City of London welcomes plan to cut bankers’ bonus caps

City of London welcomes plan to cut bankers’ bonus caps

Kwasi Kwarteng’s plan to scrap Britain’s banks’ bonus cap has been welcomed in the City of London, but it will plunge the chancellor into a fierce debate about how best to boost the country’s anemic growth rate.

The opposition Labor Party argues that removing the cap, which limits bonuses to twice the annual salary and aims to prevent excess risk-taking, will do little to boost growth and simply amount to a pay rise for wealthy bankers as the country faces a cost-of-living crisis.

But Kwarteng told treasury staff on a Zoom call this week that their “entire focus” now had to be on boosting growth; he will set out his strategy in a mini-budget to be held on Friday 23 September.

The chancellor’s plan to scrap the cap on City bonuses is a sign that Liz Truss’s new government is willing to take big political risks as it tries to push annual growth up to its pre-financial crash average of 2.5 per cent .

Truss and Kwarteng were among the authors of Britannia Unchained, a free-market treatise published a decade ago, which called for a radical new economic approach or risk “an inevitable slide into mediocrity” for Britain.

While the Treasury under successive Chancellors has dreaded “distributive analysis” to show that budget measures were “fair” across income groups, Truss and Kwarteng take a different approach.

The new Prime Minister, confronted this month with a chart showing her planned cuts to National Insurance would leave some on the minimum wage just £59 a year better off while a person earning £100,000 would save more than £1,000, insisted this was “fair”.

She argued that rich people paid more taxes, so of course they would benefit more from tax cuts. For Truss and Kwarteng, promoting growth is the key to fixing public services and helping everyone. Critics have called it a revival of “trickle-down economics,” the discredited idea that policies to benefit a small number will ultimately benefit the entire population.

Kwarteng’s expected move to remove the EU bank bonus tax for 2014 in the UK (no final decision has been made) follows the same approach; he believes a “Big Bang 2.0” deregulation of the city will boost growth and benefit everyone.

Regulators at the Bank of England, which have opposed the tariff from the beginning, also support the move. “The remuneration rules for deferment, clawback and malus are more effective tools to ensure that bankers take proper account of risk,” a spokesperson said.

These rules make senior executives liable to a fine, ban or even prison for mistakes on their watch, and there are provisions that can withhold or claw back bonus payments as punishment.

But a Labor official said Truss and Kwarteng wanted to portray the opposition party as “anti-growth”, but added: “Why do they think scrapping the bonus cap will help economic growth?”

The Unite Union characterized the idea as “a grave insult to workers” who are being “urged to exercise pay restraint while the government tells bankers to let it rip”.

“As millions struggle to feed their families and keep the lights on, the government’s priority seems to be increasing the phone number salaries of their friends in the city,” it said.

David Gauke, the former Tory Chancellor of the Exchequer, said he supported ending the cap in principle, as it served no “particular regulatory purpose”, but acknowledged that delivering it would be “politically hugely challenging”.

“In some ways, there’s something quite brave and admirable about that,” he said. “But it’s taking a big political risk, when you consider that they’re also reversing the increase in corporate tax, not imposing an unexpected tax on energy companies – when the country is in economic crisis.”

Economists are skeptical that across-the-board tax cuts will make much of a difference to Britain’s potential growth rate, noting that bankers in the City account for only a small part of the UK economy.

They say any change to the bonus regime, presented by ministers as one of the deregulatory “benefits of Brexit”, will not make a big difference to overall UK growth. Other policies that could increase growth were available but had been rejected.

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Jonathan Portes, an economics professor at King’s College London, has backed the government’s easing of skilled labor immigration, which he said could improve growth rates.

Portes said Truss had rejected other ideas, including “improving the speed and flexibility of planning to make it easier to build, improving connectivity, both physical and digital, and putting the UK-EU relationship on a more positive footing”.

Kwarteng’s proposal is the latest bank-friendly policy adopted by the government as it tries to fend off attempts by the EU to force more economic jobs, activity and tax revenue to the continent after Brexit.

The news has been greeted, privately, with joy by US investment banks, which will be the main beneficiaries of the change and have grown to dominate London since Margaret Thatcher’s sweeping deregulation of the city in 1983.

Wall Street executives have consistently argued that the bonus cap does not encourage lower wages but rather pushes up wages, which are fixed and difficult to cut when earnings fall, while bonuses can easily be cut to zero in a bad year.

The likes of Goldman Sachs and JPMorgan will also be able to more easily move employees between New York and London without having to change the salary structure, keep wages relatively low and retain variable bonuses as the main part of remuneration.

A US bank executive based in London said: “A departure from the bonus cap will be a huge positive for the city and for us in terms of talent attraction, investment and reducing fixed costs.”

Others are more skeptical about the benefits of removing the cap, which has never been a significant focus of the sector’s lobbying efforts and affects only a small part of the workforce.

“This is not necessary,” said Sir Win Bischoff, former chairman of Lloyds and Citigroup. “By itself, removing the cap does not make us more competitive . . . [it is] not an important factor that maintains London’s status as a global financial center. It is more of a symbolic gesture. In itself that will not attract people back to London if they have already left because of Brexit.”

Similarly, the chairman of a retail-focused UK lender dismissed the potential move as “mere politics” and tokenism compared to the greater long-term damage inflicted on London by Brexit.

“You destroy the city, you make capital and people move, you don’t take financial services into account in the Brexit deal – and now you turn around and say the pay cap should be removed?” said the person.

“This is only going to play to your Tory crowd. It’s going to have a zippo effect of attracting bankers here because they’ve already found loopholes around the cap – nobody’s going to ditch fixed pay, so if anything this will only lead to wage inflation. “

A spokesperson for UK Finance, which represents the UK banking sector, said that “ensuring the industry is globally competitive is vital to future economic growth and we are keen to see the steps the government plans to take to make the UK an attractive place to do business Business. “.

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