Kwasi Kwarteng’s plan to scrap Britain’s bankers’ bonus cap has been welcomed in the City of London, but it will plunge the chancellor into a ferocious debate about how best to boost the country’s anaemic growth rate.
The opposition Labour party argues that axing the cap, which limits bonuses to twice the annual salary and aims to prevent excess risk taking, will do little to boost growth and simply amounts to a pay rise for wealthy bankers as the country faces a cost of living crisis.
But Kwarteng told Treasury staff on a Zoom call this week that their “entire focus” now had to be on boosting growth; he will set out his strategy in a mini-Budget to be held on Friday September 23.
The chancellor’s plan to scrap the cap on City bonuses is a sign that Liz Truss’s new government is willing to take huge political risks as it tries to push annual growth up to its pre-financial crash average of 2.5 per cent.
Truss and Kwarteng were among the authors of Britannia Unchained, a free-market tract published 10 years ago, which called for a radical new economic approach or risk “an inevitable slide into mediocrity” for the UK.
While the Treasury under successive chancellors has agonised over “distribution analysis” to show that Budget measures were “fair” across income groups, Truss and Kwarteng take a different approach.
The new prime minister, confronted this month with a chart showing that her planned cut to national insurance would leave someone on the minimum wage only £59 a year better off while a person earning £100,000 would save more than £1,000, insisted this was “fair”.
She argued that rich people paid more tax, so of course they would benefit more from tax cuts. For Truss and Kwarteng, promoting growth is the key to fixing public services and helping everyone. Critics have called it a revival of “trickle down economics”, the discredited idea that policies benefiting a small number will eventually benefit the entire population.
Kwarteng’s expected move to axe the 2014 EU bank bonus tax in Britain (no final decision has been taken) follows the same approach; he believes a “Big Bang 2.0” deregulation of the City will boost growth and benefit all.
Regulators at the Bank of England, which has opposed the cap from the outset, also support the move. “The remuneration rules on deferral, clawback and malus are more effective tools for ensuring bankers take proper account of risks,” a spokesperson said.
These rules make top executives liable for a fine, ban or even prison for failings on their watch and there are provisions that can withhold or recover bonus payments as punishment.
But one Labour official said Truss and Kwarteng wanted to frame the opposition party as “anti-growth”, but added: “Why do they think scrapping the bonus cap will contribute to economic growth?”
The Unite union characterised the idea as “a grave insult to workers” who are being “urged to exercise pay restraint while government tells bankers to let it rip”.
“When millions are struggling to feed their families and keep the lights on, the government’s priority appears to be boosting the telephone number salaries of their friends in the city,” it said.
David Gauke, former Tory Treasury minister, said he supported the ending of the cap in principle, as it served no “particular regulatory purpose”, but he acknowledged that delivering it would be “politically enormously challenging”.
“In some respects there’s something rather brave and admirable about it,” he said. “But it’s taking a big political risk, when you consider they are also reversing the corporation tax rise, not imposing a windfall tax on energy companies — when the country is in economic crisis.”
Economists are sceptical that general tax cuts will make a large difference to the UK’s potential growth rate and note that bankers in the City account for only a small part of the UK economy.
They say that any change in the bonus regime, presented by ministers as one of the deregulatory “benefits of Brexit”, would not make a large difference to overall UK growth. Other policies that might boost growth were available but had been rejected.
Jonathan Portes, economics professor at King’s College London, has supported the government’s relaxation in skilled work immigration, which he said could improve growth rates.
Portes said Truss had rejected other ideas, including “improving the speed and flexibility of planning to make it easier to build, improving connectivity, both physical and digital, and putting the UK-EU relationship on a more positive footing”.
Kwarteng’s proposal is the latest bank-friendly policy enacted by the government as it tries to head off attempts by the EU to force more financial jobs, activity and tax revenue to the continent after Brexit.
The news has been greeted, privately, with glee by US investment banks, which will be the main beneficiaries of the change and have grown to dominate London since Margaret Thatcher’s sweeping deregulation of the City in 1983.
Wall Street executives have consistently argued that the bonus cap does not encourage lower pay but rather pushes up salaries, which are fixed and hard to cut when revenues fall, whereas bonuses can easily be slashed to zero in a bad year.
The likes of Goldman Sachs and JPMorgan will also be able to more easily relocate staff between New York and London without having to alter their pay structures, keeping salaries comparatively low and retaining variable bonuses as the bulk of remuneration.
One US bank executive based in London said: “A bonus cap exit would be a massive positive for the City and us in terms of talent attraction, investment and reduction of fixed costs.”
Others are more sceptical of the benefits of removing the cap, which was never a significant focus of the sector’s lobbying efforts and only affects a tiny sliver of the workforce.
“This isn’t necessary,” said Sir Win Bischoff, former chair of Lloyds and Citigroup. “By itself, removing the cap doesn’t make us more competitive . . . [it is] not a major factor keeping London’s status as a global financial centre. It’s more of a symbolic gesture. By itself, it won’t attract people back to London if they have already left because of Brexit.”
Similarly, the chair of one retail-focused UK lender dismissed the potential move as “just politics” and tokenism compared with the greater long-term damage done to London by Brexit.
“You destroy the City, you make capital and people move, you pay no attention to financial services in the Brexit deal — and now you turn around and say salary caps should be removed?” the person said.
“This is just playing to your Tory audience. It is going to have zippo effect on attracting bankers here because they have already found loopholes around the cap — no one is going to drop fixed pay, so if anything this will only cause pay inflation.”
A spokesperson for UK Finance, which represents the UK banking sector, said that “ensuring the industry is globally competitive is essential for future economic growth and we are keen to see the steps the government plans on taking to make the UK an attractive place to do business”.