The government's failure to take action over bankers' bonuses does not mean that we can't get our money's worth from the banks, argues Ben Fox.
As expected, the rumours that major UK banks and the British Bankers Association were attempting to reach a deal to slash bonus payments for 2010 have turned out to be a smokescreen. Around £7 billion will be paid out in bonuses by British banks over the next few weeks, despite public outrage at a time when many are starting to feel the pain of public sector cuts and the VAT rise.
In particular, the Bank of England has stated that the part-nationalised banks, which include the likes of RBS and Lloyd’s, and are state subsidised to the tune of around £100bn, should not pay any bonuses.
Back in May, the third commitment in the coalition’s government programme was to:
“Bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.”
Have they delivered? The answer is a resounding no. The truth is that the government has done absolutely nothing on this “commitment”, aside from proposing a meagre bank levy that, as Left Foot Forward has previously reported, they have tried to reduce. But what can and has been done elsewhere?
While the government of millionaires has sat on its hands, the European Union has acted, and Ed Miliband has today rightly called for the 50% ‘bonus tax’ to be extended. Labour should also continue to call for a massive increase in the size of the bank levy.
The EU’s Capital Requirements directive, which was pushed through the European Parliament by Labour’s Arlene McCarthy, requires that at least half of a bonus must be paid in shares and between 40% and 60% can’t be cashed in for years.
As Robert Peston has said:
“It is highly likely that for the top earners at the UK’s leading banks, more-or-less 100% of payments will be made in shares or in subordinated debt.”
In other words, this should remove two elements of risk, by not depleting banks’ capital and liquid resources, and discouraging them from taking short term risks that could lead to a collapse in share values, since a reduction in share values would see the bankers take the financial hit. It also greatly increases the potential tax take from capital gains, since these shares would be taxable.
Secondly, if excessive bonuses cannot be stopped, then Miliband is right to demand a continuation of Alistair Darling’s highly successful 50% ‘bonus tax’, which brought in £3.5bn in revenue. When it was introduced City lobbyists and institutions claimed that thousands of financial sector workers would re-locate, while the Treasury estimated a tax take of £500m. Both were wrong.
Finally, there is no reason to keep the bank levy so low. The government has proposed a rate of 0.05% in 2011 rising to 0.075% for the remainder of the Parliament. But there is no reason why it should not be higher. For example, a bank levy of 0.15% would raise £7.5bn per year which, combined with a ‘bonus tax’ would generate £11bn – a comparable figure to that estimated to be gained through the VAT rise. Then the Conservative-led government could genuinely say that ‘we are all in this together’.
The payment of billions of pounds in bonuses will cause more political problems for Vince Cable who famously condemned the actions of ‘spivs’ in the financial sector in his Lib Dem conference speech, and to Nick Clegg who also warned banks not to pay out large bonuses if they continued to limit business lending.
If the banks don’t come up with promises of more and cheaper credit for smaller businesses, the political pressure for a new tax will become harder to resist. Lib Dem Treasury spokesman Lord Oakeshott’s words should be a warning to the government:
“This is the coalition’s moment of truth on fairness. The first item on our coalition agreement is a promise to deal with unacceptable bankers’ bonuses. Secret bonuses are by definition unacceptable, so they must be disclosed.”
As Lord Oakeshott said, this is a “moment of truth for the coalition”. He’s right and the government will be judged by their actions on this issue.Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.