Osborne hikes levy on British banks

Levy will now raise £2.5b, rather than £1.7b

The British government said on Tuesday it will increase the levy on banks by £800 million to £2.5 billion this year - and that it will be permanent.

Chancellor of the Exchequer George Osborne said the tax was being hiked before banks could unveil their bonus payments.

Originally, Osborne had said the new bank levy would be phased in slowly and at a lower rate.

The initial rate amounted to 0.05 per cent of bank profits (which was expected to raise £1.7 billion. Under the higher levy, starting March 1 the rate will be at 0.1 per cent for two months, before moving to 0.075 per cent, according to the Treasury.

Under the new levy, the Treasury expects to generate the afore-mentioned £2.5 billion this year and next; and then rising to £2.6 billion in each of 2013 and 2014.

"We want more lending (banks) to pay more tax, make a bigger contribution to our society and pay less bonuses next year," the chancellor told BBC radio.

Project merlin stalled

The bank tax will apply to both United Kingdom banks and the British operations of foreign banks. However, lenders with a balance sheet below £20 billion will be exempt.

Separately, a deal between the government and banks under which the latter would increase business loans and impose a cap on bonus payments - also known as 'Project Merlin' - has not yet been completed, as negotiations have stalled.

Under terms of these proposed agreements, British banks would make £190 billion of credit available to businesses, as well as provide financing for middle-sized businesses in poorer parts of the country, and also limit bonus payments to senior executives.

The Financial Times reported that the coalition government believes that under this scheme, banks would be able to provide £1.3 billion over the next three years to parts of Britain worst hit by spending cuts, in addition to the £1.5 billion Business Growth Fund already announced last year.

"What really matters is if we get a measurable and significant increase in lending to small and medium-size businesses," Osborne told BBC radio. "That's what people will want to look at when we conclude a deal, if we conclude a deal."

Limiting bonuses paid to bankers remains a touchy subject - UK banks will start revealing the value of their bonus rewards next week. Press reports indicate such payments could be as high as £6 billion or more - far more than the amount the next levy would generate.

"It would have been better if, when we were bailing the banks out, we had secured something from the banks in return," Osborne added, in reference to bank bonuses.

"Unfortunately, I was not chancellor at the time."