According to the briefing, the question is not whether taxes on the banks will rise, but which taxes, and by how much. The Times View: Raising bank taxes will damage growth Advertisement This is, undoubtedly, politically savvy. But it has two key drawbacks. First, UK banks already pay substantially more tax than their foreign rivals. Taxing them even more makes it harder for them to compete, driving economic activity — and revenue — overseas. Top stories 1 Will Lyons: my vintage wine tour of South Australia Inspiration But more importantly, taxing the banks will compound one of Britain’s greatest financial errors. The reason our economic system is called “capitalism” is that it revolves around capital. People borrow money to start companies. Companies make stuff people buy. Their owners pay the money back. It is lent out again to start more companies. In other words, the core function of the banking sector is not to provide a place to park your money. It is to take those savings and turn them into mortgage loans, business loans and other investment. As Healey himself puts it, the banks are “hardwired into the economic fabric”. This is, of course, an incredibly simplified explanation. But it is basically and fundamentally true. Just as it is basically and fundamentally true that if you tax the banks more, it will mean there’s less grease for the flywheel, either because they pass the costs on via higher interest rates, or because they lend less in the first place. To quote one of the many academic papers analysing the impact of higher bank taxes, “the increase in government revenues comes at a cost of a long-run decrease of GDP, an increase in loans’ interest rates and a reduction in the volume of credit, deposits and bank capital”. In fact, there’s a bigger story here. We may not have jailed any bankers after the financial crisis, but we did whack the banks, via a combination of taxation and regulation. The result is that, while America’s banks are now roughly twice as large as they were then, ours are pretty close to the same size. That means they have less capital. And the proportion of that capital they can lend has been significantly constrained by new lending rules. In particular, as Boston Consulting Group has pointed out, the volume of outstanding bank loans to small and medium-sized businesses has halved as a percentage of GDP — and half those loans are for the property sector rather than start-ups. Advertisement Of course, some of the gap has been filled by other sources, including lending platforms like Funding Circle and venture capital investors. But not enough. In a recent paper for the Institute of Economic Affairs think tank, the US economist Tyler Goodspeed argued that the constriction of lending to businesses and households since 2008 is the single biggest reason why Britain has failed to recover properly from the crash, and why we are now so much poorer than the US. In effect, we’ve starved our companies, and our potential companies, of the cash they need to grow. This, then, is the case against taxing the bankers . Taxing banks is taxing investment. Taxing investment is taxing growth. But it’s also an illustration of why our economic policy keeps going wrong — because chancellor after chancellor reaches for the most politically palatable solution. You can understand why, in the wake of the financial crisis, George Osborne introduced extra taxes on both the banks and the bankers. But we kept them there long after the lesson had been learnt. We taxed the North Sea, because nobody likes the energy firms and they seemed to be making too much money. When Rachel Reeves needed cash, she taxed the employers, not the employees. The sole exception came when Rishi Sunak needed to repair the public finances after Covid, and tried to tax the voters as well as the corporations — which was also the point at which the Tories’ poll ratings fell off a cliff. Politics newsletter Get our daily insider’s guide to Westminster, plus a rundown of PMQs every Wednesday. Sign up with one click You’ve successfully signed up to the Politics newsletter Explore our newsletters An error occurred. Please use the link below. Politics newsletter Explore our newsletters As that example suggests, not all of this is the chancellors’ collective fault. A decent rule of thumb when it comes to tax policy is that there is an inverse relationship between the popularity of any given measure and how much economic sense it makes. But an even better rule of thumb is that it’s much better, economically speaking, to tax the harvest than the seed corn. And all too many of these measures ended up doing exactly that: taxing investment, employment or all the other things that generate that harvest. Advertisement I do feel sorry for Healey — and not just because of the whole tuk-tuk thing, or indeed having to hang around in Bangkok with Ed Miliband. Healey seems a decent man, with less obviously lunatic economic instincts than many of his parliamentary colleagues, who is having to make some incredibly hard decisions and is trying to minimise the harm he causes while doing so. But if we want the chancellor — any chancellor — to have some money to spend at the dispatch box, we need to accept that you have to let people make it first.