Connected Research

Union policy research in the 21st century

Bankers’ bonuses (again)

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Apart from Copenhagen, today’s major news stories all feature this week’s much-anticipated Pre-Budget Report.

Significantly, Chancellor Alistair Darling is considering including a ‘crackdown’ on the bonuses of highly-paid City bankers in his PBR speech, via a windfall tax, after apparently having dismissed a windfall tax on banking profits themselves as likely to jeopardise the strengthening of banks’ balance sheets. Larry Elliott in The Guardian summarises the economic and historical case for such a tax, while William Keegan, his colleague over at The Observer, also provides some interesting political context for longer-than-short-term hopes that a revived manufacturing industry (hopefully including, as Elliott argues, a large element of green investment) might take the place of the recent economic over-reliance on the financial services sector.

At the same time, the Engineering Employers Federation, making its own pitch to the Pre-Budget Report, points out that confidence remains fragile even if a recovery is in sight while leading economists have written to the FT to point out that, in this context, public spending cuts will undermine the recovery – a sentiment well in tune with the TUC’s Brendan Barber’s own thoughts on the PBR yesterday and specifically welcomed by him today.

Regardless of its evident populist appeal, a punitive tax on the bonuses of bank executives remains the right thing to do in the context of the banking profits on which such bonuses are proposed having been made on the back of taxpayer-funded bail-outs and on the impact of the Bank of England’s quantitative easing programme. It does, clearly, need to be sufficiently robust to circumvent City creativity (not least to allow the tax to follow bonuses awarded in respect of this financial year but paid in future ones, or in shares), and to be on a sector-wide basis so as to prevent poaching by other financial institutions. Nevertheless, the practical difficulties inherent in a particular policy are rarely sufficient to undermine whether or not it is right to implement it. Darling will evidently need to define the tax carefully – but if it encourages banks to pay smaller bonuses, then it will have done its job. It is, ultimately, a question both of accountability and of legitimacy; in forcing financial institutions to confront the legitimacy gap in what they are proposing on bankers’ bonuses, Darling will be doing democratic values a favour, too.

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Written by Calvin

07/12/2009 at 5:00 pm

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