In Defence of Liberty

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Labour’s Bank of Contradiction

Like a ghost from the past, Labour has returned to a tripartite system against banks and bonuses. The Royal Bank of Scotland (RBS) is expected to invoke a European Union (EU) rule that will allow the bank to pay up to twice an employee’s basic salary in bonuses, only if 65% of shareholders agree. Chris Leslie, Shadow Chief Secretary to the Treasury, said:

At a time when families face a cost-of-living crisis and bank lending to business is failing, it cannot be right for George Osborne to approve a doubling of the bank bonus cap.

Labour leader Ed Miliband is expected to announce that a Labour government would inquire into the competition between banks, and possibly suggest a cap on bank size based upon their UK market share. The laser-like focus on bank bonuses is a laughable part of British political culture.

Since the financial crisis, RBS has drastically changed. According to the BBC, “fewer than 100 RBS investment banking staff would be affected by the bonus decision, as RBS has reduced the size of its investment banking by about three-quarters since 2007.” By placing proportional limits on bank bonuses, the EU has incentivised banks to increase base remuneration.

Total pay is not determined by government edicts. In 1942, United States President Franklin D. Roosevelt issued an executive order preventing increases or decreases in wage rates, unless authorised by the National War Labor Board. Since fringe benefits – like health insurance – were not included in wages for the purposes of these controls, health insurance paid by the employer became incredibly popular, as US businesses competed for staff. Health insurance was solidified into the US pay system when the Internal Revenue Service decreed employer-sponsored health insurance was exempt from income taxation.

(Video: liarpoliticians)

A Tax on Bankers’ Bonuses

Bonus structures have also reformed. Allister Heath of City AM elaborates: “And is the party aware that base pay is in cash – but that bonuses are equity-based, increasingly deferred and subject to claw-back clauses?” Capping variable costs, whilst inflating fixed employee costs, places banks in a precarious position. This is particularly true if another downturn arrives. Wage controls are simply another example of the general failure of price controls. Absurdly, Labour have a series of proposals – including a youth jobs guarantee, engorging capital spending and building new houses – to be funded by a bank bonus tax. Whilst Labour has made over £30bn of spending commitments supposedly funded by a tax that last raised £2.3bn, limiting these bonuses further dries the funding pool for their plans.

On competition, the coalition government’s 7-day guarantee scheme for current account transfers has increased switching by 17%. A market share cap would have a perverse effect on competition: any bank or building society that hit that limit would be incentivised to ignore standard customers whilst seeking well-paid clients. There are more ways to inflame competition, through fully-portable current accounts, online-only accounts and improving the role of supermarket subsidiaries and other smaller banks.

Labour’s return to banking reform is predictable, and given their other policies, rather contradictory.

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This entry was posted on January 16, 2014 by in National Politics and tagged , , .
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