“Good economic policy shouldn’t be guided by whatever happens to be the most convenient target”
As predictably as the leaves turning and the temperature dropping, October brings its familiar round of Budget speculation. Both signal that it is time to prepare for the months ahead, whether you’re getting your car ready for winter or deciding how to best keep the economy moving.
Just as we’re told to heed warnings about keeping our cars roadworthy, as he delivers his Budget on Wednesday, the Chancellor would be wise to avoid undermining the fundamentals that power our economy.
It is no exaggeration to say that financial services is the engine that powers the Scottish economy. It finances homes and businesses, helps people save for the future, attracts investment and supports growth in every other sector. Scotland’s financial services sector has been motoring along nicely of late, growing at a rate more than double that of the wider economy over the past five years. So, at a time when our economy most needs a reliable driver of growth, the last thing government should do is siphon the oil from that engine.
Yet that is essentially what the Chancellor would be doing if he acted on recent speculation to increase taxes on banks. The temptation is understandable: the public finances are under pressure and banks are visible, profitable businesses. But good economic policy shouldn’t be guided by whatever happens to be the most convenient target. The Chancellor’s focus should rather be on what best strengthens investment, productivity and jobs over the long term.
A further banking tax would fail that test. It might appear to provide a quick fiscal fill-up, but it would reduce the capacity of the very industry government needs to accelerate growth. Groups such as UK Finance and TheCityUK have warned of the risks to long-term investment and confidence at a UK level, and how the Budget should aim to “do no harm”. For Scotland, the stakes are particularly high. We are home to a financial services sector built over more than three centuries with two of the UK’s largest banks being registered in Edinburgh and others investing heavily in their operations here.
This is not special pleading for an industry seeking to avoid its responsibilities. Banks in the UK already pay higher tax than almost all of our competitor countries, with HMRC recording £39.1 billion in PAYE, corporation tax, bank levy and bank surcharge receipts from the sector in 2025-26, or more than £1,300 for every household across the country.
The real question is not whether banks should pay their fair share - they do - but whether adding even more sector-specific tax will help the wider economy. It will not. Tax is a cost, and costs affect decisions about lending, pricing, investment, hiring and where internationally mobile activity is based. Capital allocated elsewhere cannot finance a Scottish scale-up, a manufacturer’s new equipment or a family’s first home here.
The sector’s contribution at a UK level has fallen back significantly in the past 15 years, largely as a consequence of the tax, regulatory and capital environment, and with the resultant loss in GDP and tax revenues of an estimated £40bn. The sector in Scotland has bucked that trend, and now supports around 157,000 jobs - 21,000 more than in 2023. Its gross value added has risen from £14.3bn to £17.7bn, and annual exports have grown by 16 per cent to £12bn. This coupled with the fact that our sector accounts for a quarter of all income tax generated in Scotland shows the particular significance of the sector to the wider economy.
We should be building on that progress and, whatever happens in the short term, ministers should set out a timetable to normalise taxes on the banking sector to align with other sectors of our economy. Scotland has world-class strengths in asset management, green and sustainable finance, fintech, data and artificial intelligence. But firms can choose where to invest. Policy stability and competitiveness are not optional extras; they are among the conditions that turn our capabilities into jobs and economic value.
We have seen the risks of getting this wrong. The energy profit levy was designed to capture exceptional returns, but its repeated extension and tightening created uncertainty and weakened investment incentives in another globally competitive Scottish industry. This has led to projects deferred, jobs put at risk and a smaller tax base over time. Banking is different, but the lesson is the same: a short-term revenue measure can produce long-term economic damage by creating uncertainty for investors.
You cannot credibly champion investment while making one of our leading sectors less attractive than its international competitors.
Whilst this is a reserved issue, the Scottish government also has an opportunity to demonstrate its commitment to growth by publicly standing up for the country’s most important economic driver. We recognise the challenges facing the public finances, both in Scotland and across the UK, but this is a test of both governments’ commitment to growth. A larger, more competitive financial services industry will generate more jobs, more investment and more sustainable revenues than one treated as a convenient fiscal reservoir. As we have seen many times before, you cannot tax your way to growth.
So the Chancellor has a choice. Keep the engine supplied, give it the stability to accelerate and let financial services power growth across Scotland and the UK. Or siphon away the oil for a short-term fix and discover, too late, that the vehicle has stalled. If growth is truly the destination, increasing banking taxes risks putting Britain in the ditch before the journey has properly begun.
Sandy Begbie CBE FRSE, chief executive, Scottish Financial Enterprise (SFE)