British public, politicians happy with bonus tax while bankers sulk

09:17, December 21, 2009      

Email | Print | Subscribe | Comments | Forum 

by Peter Barker

The most controversial announcement in British chancellor Alistair Darling's pre-budget report (PBR) on Dec. 9 was a one-off tax on bankers' bonuses of 50 percent, but a fortnight later what has been the effect of the headline-grabbing move?

There had been much speculation before the PBR that about what the chancellor, the British finance minister, would do faced with the return of large bonuses for bankers.

In the PBR Darling said the one-off tax would apply to banks operating in Britain and to their Britain-based employees. Bonuses of 25,000 pounds (about 40,000 U.S. dollars) or more would be put into a pot for each bank and that pot would be taxed 50 percent.

"The choice facing the country is between securing recovery or wrecking it -- between investment to build a fair society where all prosper and a divided society that favors the wealthy few," he said.

Darling announced the tax against a background of considerable voter anger over bankers' bonuses.

The governing Labor Party will face the electorate in a general election in May of next year at the latest. They are currently well behind the opposition Conservative Party, with the most recent IBM poll for the Guardian newspaper showing the Tories ahead on 40 percent to Labor's 31 percent. The poll was taken the first weekend after the PBR.

But Labor were up 2 points month on month, and the Conservatives were down 2. And the Conservatives are now a long way off their 17 point lead which they enjoyed just two months ago. The narrowing of the gap is part of a four-month swing to Labor, and gives strength to calls for Prime Minister Gordon Brown to go to the country earlier than his May deadline.

Voters were also asked what they thought of the bankers bonus tax -- and a massive 71 percent welcomed the tax. Hitting bankers has been good for Labor.

Several banks -- most notably the Royal Bank of Scotland (RBS) and Lloyds Group -- were bailed out in 2008 and have received further state aid since. The well-known high street bank Northern Rock had to be bailed out by the Bank of England in September 2007,and wholly bought by the government to prevent its collapse in February 2008. According to National Audit Office figures, the British government has so far spent 117 billion pounds (about 189 billion U.S. dollars) to rescue the banks.

Why should the government do this? Financial services are a vital part of the country's economy. According to the Corporation of London the financial services sector in Britain makes a trade surplus of 43.3 billion pounds (about 71 billion U.S. dollars). There are 250 foreign banks in London, and three quarters of all Fortune 500 firms have office in the city. The city sees 1,679 billion U.S. dollars of foreign exchange turnover each day, 35 percent of the global market.

Just as a windfall bankers tax is popular with voters, it's very unpopular with the people who might have to pay it.

Stuart Fraser, City of London (where many banks are based) policy chairman, said of the tax: "A windfall tax on bonuses above25,000 pounds (about 41,000 U.S. dollars) may appeal to a public still angry about individual and collective lapses during the crisis. However, an excessively punitive approach towards remuneration will benefit nobody.

"A broad brush taxation policy risks encouraging the 250 or so overseas banks, based in the City, to reconsider their commitment to the UK. Sending out a message that the UK does not welcome high earners will be music to the ears of rival global financial centers.

"The financial services industry contributed 12.1 percent of total tax revenues in 2008/09. We cannot afford to lose the taxes -- both in terms of income and spending -- that top talent generates for the government and the wider economy."

Fraser's worries were echoed among bankers. Reacting to the chancellor's announcement, Sean Drury, international mobility partner, PricewaterhouseCoopers LLP said: "It's unlikely a one-off levy on bonus pools in isolation would cause employers or employees to decide to relocate outside of Britain.

"But, in combination with the incoming 50 percent income tax rate (already announced and set for April 6, 2010), National Insurance Contributions increases, restrictions on pensions tax relief and changes to the taxation of foreign nationals, the tax on bonuses will contribute to the declining attractiveness of Britain as a business location."

In positions of authority, some believe an opportunity for change must be seized. Andrew Haldane, the Bank of England's head of financial stability, told the BBC World Service Business Daily program on Friday: "The costs of carrying around a large financial system are now evident to all. If some of that (large financial system) were to migrate overseas that would be unfortunate -- but given the costs, it may be a price worth paying."

Haldane believes there must be long term, structural changes in world banking, or at least in domestic banking and that the state must get out of its "doom loop" with the banking system, in which it rescues it every time there is a catastrophe, and the bankers then simply up the stakes -- making the next catastrophe even more expensive to fix.

So far, only Deutsche Bank, which has 8,000 employees in Britain, is the only bank to publicly reveal its bonus tax plan --it would be spread across all its 80,000 worldwide employees. Josef Ackermann, the bank's chief executive, told the Financial Times in London: "If parts (of the cost of the tax) are paid out of the bonus pool we would seek to globalize it. It would be unfair to treat UK bankers differently."

Some individual bankers are taking things into their own hands. The British newspaper the Sunday Telegraph reported that senior directors at international banks based in the city have received requests from American, French, Spanish and German staff to transfer back to their home countries or elsewhere overseas after the windfall tax was announced. But it could not yet reveal details.

Barclays Bank chief executive John Varley was the first bank chief to attack the bonus tax. He told the BBC on Friday: "Banks are competing globally -- this bank, Barclays, competes with banks all around the world and we have to be able to compete on a level playing field.

"The United Kingdom and France have gone in that direction (the bonus tax) and I lament that."

Varley would say that. Britain's Sky News reported this weekend that Barclays was considering paying out bonuses in the New Year, and that they would total "north of 3 billion pounds" (about 4.85 billion U.S. dollars).

Source: Xinhua
  • Do you have anything to say?
Special Coverage
Major headlines
Editor's Pick
  • Fireworks display marks 10th anniversary of Macao SAR
  • Water knows the answers
  • Philippines says major volcano eruption within days
  • China's third escort mission returns home from Somali waters
  • Russia launches manned spacecraft to ISS
Most Popular
Hot Forum Dicussion