Labour tax fears cause a multi-billion pound drop in bank stock values

Mounting fears that Labour will stage a tax raid on banks saw billions of pounds wiped off the values of the biggest lenders yesterday. Shares in NatWest, Lloyds, Barclays and HSBC sold off after a think-tank close to Labour called for a levy that could raise £8billion a year.

Speculation that the Government could increase the surcharge on corporation tax that banks already pay also dragged on the sector. And Labour's decision to bring in left-wing pensions minister Torsten Bell to help write the next Budget has raised further alarm bells in the City about a punishing raid on the sector. 'That has caused a lot more panic in the market,' said one industry source. 'It's scary. We know how Left he is.'

Shares in NatWest fell 4.8 per cent with Lloyds down 3.4 per cent and Barclays off by 2.2 per cent. HSBC, which is more globally focused, dropped 1 per cent. The falls knocked a combined £6.8billion off the value of the four banks. The threat of a tax raid comes despite recent warnings by bosses such as NatWest's Paul Thwaite and Lloyds' Charlie Nunn that such a move could damage their ability to finance growth.

But Chancellor Rachel Reeves is looking to fill a financial black hole of up to £50billion by either raising revenues or cutting spending. She has proved unable to make cuts – after Labour backbenchers forced U-turns on winter fuel payments and welfare reform.

Instead, spending pressures are only growing as the UK ramps up its defence budget while bond markets drive the cost of borrowing higher. That leaves tax rises looking inevitable, resulting in speculation over a series of possible measures including charging National Insurance on rental income, levying capital gains tax on expensive homes, a wealth tax or more inheritance tax. Analysts warned that a raid on the sector was likely to backfire.

George Godber, a fund manager at Polar Capital, said: 'Banks are already incredibly highly taxed in the UK but it's obvious why they would go for them. Despite saying they want to improve growth and lending in the economy, they want to raise money. They are obviously desperate for any form of tax revenues and are probably not so fixated on the economic consequences.' Godber warned it would be 'unequivocally bad' leading to a 'doom loop of lower lending and lower growth and in turn lower tax revenues'.

'There are compelling arguments to leave this well alone,' Godber added. 'Taxes are a burden borne by the consumer. So people with mortgages, credit cards, overdrafts and so on will pay more. If you put bank taxes up, they will put prices up. It would obviously damage London's reputation as a financial centre.' Analysts at Redburn said there were 'economic risks', with UK banks already paying an effective tax rate of 46 per cent compared to 39 per cent in Frankfurt and 28 per cent in New York. 'Further such taxes would risk pushing activity overseas,' Redburn's experts said.