This has to hurt

Long stories short

• Elon Musk and Mark Zuckerberg appeared to agree to fight each other in a cage match.
• 3M reached a $10.3 billion settlement with US public utilities over water pollution linked to “forever chemicals”. 
• Vanessa Pappas, TikTok’s operating chief and its public face in the US, stepped down after five years in the role.  

This has to hurt

Rachel Reeves said yesterday lenders should be ready to extend mortgage terms, grant payment holidays and allow borrowers to switch to interest-only loans to help them cope with the highest UK interest rates since 2008.

So what? It’s what she didn’t say that counts. That clinking sound is a quiet City toast to Britain’s chancellor-in-waiting, who didn’t announce a windfall tax on bank profits to help strapped mortgagees through what looks like being an extended cost-of-living crisis.

Keir Starmer has already ruled out more taxes on banks and is unlikely to reverse himself before the next election. But times change and there’s a compelling logic to the idea of emergency levies on freak profits at a time of high-interest rates, inflation and fuel prices:

• They offer an ad hoc mechanism for helping borrowers and consumers facing repossession and hunger, funded by those who can afford it best.
• Spain, Hungary and the Czech Republic have tried them and raised useful sums. Some Spanish banks are challenging them in court but not in open rebellion.
• Reeves’ Labour Party says it will introduce a windfall tax on North Sea energy.
• Regulators in Washington and Brussels are looking for equivalent ways of clawing back profits earned through dumb luck, sharp practice or monopolistic muscle as profits are concentrated in a few ultra-lucrative sectors. The US Federal Trade Commission’s lawsuit against Amazon this week for allegedly duping customers into buying Prime memberships is a case in point (more below)

The case for a windfall tax on banks rests on the way their profits tend to rise with interest rates. High base rates give scope to charge more for loans than they pay out to savers:

• The UK’s five biggest banks made profits of £37 billion last year, of which the Unite union found £7 billion came from failing to pass on interest rate rises to depositors.
• Lloyds’ profits for the first quarter of this year were up 46 per cent to £2.3 billion and Natwest’s up 50 per cent to £1.9 billion.
• If the banks were made to pay a 15 per cent windfall tax (equivalent to a payout by the Nationwide building society to its customers last year), it would have generated £5.5 billion for mortgage interest relief last year, with the prospect of much more this year.

These numbers were collated by John McDonnell, Jeremy Corbyn’s former shadow chancellor, since cast out of Labour policymaking circles. But broader arguments for windfall taxes include efficiency (they’re hard to dodge); and fairness (the idea is they’re levied on good fortune rather than productive activity, per Stuart Adam of the Institute for Fiscal Studies).

The case against is that windfall taxes are arbitrary, one-sided and retrospective:

• Why tax some windfalls and not others?
• If energy companies are to be taxed on windfall profits when oil and gas prices are high, should they be subsidised when prices are low? 
• Taxation needs to look ahead, plan for all circumstances and be predictable. Ad hoc taxes raise worries about where they will fall next, undermining faith in the system. 

Banks also note that while they earn more as rates rise, they lose share value when investors fear recession – as they do now. 

But TINA. There is (or may be) no alternative. The politics of windfall taxes are barrelling towards governments everywhere as they grapple with the challenge of fair taxation of eye-watering profits in energy, finance – and tech. In the UK, where one main party is allergic to tax increases and the other to spending cuts, the case for emergency levies in some form may become unanswerable if the goal is to help people in danger of losing their homes without fuelling the inflation that is driving higher rates.

Some argue that goal is unattainable – that bailing out homeowners will itself fuel inflation and defeat the object of yesterday’s painful rate rises. Spain’s Pedro Sanchez isn’t buying it.

More numbers: 

€6 billion – expected to be raised by Spain’s windfall taxes on banking and energy firms this year and next.

3.2 per cent – headline inflation in Spain, compared with 8.7 in the UK

€50 billion – sum Spain’s banks warn could be sucked out of the country’s mortgage market as the price of raising €3 billion in extra tax, because of high capital ratio requirements.

That warning may spell misery for borrowers but it points to exactly the sort of deflationary pressure the Bank of England is trying to impose in the UK. One way or another, this is going to hurt.