Higher pay for bankers and in the middle of a cost of living crisis. The politics of this may not look good but the economics behind this make sense and should be seen as a separate issue to the pay demands behind the recent rail strikes.
Last week Steve Barclay, the Cabinet Office Minister and Boris Johnson’s Chief of Staff asked the Chancellor to introduce deregulatory measures to help businesses. Controversially, this included removing the cap on bankers’ bonuses.
This cap was introduced by the EU following the 2008 financial crisis. At the time, then Mayor of London Boris Johnson witheringly described the policy as ‘the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire’.
He was right. Like many such interventions, rather than achieving its stated aims the bonus cap simply ended up distorting the market.
It triggered a huge rise in basic pay for bankers and across the financial sector. The big firms and incumbents could afford this, but it made life harder for new entrants and the smaller, innovative and dynamic firms that the City needs.
Nor did it help London’s competitive position as a leading global financial centre. All of which means it’s high time the bonus cap was removed, especially given the challenges the City is currently facing.
The first of these challenges is a post-Brexit assault by EU financial centres like Paris and Frankfurt. None can match London, but regulators in a host of EU countries – particularly France – are no longer playing by the normal rules.
They have become politically motivated and are telling some firms in the City to move operations. Legally they don’t have to, but the pressure persists. This behaviour requires the Government, Bank of England and UK regulators to collectively tell the EU to back off.
The second, more significant, long-term challenge is the intense competition from both New York and Asian centres like Singapore and Hong Kong.
This is where the lifting of the cap on bonuses makes a big difference. It levels the playing field for London with New York as well as highlighting another of many pro-business differences with Paris.
The key point here is that in a global market, firms and skilled people can move with relative ease. That means a financial centre like London needs the right tax, regulatory and wage environment to continue to both attract firms and retain talent.
This policy is not just about helping the City – it is about what is right for the whole British economy. And thanks to our progressive tax system, boosting financial services ensures the Exchequer gains. After all, the top 1% of earners pay close to 30% of income tax.
What’s more, the whole of the country gains from a healthier financial services sector. The focus may often be on London, but The CityUK highlights that half of financial sector jobs are outside London, many well paid. We should be looking to expand that number, by using smarter regulations and investment to onshore back office jobs to the UK from other countries.
There is another important aspect of removing the cap – making sure the UK makes the most of its post-Brexit freedoms.
Outside the EU we have a real opportunity to create a bespoke regulatory environment for the City and to act quickly in establishing a lead in innovative areas of finance. We have world-class regulators, but we also need the right parliamentary scrutiny to ensure we capitalise on this opportunity.
This is an opportunity for smart regulations that both prevent a repeat of the 2008 crisis and help super-charge the City’s competitive position, with associated positive spin-offs for the economy. This isn’t just about financial services either: it should be the trigger to embrace wider pro-business policies across the whole economy.
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