The real reason for the increased bank levy

American banker John Pierpont Morgan, the founder of the modern bank that still bears his name, once observed that a man had two reasons for doing anything, “a good reason and the real reason”.

By Harry Wilson 08 February 2011 • 9:34am

This morning George Osborne gave plenty of “good reasons” why it was right the Government’s new levy on banks should be higher in its first year than originally expected and also permanent.

The Chancellor gave two good reasons for the change when he argued that the country needed the money to help cut the deficit and that there is a greater degree now of market stability than when the tax was first announced meaning the ability of banks to pay the levy is greater than it was.

But what are the “real reasons” for today’s move? Speaking on the radio this morning, Mr Osborne gave a hint of what these might be when he spoke of getting a “fair share for the taxpayer”.

Since late last year the pressure has grown on the Government to be seen to be doing more to make the banking industry pay for a financial crisis that is widely blamed on its actions.

Leaving aside whether this analysis is indeed right, and some would say it is not, ministers have spent months desperately trying to extract concessions from banks that they can then show to the public as evidence of their efforts.

With the protracted Project Merlin talks between Britain’s largest banks and the Government unlikely to deliver the type of far-reaching reforms many people would like to see, Mr Osborne’s opportunistic tax increase on the sector this morning is the type of easy win he will be able to highlight in future when he is accused of pandering to lobbying from bankers.

Mr Osborne knows that an extra £800m a year in tax from an industry that this month will announce profits of more than £20bn is a relative drop in the ocean and is unlikely to convince the board of any London-based bank to up sticks and move to Hong Kong, Singapore or any of the other places that would love to snare them.

While he will still be criticised for not getting more from the banks, today’s levy combined with Project Merlin and added to whatever recommendations he chooses to follow from the Independent Banking Commission will begin to lay to rest the charge that the Government has not got a grip of the big banks.

Good reasons and real reasons: it appears Mr Osborne has both.