Merlin talks still on target, says Treasury

GEORGE Osborne yesterday announced an £800m hike in this year’s bank levy, in a surprise move designed to “clear the decks” before the government signs a flagship agreement on lending and bonuses with the banks.

The chancellor initially planned to introduce the £2.5bn-a-year levy at a reduced rate in 2011, yielding £1.7bn from the Treasury and allowing banks to rebuild their capital buffers.

But yesterday Osborne shocked the banks by announcing he would introduce the levy at the full rate this year, costing the industry an extra £800m.

The chancellor’s aides insisted the move had not been designed to wrong-foot the banks, who are locked in talks – codenamed project “Merlin” – with the government over boosting business lending this year.

One source close to the chancellor said: “We didn’t want to agree Merlin and then subsequently announce a higher bank levy – that isn’t in the spirit of Merlin. And we couldn’t tell the banks privately, because the information is market sensitive.”

The source added that “everything is out there on the table” in terms of extra taxation on banks, providing that HSBC, RBS, Lloyds, Santander and Barclays agree to new lending targets this year.

However, aides insist the chancellor is willing to introduce further taxes should the Merlin talks fall through. One option repeatedly talked up by the Treasury is a financial activities tax, which would be levied on profits and remuneration.

Sources close to the Merlin talks said the banks were “not overjoyed” by the decision to hike the levy without consultation, but that the move had not totally derailed the negotiations.

“We’re still hopeful of getting a deal within the next week,” said one source.

Osborne made the surprise move after he decided he was losing political points to Labour in the populist battle over bank remuneration. Aides felt he was particularly vulnerable to opposition claims he had handed the banks a “tax cut”, after they were forced to shell out for Alistair Darling’s one-off bonus levy last year, which raised £3.2bn.

Yesterday, Osborne claimed the £2.5bn levy will raise more than the £3.2bn bonus tax, because the latter policy had a detrimental effect on corporation tax receipts.

And he pointed out that the levy – which will raise £10bn over the next four years – was permanent, whereas Labour’s tax was only ever intended to be a one-off measure.

However, shadow chancellor Ed Balls dismissed the levy as a “damp squib” and said Labour would repeat the bonus tax if it were in power.