TheChek News Flow

Bankers fear Reeves is preparing UK tax raid on sector in the Budget

Chancellor to hold meeting with bosses after Britain’s big six lenders reported record profits

Rachel Reeves should be wary of hobbling Britain’s sluggish economy with a Budget tax raid on banks, the City of London has warned, ahead of a meeting with the nation’s top financiers in Downing Street on Thursday.

The chancellor and Bank of England governor Andrew Bailey will hold talks with the bosses of leading lenders, which have just enjoyed a year of record profits boosted in part by higher interest rates.

The industry fears that Reeves may squeeze the sector after a year where profits at the six biggest British lenders — Barclays, Lloyds Banking Group, HSBC, NatWest, Nationwide and Santander — surged 39 per cent to a new all-time high of £48bn.

One senior banker said that the City offers a “tempting target” to the chancellor as she seeks to repair the nation’s public finances.

Prime Minister Sir Keir Starmer on Wednesday declined to rule out higher taxes on banks in next month’s Budget.

Officials close to the Treasury’s Budget preparations say higher bank taxes are one of a full range of options on the table.

Banks are already making their case against a tax rise.

“The banking sector is a major contributor to the UK’s tax base, and supports a large number of skilled jobs while delivering growth and investment up and down the country,” UK Finance, the main lobby group for British banks, said on Wednesday.

“Banks’ profits allow them to invest in their businesses for the benefit of customers and deliver shareholders, including pension funds, a return on their investment,” it said, adding that this “should be considered in terms of taxes on banks in the UK”.

The Treasury has been approached for comment.

Thursday’s meeting is primarily to discuss new capital rules for the sector: the Bank of England is expected to announce it is delaying the start date for tougher capital rules from the middle of next year until at least the start of 2026.

But banks and Treasury insiders say the issue of how to boost growth — particularly ahead of an investment summit in London next month — is also likely to come up in the talks.

Bank executives are likely to point to recent calculations by PwC for UK Finance showing the total tax rate for a typical British lender this year was 45.8 per cent, well above the equivalent 27.9 per cent for a New York-based rival or 38.6 per cent for one based in Frankfurt.

Reeves needs the banks to help deliver her growth agenda. The scale of her challenge was underlined by data released on Wednesday showing the UK economy unexpectedly stagnated for a second consecutive month in July.

She is facing political pressure, after Sir Ed Davey, Liberal Democrat leader, on Wednesday called on Starmer to reverse Conservative cuts to the bank levy and the bank corporation tax surcharge. Lib Dems claim that could raise £3.5bn.

“I’ll resist the temptation to get ahead of the Budget,” Starmer said in response.

Jeremy Hunt, former chancellor, cut the bank corporation tax surcharge from 8 per cent to 3 per cent in April 2023, at the same time as he raised the general rate of corporation tax from 19 per cent to 25 per cent.

Reeves has said she wants to “fix the foundations” of the economy, suggesting she will be looking for tax rises to repair the public finances in the years to come. That would imply a more lasting change to tax rates than the one-off levy feared by some in the sector.

Hunt, now shadow chancellor, said hiking taxes on the banks would backfire. “It would be the most counter-productive own goal in history for a chancellor to hit the golden goose in the way some are speculating,” he said.

Before the election Reeves was adamant she had no plans to increase taxes on banks, but since polling day she claims to have unearthed a £22bn fiscal hole, a claim strongly denied by Hunt.

“There’s no need to have a tax on banks,” she told the FT in June, before the election. “I don’t believe that doing that would help us achieve what we want to achieve, which is growing the economy.”

But one senior banker admitted that in the wake of the row over Reeves’s decision to cut winter fuel payments to pensioners, higher bank taxes would be politically attractive.

“It’s possible they will do it,” the banker said. “The banks do present a tempting target.”

The fear shared by bankers and many bosses across the economy is that Reeves has boxed herself in by ruling out tax rises in the biggest Treasury revenue raisers: income tax, value added tax, employee national insurance and corporation tax.

She is therefore confronted with a range of tax-raising options which could hamper her “growth mission”, including increasing capital gains tax, higher bank taxes or employer NICs, alongside her stated plan to put up taxes for non-doms and private equity executives.

Move in retaliation over sanctions could affect western nuclear reactors, many of which rely on Russian supplies

Vladimir Putin has called on Russian officials to consider restrictions on exports of commodities including uranium, in retaliation against fresh western sanctions against Moscow and its allies.

“Please take a look at some of the types of goods that we supply to the world market . . . Maybe we should think about certain restrictions — uranium, titanium, nickel,” Russia’s president said in a televised meeting with top government officials on Wednesday. 

Any curb on sales of enriched uranium could affect western nuclear reactors. Many of them have long-term contracts for supplies from Russia, which accounts for about a third of the world’s uranium enriching capacity, and about 5 per cent of uranium mining.  

Putin emphasised that the suggestion was in response to western pressure. “We’re facing restrictions on some imports, so perhaps we should consider imposing certain limitations ourselves,” he said.

“But we must ensure we don’t harm ourselves in the process,” he added.

His remarks follow an escalation in western sanctions against Russia and its allies, China and Iran. Earlier this week, US deputy secretary of state Kurt Campbell accused China of providing Russia with support for its “war machine”.

While the initial sanctions following Russia’s invasion of Ukraine were focused on energy products like oil and coal, western allies have this year increasingly targeted Moscow’s metals exports. The US has banned some imports of Russian-origin metals. Leading exchanges in the UK and US are no longer trading any new Russian aluminium, copper or nickel.

“We are in this world that is geopolitically segmenting, and commodities tend to be at the forefront of it,” said Colin Hamilton, metals analyst at BMO Capital Markets, an investment bank. 

Potential curbs on uranium exports could be particularly painful, Hamilton added. “This is something the uranium industry has been fearing.”

While the US has already banned imports of enriched uranium from Russia, the ban excludes existing contracts with US utilities. 

Russia, meanwhile, cut gas supplies to the EU through the Nord Stream pipeline in 2022, threatening to “freeze” the west. The pipeline was later destroyed by an explosion.

Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center, described the comments as “a typical Putin threat”.

“It’s a message to the west: ‘Look, despite all your energy transitions, we’re one of the leaders in rare earth metals, which you need for your shift to green energy. We can cut off those exports, and your plans will fall apart.’”

As western sanctions on Russian commodities ratchet up, more and more of those shipments are heading towards China instead, including for commodities such as coking coal and aluminium.

Russia’s agriculture minister Dmitry Patrushev had earlier claimed that western sanctions on agricultural products benefited Russia’s domestic farming industry.

In 2014, the western response to the annexation of Crimea led Russia to ban imports of vegetables, fruit, meat and dairy products originating in the US and the EU.

Russia learned to produce alternatives domestically, or import them from other countries. However the sanctions led to double-digit price increases.

“In the initial phase, unfortunately, there was a rise in domestic prices. But then it spurred the development of agriculture within Russia,” Putin said. “A similar process is now happening in the industry.”

BERLIN (Reuters) - Danish logistics company DSV won the race to buy Schenker, the rail logistics arm of German state railway Deutsche Bahn, sources at the railway and at the German government said.

The sources said a preliminary contract for the transaction, worth some 14 billion euros, would be signed in coming days. The deal must be approved by DB's supervisory board, comprised mainly, but not exclusively of government, parliamentary and union representatives.

A spokesperson for DB declined to comment on the report. DSV said it did not comment on market rumours.

Financial investor CVC was the other contender remaining in the race to buy Schenker, which according to its website has more than 70,000 employees in 1,850 locations worldwide.

French AI startup Mistral has released its first model that can process images as well as text.

Called Pixtral 12B, the 12-billion-parameter model is about 24GB in size. Parameters roughly correspond to a model’s problem-solving skills, and models with more parameters generally perform better than those with fewer parameters.

Built on one of Mistral’s text models, Nemo 12B, the new model can answer questions about an arbitrary number of images of an arbitrary size given either URLs or images encoded using base64, the binary-to-text encoding scheme. Similar to other multimodal models such as Anthropic’s Claude family and OpenAI’s GPT-4o, Pixtral 12B should — at least in theory — be able to perform tasks like captioning images and counting the number of objects in a photo.

Available via a torrent link on GitHub and AI and machine learning development platform Hugging Face, Pixtral 12B can be downloaded, fine-tuned and used under an Apache 2.0 license without restrictions. (A Mistral spokesperson confirmed the license being applied to Pixtral 12B via email.)

This writer wasn’t able to take Pixtral 12B for a spin, unfortunately — there weren’t any working web demos at the time of publication. In a post on X, Sophia Yang, head of Mistral developer relations, said Pixtral 12B will be available for testing on Mistral’s chatbot and API-serving platforms, Le Chat and Le Plateforme, soon.

It’s unclear which image data Mistral might have used to develop Pixtral 12B.

Most generative AI models, including Mistral’s other models, are trained on vast quantities of public data from around the web, which is often copyrighted. Some model vendors argue that “fair use” rights entitle them to scrape any public data, but many copyright holders disagree, and have filed lawsuits against larger vendors like OpenAI and Midjourney to put a stop to the practice.

Pixtral 12B comes in the wake of Mistral closing a $645 million funding round led by General Catalyst that valued the company at $6 billion. Just over a year old, Mistral — minority owned by Microsoft — is seen by many in the AI community as Europe’s answer to OpenAI. The younger company’s strategy thus far has involved releasing free “open” models, charging for managed versions of those models, and providing consulting services to corporate customers.

Both the carmaker and its home country are suffering from high costs, eroding tech leadership and a reliance on China

Volkswagen VOW3 0.61%increase; green up pointing triangle is going through its deepest crisis in years. So is Germany. And that’s no coincidence.

While the carmaker’s travails are exposing missteps, they also show how Germany’s economic model is struggling to keep up with a changing world. Fixing these problems will require changes both for the carmaker and the world’s third-largest economy.

“VW’s problems mirror to a degree the problems of the German economy, and the problems of the German economy are reflected in VW,” said Moritz Schularick, president of the Kiel Institute for the World Economy, an independent think tank. “Resistance to change is something that hangs over both.”

Tepid sales, mounting foreign competition, and an expensive electric-vehicle strategy that hasn’t wowed buyers have left VW’s stock trading around 14-year lows. On Tuesday, the company canceled a 30-year agreement to avoid compulsory redundancies at the VW brand, setting up a battle with workers as it looks to rightsize its cost base.

Meanwhile, Germany’s economy is stagnating. Its GDP, almost flat since 2019, shrunk 0.3% last year, and some economists expect it to contract again this year.

VW is Germany’s largest employer and car making is the country’s flagship industry, accounting for 5% of gross domestic product, according to several estimates.

“VW is to Germany what Nokia was to Finland or Samsung is to South Korea…There’s a scenario where that sector will shrink significantly and replacing those jobs with equally well-paid jobs will not be easy,” said Dirk Schumacher, Europe economist at Natixis.

Germany’s economic malaise and the crisis at VW have joint roots, according to economists and analysts: Heavy reliance on China, high costs and an eroding technological leadership.

Excessive reliance on China

Manufacturing accounts for a fifth of Germany’s gross domestic product, about twice the U.S. level, with a focus on capital goods and cars. For years, this was a good fit for a globalizing world: German companies built factories in emerging markets, dug Chinese subways and made cars for the new middle classes. While the Midwest was ravaged by deindustrialization, Germany’s industrial base grew.

Nowhere was the boom clearer than at VW. A decade ago, the company recorded €5.2 billion, equivalent to around $5.7 billion, of operating profit from its Chinese joint ventures, and that doesn’t include income from brand licensing, parts sales or exports of high-end models from Germany.

Covid-19, geopolitics and China’s maturing economy changed that. As tariffs and other trade barriers rose around the world, German exports began falling. China had been Germany’s largest trade partner since 2015, so slowing growth there hit German companies hard, as did the rise of Chinese competitors. “China,” said Schularick, “turned from tailwind to headwind.”

EV giant BYD overtook VW last year as China’s bestselling car brand. VW has relaunched its China strategy and expects its joint ventures there to bring home as little as €1.5 billion in operating profit this year.

“When Western executives returned to China after the pandemic…everybody expected the country to be sitting in a deep Covid hole but they had used the time to invest, become more competitive, cheaper and faster,” said Ulrich Ackermann, head of foreign trade at Germany’s VDMA mechanical engineering industry association.

In 2020, China overtook Germany as the biggest exporter of machinery and equipment, according to German trade statistics. Today it produces more industrial machines than the U.S., Germany and Japan together.

High costs at home

China isn’t alone to blame. The scale, cost and inflexibility of VW’s operations in Germany mean the company has thinner profit margins than its rivals despite owning a lucrative portfolio of luxury badges including Audi and Porsche. That makes the company vulnerable to macroeconomic or industry challenges. The tepid post-Covid recovery in European car sales, no longer masked by cash flows from China, is just the latest example.

In the year through July, roughly 17% fewer vehicles were registered in the eurozone and U.K.—key markets for the VW brand—than in 2019. Justifying its call for compulsory redundancies, management said the division had lost two plants’ worth of production.

While European peers Stellantis and Renault have trimmed staff in recent years, VW’s head count has grown modestly.

VW finds it hard to let workers go because of its unusual governance. The State of Lower Saxony owns 20% of the company’s voting shares, and a special “Volkswagen law” sets a high bar for significant changes to its operations.

“It is more like a state-owned company than a private one,” said Ferdinand Dudenhöffer, director of Germany’s Center Automotive Research.

Volkswagen’s operational skew toward its high-cost home territory is unusual. Germany accounted for 57% of its assets and 44% of its employees in 2023 but only 19% of revenue. At Toyota, VW’s closest rival in terms of scale, Japan accounted for 23% of revenues, 27% of assets and 18% of employees in the year through March.

After years of wage restraint boosted its competitiveness in the early 2000s, Germany briefly became the world’s largest exporter of goods. This advantage has since faded. German labor is now among the most expensive in the West, and labor productivity has been flat since 2019.

In Germany, Europe’s top car producer, an auto worker cost roughly €62 an hour last year, compared with €29 in second-ranked Spain, according to an analysis by the German Association of the Automotive Industry.

The Ukraine war and Berlin’s decision to forgo nuclear energy have also left Germany with high energy costs. Natural gas is three to five times more expensive than in China and the U.S., and electricity is 60% to 75% more pricey than before the pandemic, according to the BDI Federation of German Industry.

“German industry is slightly more energy intensive than the average and Germany depends more on industrial production, so that higher energy costs have a strong impact,” said Clemens Fuest, president of the IFO economic institute in Munich.

An example of Germany’s problems feeding into each other is Thyssenkrupp. The steelmaker has been beset by low demand from carmakers and falling steel prices because of Chinese exports. Meanwhile, a project to switch its fuel from coal to green hydrogen is increasing capital expenditure and threatening to push production prices even higher.

Losing the tech race

VW outspends industry peers—and any other European company—on research and development. Analysts expect it to shell out the equivalent of almost $19 billion on R&D this year, more than double Toyota. Yet it hasn’t had much to show for it lately.

VW’s decades of excellence in combustion engines was little help in developing EVs, whose performance depends largely on batteries and software. With those technologies led by Tesla and China, Volkswagen is struggling to stand out.

“Whereas a decade ago the Golf enjoyed a comfortable premium to all of its competitors, I’m not sure that is true for their electric vehicles. They’ve lost some of the fairy dust,” said HSBC analyst Mike Tyndall.

Some German manufacturers offer cutting-edge products ranging from sophisticated lasers to advanced optics that few foreign rivals can match. But many others have struggled to maintain a technological advantage.

Despite its engineering tradition and research institutions, Germany doesn’t have a sizable tech sector. SAP, the only software company in the DAX-40 blue-chip stock index, was created in 1972. The number of patents filed by German entities has dropped every year since 2018 except in 2023, World Intellectual Property Organization data shows. Corporate investment in the country fell 5% last year, according to the Kiel Institute for the World Economy, with many companies focusing on faster-growing markets.

R&D spending “in Germany amounts to about 3% of GDP, more than the European average, said Fuest. “The problem is that a large part of this is concentrated in the automotive sector.”

While China tapped German industrial know-how for decades, technology transfers are now flowing in the opposite direction too. Several German companies are building R&D capacity there to take advantage of local know-how, government subsidies or the absence of red tape, according to a German industry lobbyist based in China.

Ironically, expensive labor isn’t the only reason VW’s production costs are higher in Germany than in China, analysts say. Another is that its Chinese plants tend to be more automated and digitized.

Policymakers need to implement global standards if we are to scale up the role of credits

One of the thorniest talking points in climate right now is the carbon credit market. This remains a critical mechanism for funding projects that help offset greenhouse gas emissions at scale. Nevertheless, some areas — namely, the so-called voluntary credit markets — have an integrity problem, which is holding back adoption of the whole. Stakeholders can help supply a solution by moving the entire market towards a compliance-based approach.

Despite recent controversies, carbon credits continue to enjoy a bedrock of international support. Ten west African nations recently reiterated support for projects that generate carbon credits and the critical role they play in meeting climate, nature and finance needs. And several US government agencies announced the principles for high-integrity voluntary carbon markets, which aim to address some of the issues.

However, the fact remains that voluntary carbon markets are fragmented and do not have to comply with uniform global standards. This has made them uneven, hampering supply and demand. Although the principles are welcome, they should be a stepping stone towards compliance-based markets with mandatory standards.

As the impact of climate change and nature loss on our economy grows, the size of the carbon market is projected to double to $2tn by 2030. But despite these tailwinds, scaling up projects has been difficult, and many nations are still struggling to trade their first set of credits beyond small pilot projects.

Prices are important here. Today, the average price of carbon dioxide emissions is only $5 per tonne. Only the EU and UK within compliance markets have average prices of over $50 per tonne. The IMF estimates the equilibrium price at over $80 by 2030. There is clearly a big discrepancy between where prices are and where they need to be. Higher-quality credits will be critical.

These markets are not a losing proposition. Carbon pricing programmes now cover a quarter of global emissions, double the figure in 2015. But to meet long-term needs, they must change their governance and the administration of carbon prices. For a commodity with the potential to save the planet, it is perplexing that the administration of the clearing price is voluntary and only regulated by civil society organisations.

Authorities globally need to collaborate on a broad-based compliance system. This will help lower-income countries meet their own needs but also allow companies to do more. They also need to agree standards for projects that generate carbon credits and certification under one international body.

Policymakers must focus on turning national and corporate carbon-reduction targets into actionable plans embedded in transition strategies and underpinned by binding regulation. Carbon market revenue must accrue more benefits to local communities. An example might include carbon capture projects that boost smallholder farmers’ resilience and productivity (while also reducing methane emissions).

In this context, the World Bank’s International Development Association presents a huge opportunity. IDA provides lower-cost financing for lower-income countries at scale and is replenishing its funds this year, to the tune of over $100bn. Using this money to help developing countries plug into carbon markets could unlock a huge supply of credits, as well as demand from organisations looking for trustworthy credits to buy. Over time, this investment would have the potential to pay itself back many times over.

Carbon markets fully deserve the attention that the US government and others have given them. It is now up to policymakers globally to take the baton and implement uniform interoperable standards. The fate of our climate, our natural world and our economy depend on it.