Kwarteng has sent a powerful message on bankers’ bonuses
Among all the headline-grabbing tax cuts and growth initiatives in Kwasi Kwarteng’s so-called mini-Budget was one small, but powerfully symbolic, deregulation for the City of London.
The new chancellor, heartily applauded by prime minister Liz Truss as he delivered his debut policy package to the House of Commons, confirmed a well-trailed plan to ditch the bankers’ bonus cap — the EU rule introduced in 2014 that limits bonuses to double a banker’s salary.
Cue loud heckles from Labour MPs and across social media. The prospect of higher pay for bankers — reinforced by the axing of the 45 per cent tax band — will certainly grate with many voters as they struggle with a cost of living crisis. The idea of handouts for wealthy bankers would be widely alienating at the best of times — and this isn’t the best of times: average pay in the UK is shrinking at close to 3 per cent in real terms, according to the Office for National Statistics.
For the best bankers, this is still a competitive environment. It has cooled significantly since last summer’s peak, when multiyear guaranteed bonuses, on top of higher fixed pay, became the norm again as banks increased staff numbers to keep pace with the rebounding economy. Today the technology sector is less of a competitive threat for bank “talent”, as the value of equity packages has declined. But bank bosses warn that other areas of finance, such as private equity, are still in boom mode — for now.
As the economic downturn intensifies, though, banks’ ability to limit their pay bill should be aided by Kwarteng’s axing of the bonus cap. New recruits in particular can expect salaries to be lower in future, and though bonuses might be potentially higher to compensate, that may not be the case for many during the tricky times ahead.
Kwarteng’s decision is underpinned by economic logic (the greater flexibility for employers) and ideological consistency (his Thatcherite deregulation pledge). But it also has political appeal. Yes, some Red Wall Tory votes may be sacrificed, but for Truss and Kwarteng, it’s just a question of which votes you want to secure. True Brexiters will be rejoicing at one key ancillary benefit of ditching the EU bonus cap: the staff of UK banks anywhere in the world, and of foreign banks in the UK, will be liberated from its restrictions; the exception being EU banks whose staff in London or anywhere else will continue to be governed by it. Expect Kwarteng to cite this as a quick Brexit dividend.
This story originally appeared on: Financial Times - Author:Patrick Jenkins
