City of London
The City of London has been hit with a higher bank levy, unveiled by George Osborne in his 2015 budget.Reuters

George Osborne's latest raid on banks risks damaging efforts by finance firms to shore themselves up with capital buffers, knocking their share prices and deterring foreign institutions from setting up new business in the UK. That is according to an assessment by the Office for Budget Responsibility (OBR), the UK's independent fiscal watchdog.

Chancellor Osborne revealed the bank raid in his final budget before the 2015 general election as he tried to woo voters in a close-fought contest that looks set to produce an even tighter hung parliament than in 2010.

He said the bank levy, an annual tax on banks, will rise to 0.21% from 0.156% and will raise £4.375bn in the five years from 2015/16 to 2019/20.

Osborne will also end the practise of banks writing off their compensation payments for past bad behaviour, such as the mis-selling of payment protection insurance (PPI), against their corporation tax bill, a move forecast by the OBR to raise £965m over the same period.

bitcoin UK budget george osborne
George Osborne holds out his budget red box.Reuters

"The banks got support going into the crisis," Osborne told the House of Commons. "Now they must support the whole country as we recover from the crisis."

But in its analysis of Osborne's budget, the OBR said that these measures "will have a negative effect on retained earnings, which may affect banks' ability to meet capital requirements".

Regulators expect banks to hold enough capital to protect themselves from any future crisis. This is because many banks were caught out during the 2008 financial crisis and had to be rescued with bailouts, where governments injected emergency capital to spare institutions from collapse and save the entire system from a potentially catastrophic fallout if any went bust.

The OBR said: "To the extent that banks are capital constrained, the measures could affect the supply of credit and thereby GDP growth. However, we do not judge that such effects would be significant, given the scale of the changes and that the banking sector as a whole appears to be relatively well capitalised, suggesting that material deleveraging would be unlikely. The changes are likely to have a small effect on the share prices of affected financial institutions by reducing the expected future flow of post-tax income."

The OBR also said it has taken steps to measure for a significant negative reaction by some in the financial sector after projected tax receipts were over-estimated in the past.

"Given that the budget announcement is for a sizeable rise in the bank levy rate, we have allowed for a larger behavioural response to the policy change. Banks may restructure their funding arrangements, while foreign banks may locate less activity in the UK."

The OBR added that there is "significant uncertainty" around the costings of the money forecast to be raised from Osborne's new measures. That means there is no guarantee that the cash will come in to fund the "giveaways" elsewhere in his budget, including cutting income tax by raising the personal allowance threshold and a subsidy for first time buyers which sees their deposit savings topped up by government.

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