Could a Thatcher-era tax set an unsettling precedent for modern finance? That was the question rattling investors on Friday, as a proposal for a new bank levy, explicitly compared to a 1981 policy, contributed to a £6.4 billion stock market rout. The idea of reviving a past tax to solve a present problem spooked the highly globalised and complex financial sector of today.
The proposal came from the IPPR thinktank, which suggested a levy on bank deposits to reclaim “windfall” profits from the quantitative easing (QE) program. The thinktank argued that this historical precedent shows that such a tax is feasible and could be used to redirect the £22 billion annual cost of QE back to the public.
The market, however, was unsettled by the historical echo. Investors in NatWest, Lloyds, and other major banks sold their shares, fearing that the government might be tempted by a policy that seems to have a precedent. The sharp decline in valuations showed a clear rejection of this retrofitted idea.
Critics argue that the economic context is now completely different. While the 1981 tax was introduced in a specific set of circumstances, today’s economy is heavily dependent on the smooth functioning of the credit market. Reintroducing such a levy, they warn, could have far more disruptive and negative consequences than its historical predecessor.