The current rhetoric against bankers is deflecting from the fact that large banking bonuses are actually a good thing for the economy.
The issue of bankers’ bonuses is refusing to go away. The latest controversy surrounds whether 81% state-owned Royal Bank of Scotland should ask its main shareholder – the UK government – for permission to allow bonuses to be paid to up to twice base salary. Under EU law, bonuses can only be 100% of salary, unless special agreement by the shareholders is given.
The opposition Labour Party has scented the chance to make political capital by advocating that the government, as RBS’s main shareholder, does not agree, if asked, for the restriction to be lifted.
In the running of a country there are decisions that are good economically and decisions that are good politically. The dire state of affairs in many European democracies is because too many politically good but economically bad decisions have been made – on welfare, pensions, health, tax, property – on almost everything, in fact.
The economic case for allowing RBS to pay larger bonuses is simple – government setting of remuneration for market-facing firms does not usually work out well and usually firms find ways around it; RBS has to compete for talent against banks (and London has to compete against financial centres) not subject to EU rules; regulations concerning bonuses and how they can be paid have been tightened up to stop short-term gaming of the system; and, critically important but often forgotten, 45% of the bonuses are collected in tax so helping the UK’s fiscal problems.
It was, in fact, dependence by the previous Labour administration on tax revenues from the financial sector that made the post-crisis fiscal situation in the UK worse than in almost any other European country apart from Greece. These revenues collapsed in the crisis and there was nothing to replace them.
A smarter response from Labour leader Ed Miliband would be to come up with policies aimed at reducing the UK’s dependence on the financial sector – one of the few in which the country enjoys a trade surplus – by promoting the manufacturing sector. Unfortunately, this does not grab the headlines in the same way as banker bashing and requires deeper thinking.
