Our public services face the severest cuts in living memory – to be replaced by a sound bite ‘The Big Society’. The NHS is being effectively privatised, as the higher education sector was when the government decided to withdraw funding and allow universities to triple tuition fees. Welfare reforms will hit the most vulnerable, as has the VAT rise, which additionally has put a strain on small businesses and put the brakes on an economic recovery the first signs of which were showing when the coalition came to office. Police numbers are being reduced, serviceman have been told by email that they are being laid off. And as we are told that we are ‘all in it together’, one sector, that which caused this chaos in the first place – continues to act with reckless abandon as if the past three years had not happened. The banking industry, returned to profit after the biggest bail-out in history, is shamelessly rewarding its top earners with seven-figure bonuses. The coalition government has refused to call the bankers to account: indeed the reverse is true. Mr Cameron lectures us that it is time to lay off the criticism, and all the signs are that he and his Chancellor are planning less regulation of a sector that has shown beyond doubt that it is incapable of self-control.
In these circumstances, it is important that our elected representatives are called to account for what they are allowing to happen. I have tried engaging my MP – newly elected Tory MP Harriet Baldwin, arriving at the House after a career in the City – on the issue of the banking sector. To date it has not been as illuminating as I had hoped.
I emailed Ms Baldwin about bankers’ bonuses on 30 January and, having received no reply, emailed her assistant on 8 February, as follows:
I contacted Ms Baldwin over a week ago, pointing out that if the £7bn that the government is allowing banks to pay its senior staff in bonuses were instead paid to offset the cost of the tuition fees imposed by this government, then it would pay for 250,000 students to receive three years’ university education. And I asked her whether she thought the government had got its priorities right. I wonder if and when I might get a response to my enquiry?
Additionally, I wonder whether she would be willing to comment on government plans to exempt from UK corporation tax the profits of large companies (though not small companies) earned abroad when that money returns to this jurisdiction (the practice being at present to tax the difference between the UK and overseas rate), while allowing those companies to offset against UK tax the cost of running those overseas branches. This will not only deprive the Treasury of a significant tranche of revenue, but will encourage the export of jobs to those overseas jurisdictions. This seems a particularly surprising move in these austere times. Will Ms Baldwin be supporting these plans?
I would be grateful if, when responding, no reference were made to the plans of the previous administration, or to what Labour might have done had they won the last election. I am not a Labour voter and am interested in what the Tory-led coalition are doing, and not in the hypotheticals of a Labour administration.
On 10 February I received in the post the following reply from Ms Baldwin.
Thank you for your emails of 30 January 2011 and 8 February about bank bonuses and the profit of large companies aboard and UK Corporation Tax.
HB: Last year, there was a one-off tax on bank bonuses. Can the Chancellor confirm that this year the higher bonuses will attract the 50% income tax and 12.8% employer’s national insurance rates.Mr O: Of course it is right that they attract both income tax and employers’ national insurance contributions.
You imply in your question that you would rather see bankers’ bonuses taxed at 100% or perhaps set at £0. I hope that you were pleased by today’s announcement on bank taxes and bonuses which will see banks pay more taxes, pay less bonuses and lend more to business and society.
With reference to your additional technical question about UK corporation tax, it is the first I had heard about this matter. I am not aware of any tax changes in advance of next month’s budget but I will write to the Chancellor with your questions.
On 14 February, I replied to that letter as follows:
I would like to thank you for your letter of 9 February, responding to my emailed enquiry concerning bankers’ bonuses and the taxation of profits, earned by oversea branches, but later repatriated to the UK, of companies based in the UK. On this latter point, I look forward to hearing how the Chancellor responds to your query.
I did indeed listen to the Chancellor’s announcement on the ‘deal’ reached with the banks. Given that the taxpayer bailed out the finance sector, costing every man, women and child in this country tens of thousands of pounds, I was disappointed to hear that there were no new taxes on bankers’ bonuses (the fact that they will be subject to existing income tax rates was not a cause for celebration), and that in return for an unenforceable undertaking that the banks will lend more (of our) money to small businesses (presumably at commercial interest rates: see further below), they will reveal just how much is being earned by a handful of their best paid employees.
I will not be alone in being surprised that, just two years after the bail-out to rescue this sector, the banks are now able to report profits of such magnitude as to justify bonuses of £7bn. Given that the country has been suffering a recession that has required the coalition government, among other things, to require the trebling of university tuition fees, and massively reduce grants to local councils that will require the public sector to lay off large numbers of staff and cut frontline services to the most vulnerable in society, how have the banks managed to perform so spectacularly well? One is entitled to ask whether, in fact, these profits are a reflection of continued public subsidy rather than outstanding performance.
Therefore, could I ask whether you would support a call that the Independent Commission on Banking investigate fully whether there are in fact hidden public subsidies (or perhaps ‘stealth’ subsidies, to use a phrase beloved of the Conservatives in Opposition), along the following lines:
● The ‘Too Big to Fail’ subsidy: The government now provides a public guarantee, effectively insurance against banks going bust. This gives banks a huge commercial advantage over other firms in a market system. It means banks are able to borrow money much more cheaply than if they were not ultimately underwritten by the public. Exchanges with leading auditors in front of the House of Lords Select Committee on Economic Affairs in January 2011 confirm this. A conservative analysis reveals that this hidden subsidy could be worth £30 billion annually. It means that bonuses to senior staff for ‘performance’ and dividends to institutional investors are at least in part a straight transfer from the taxpayer.
● The quantitative easing windfall subsidy: When it was decided that the economy needed more liquidity, the Bank of England pumped in money using ‘quantitative easing’. To meet various, and sometimes self-imposed, requirements, it did so by purchasing government bonds through investment banks. Merely for being passive conduits for this ‘risk-free’ arrangement the banks took a cut of every trade. Banks enjoyed a significant windfall, but that lack of transparency keeps the likely amount hidden.
● The ‘make the customer pay’ subsidy: Looked at sympathetically, the banks have been put in a difficult position. At the same time as being required to rebuild their capital, they are also under pressure to lend. In response, the banks have tried to manage this by increasing the gap between what they have to pay to borrow money, and what they charge people to borrow from them: the so-called interest rate ‘spread’. But of course the banks have a choice. They could recapitalise by reducing or eliminating bonus and dividend payments until their capital base is rebuilt. As it is, the taxpayer is subsidising the banks twice over: once through taxpayer funded public support to the banks, and secondly through paying much higher interest to borrow than the banks do at a time when small and medium sized businesses need money to be leant at competitive rates. This hidden subsidy to retail banking and one part of the investment banking world amounts to at least another £2.5 billion each year.
Finally, are you in a position to confirm recent reports that half of the funding for the Conservative Party emanates from the City?
Having received no reply, on 1 March I emailed Ms Baldwin asking whether George Osborne had responded to her query on corporation tax. I received no response, so I emailed Ms Baldwin again on 9 March – but this time copying the email to my local newspaper. I received a response from Ms Baldwin's office a few hours later, saying that I could expect a reply shortly.
I shall post a further blog to report its content. Given it has taken five weeks for Ms Baldwin to reply, I look forward to a detailed and illuminating response.