§ Apart from oil, one other business sector has largely been protected from the effects of the recession, and that is banking. Indeed, bank profits in recent years have increased sharply, both absolutely and by contrast with the experience of most other businesses. A substantial part of these profits is the direct consequence of high interest rates in recent years: this applies in particular to the so-called"endowment profit" on current accounts on which no interest is paid.
§ Recent levels of bank profits are partly, of course, a cyclical recovery from the low level to which they fell in the mid-1970s. Also, the banks have needed to make provision against the effects of inflation and to rebuild the 773 reserves needed to underpin the valuable support that they give to businesses in difficult times. That is why I took no action last year.
§ However, I undertook to keep developments under review. The past year has seen further high banking profits, probably at a level not very different from the record profits of 1979. Certainly the contrast with the sharply reduced profits of industrial companies is, if anything, more striking. In present difficult circumstances, I cannot avoid the conclusion that I should require the banks to make a special fiscal contribution.
§ This will take the form of a special once-for-all tax on deposits of banking businesses that are in operation today. The tax will be charged by reference to non-interest bearing sterling deposits in excess of £10 million, averaged over the final three months of 1980. The rate of tax will be 2½ per cent. It will not be deductible against corporation tax. I estimate that the clearing banks will be the source of about 90 per cent. of the revenue, but the tax will apply to banking businesses generally. Altogether, an estimated £400 million will be raised in three instalments over the second half of 1981–82. This revenue will make it possible for me to give some help to the rest of industry this year which otherwise I could not afford.