The timing is, to say the least, curious. Britain is facing its biggest cost of living crisis in decades. Workers are angry about crashing living standards. And yet one of the first things on the new government’s agenda is to scrap the cap on bankers’ bonuses. Kwasi Kwarteng may announce the decision as part of his mini-budget next Friday.
Make no mistake, there is an argument for what the chancellor is planning, namely that the cap hasn’t worked. Critics said when the EU brought in its legislation in 2014 that banks would find a way round the cap by simply paying higher salaries, and they have been proved right. Placing limits on one part of a package (the bonus) but imposing no constraints on the other part (basic pay) never made any sense. If the idea was that bankers needed to be paid less, it would have been more logical to go the whole hog and impose a cap on total remuneration.
That said, the decision to remove the cap now is a political gift to Labour and to unions, since it feeds into a clear them-and-us narrative. Bankers will be whooping it up in the champagne bars of Canary Wharf, but as a vote-winning strategy it may have its limitations.
According to the Office for National Statistics pay growth in the private sector is running at 6% as opposed to 2% in the public sector. Those working in the well-paid financial and business sector have been shielded from the worst of the cost of living crisis by generous bonus payments. Abolishing the bonus cap reinforces the already strong belief that there is one rule for bankers and another for everybody else. Inevitably, it is going to harden attitudes on picket lines. Sharon Graham, the general secretary of Unite, says that while the Bank of England lecture workers to show pay restraint, the chancellor’s signal to the City is “let it rip”.
Kwarteng and Liz Truss think they can defuse any political fallout by pointing out that the government will be spending £150bn to protect households from rising energy bills. There will be much said about how this is the single biggest economic intervention by the state on record. Privately, though, the prime minister and the chancellor know the political optics of seeming to put the interests of a banker earning £3m a year over those of a nurse earning £30,000 a year are not great.
The fact that Truss and Kwarteng are prepared to risk the political blowback says much about the new government’s ideology, which is unashamedly pro-market and pro-competition. Scrapping the bankers’ bonus cap is part of a package of planned deregulation for the City and the wider financial sector that will be gradually announced in the coming weeks and months.
This should set off alarm bells. The government’s plan is not just to make London more attractive for a global pool of footloose bankers by making it possible to earn sky-high bonuses. It is to make a bonfire of regulations so that bankers in hot pursuit of a big bonus pay-out can take more risks.
In the 1990s and 2000s, the City made itself globally attractive by becoming the light-touch, anything-goes financial centre. Bankers cut corners and ignored the warning signs. The upshot was a financial crisis from which the economy has never recovered.
Lessons were supposed to have been learned from a period in which the UK’s then biggest bank – Royal Bank of Scotland – came within hours of running out of money. These included the need for tougher supervision, more stringent capital requirements and a more balanced economy less dominated by the financial sector. Levelling up had its origins in the belief that Britain was far too dependent on the success of the City of London.
Truss’s government seems determined to follow a different approach. The dominance of the City over the economy grew after the big bang reforms of the 1980s, and now Kwarteng is talking about a big bang 2. When she was foreign secretary, the prime minister described the financial sector as the “jewel in the crown” and has made it plain subsequently that she thinks it is being held back by regulatory overkill.
Although it is less than two weeks old, the Truss government has already made clear exactly where it is coming from. The economy, starting with the City, will be deregulated. Wealth will somehow ripple out from London and the south-east to the rest of the country. Tax cuts favouring the better off will pay for themselves. Abolishing the cap on bankers’ bonuses means a booming financial sector and that will be good for all of us.
This is a classic example of the triumph of hope over experience. We have been here before – and we know it doesn’t end well.