Finance (No. 4) Bill

Adrian Bailey Excerpts

Wednesday 18th April 2012 Commons Chamber

[Karen Bradley]

I was coming to exactly that point. It is, in fact, a revenue-raiser. We need to return to the question of how money can be raised from the banks, and if that is what we wish to do, I think that the bank levy is a better way of doing it.

In preparation for the debate, I rang various former colleagues and others involved in the financial services sector. I could not find anyone who would express the view that the bank levy was a terribly bad thing. They all accepted that the tax needed to be paid, and they thought that this was a reasonable way in which to pay it.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

I am trying to follow the hon. Lady’s argument. What impact does she think the bank levy has had on the level of bonuses given to bankers?

[Karen Bradley]

My point is that it is not the Government’s job to try to drive the level of bonuses. The last Government wanted to do that, and failed miserably. It must be accepted that the bank bonus tax is a revenue-raiser and not a behaviour-driver, and that it will not determine the way in which bonuses are paid. The actions taken by the present Government to limit the level of cash bonuses that can be paid, and other such measures, are far more effective in ensuring that the bonuses that are paid reflect the performance that contributes to the building and growth of a financial services business. That is what we want in our economy. We want businesses to grow, because if they do, they will pay more corporation tax. They will also pay more payroll tax, because a 13.8% national insurance charge is levied on all employers for the sums they pay their employees. Therefore, if the banks make more money, they will pay more in payroll tax, which is a good thing.

--- Later in debate ---

[Mr Bailey]

I had not intended to speak in the debate, but I felt it was necessary to contribute to try and counter the argument from Government Members that taxation does not drive behaviour. It does.

The arguments that I have heard from Government Members are contradictory. On the one hand we are told that the bank bonus tax did not change behaviour and there was therefore no point in imposing it. On the other hand it is argued that if we have excessive taxation, people will leave the country and move banking elsewhere. One cannot argue both cases at the same time. Either taxation alters people’s behaviour or it does not. I believe that it does, but it is incredibly difficult to assess what will happen. The Treasury predictions over the past few years have not been very good at doing that.

The point has been made by several speakers that the original bank bonus tax was designed to drive behaviour, rather than to raise money. That resulted in an original estimate of receipts of about £500 million. Although the then Chancellor made it clear that it was a one-off tax, it was also made clear in the pre-Budget report that

“the Government will consider extending the period of the charge so that the tax remains in place until the relevant provisions of the Financial Services Bill come into force. Where there is evidence of avoidance schemes being put in place, the Government will take action to close those schemes.”

Implicit in that is the anticipation that other measures would defeat the bonus culture that was so damaging to our economy. It leaves open the suggestion that the then Government were prepared to review the tax if that did not happen.

It is obvious that the tax did not affect the bonus culture, which is why the tax raised about £3.5 billion. It is interesting to note that even as late as March 2010 the Treasury estimated that it would get only £2 billion—a huge underestimate of the amount that the tax would raise. Given that it raised more, behaviour had, by definition, not changed.

It is difficult to know whether the absence of any change in behaviour was in anticipation of a Conservative Government coming in who would not tackle the problem. That is a possible assumption. I contend that the previous Government had left open the option to deal with that culture, and this may be one of the measures that they would have taken both to raise revenue and to deal with the bonus culture. Given the June 2010 Budget introduced by the subsequent Chancellor and the apocalyptic vision he presented of the nation’s finances, I find it strange that a bonus tax that was raising so much money should be abandoned so readily and ruled out of consideration. The substitute tax is quite obviously designed not to raise as much and is not in accordance with the principles of responsible capitalism to which the Government say that they are committed. If we want responsible capitalism, it seems to me to be quite sensible to have a taxation regime that penalises those who act irresponsibly while at the same time raising a considerable amount of money to offset any potential burdens on those who act responsibly.

[Alun Cairns]

If the motivation behind the bonus tax is to tax those who have acted irresponsibly, would the hon. Gentleman suggest that we had an additional tax on former Labour Ministers who led us into the situation that has contributed to the debt of the nation?

[Mr Bailey]

Perhaps we should. Perhaps we should introduce a tax on certain members or major funders of the Conservative party, too.

[Mr Watts]

Does my hon. Friend not think that it a bit ironic that people who are suggesting that the previous Labour Government’s problems created the financial crisis are the same people—the Liberal Democrats and the Conservatives—who were calling for less regulation? It is interesting how the Government are trying to rewrite history.

[Mr Bailey]

I have often made the same point myself. I was on the Government Benches at the time of the so-called financial crisis and the run-up to it, and I do not remember any demands whatsoever from the then Opposition for us to introduce heightened regulation of the banking system. It is very easy to be wise in retrospect.

[Mr Redwood]

I think the hon. Gentleman has experienced some memory loss on that point, because I can remember both the Conservative and Liberal Democrat parties pointing out—as I did, too—that the borrowing was excessive and needed to be reined in.

--- Later in debate ---

[Mr Bailey]

I believe that the right hon. Gentleman introduced a paper on reducing regulation which subsequently disappeared and sank without trace in the light of the financial crisis.

In conclusion, we can argue about the behavioural changes but one thing that is absolutely certain is that the bank bonus tax raised a lot of money, that it was consistent with the principles of responsible capitalism and that it may well have affected the behaviour of bankers in the long-term if they had known that the tax would be in place as long as their behaviour justified it. The fact that the Government have removed it has meant that the bonus culture has continued. There is still a sense of unfairness and outrage within the community at large that they will have to pay for the excesses of the banking community and that the Government are not prepared to do anything about it. Even at this late stage, if the Government believe that we are all in it together, that is one thing they could do that would both benefit the Treasury and demonstrate their commitment to that principle.

[Mr Hoban]

This has been a useful debate and the clause and schedule that we are debating legislate for a change in the rate of the bank levy, increasing the full rate to 0.088% from January 2012 and making a further increase to 0.105 % from 1 January 2013. The rate changes are intended to ensure that the levy will raise the £2.5 billion a year that we said that it would and ensure that the additional corporation tax rates do not benefit the banks, a point that the hon. Member for Pontypridd (Owen Smith) did not seem to recognise.

The amendment looks remarkably familiar, as it was proposed last year, and it is good to see it being given another outing this year, but in the shadow spokesman’s 43-minute speech we heard remarkably little about it. We saw him dig himself out of a few holes of his own making, but we did not hear anything about whom it was targeting, what measures would be taken into account or, indeed, how much it would raise.

I say that because I have been going through some transcripts of radio interviews, and so far the Opposition have claimed that their measure would be used to finance £29.6 billion of additional spending or taxation. That is 10 times the amount the bank payroll tax raised when the Labour party was in government, but that is not just protestation on my part. The Leader of the Opposition, when quizzed by Jeremy Vine on 6 January 2011 about how the Labour party would pay for its VAT rise reversal, replied:

“I said for example we should have a higher bank levy.”

He was asked in a Fresh Ideas question and answer session—we have not heard many fresh ideas in today’s debate—on 25 March 2011 about how to cut the deficit, and he said that there should be “another bankers’ bonus tax”.

That is not a concoction; those are the words of the hon. Gentleman’s party leader, and I am afraid to say that the starting bid is £29.6 billion—[Interruption.] The hon. Gentleman should not question people’s arithmetic when his own was earlier found to be flawed. He should be very careful what he says. I suggested to him last night that he should have spent more time on his speech and less time in the Members’ Dining Room, but he ignored that advice. He should have followed it, shouldn’t he, really?

So we do not know how much the Opposition’s proposal would raise or at whom it would be targeted, and there is a stark difference between it and the levy that we introduced when we came into office. The bank levy is a tax on the balance sheets of banks, banking groups and building societies, and it complements wider regulatory reforms aimed at improving financial stability, including higher capital and liquidity standards. The levy ensures that the banking sector makes a fair and substantial contribution, reflecting the risks that it poses to the financial system and to the wider economy. The levy is also intended to encourage banks to move away from risky funding models.

From the outset, the Government have clearly stated that they intend the levy to raise at least £2.5 billion each year. That is an appropriate contribution, which was set with consideration to the wider environment, and it reflects the international programme of regulatory reform, the global economic conditions and the need to maintain the competitiveness of the UK financial sector.

The forecasts produced by the Office for Budget Responsibility implied that, if we did not adjust the rate, receipts for future years would fall short of the expected £2.5 billion. We will undertake a full assessment, before next year’s operational review of the bank levy, of the reasons why there is a shortfall, but fragility in the eurozone will inevitably have had a greater than the previously expected impact on last year’s balance sheets. The rate increase introduced in the clause puts us back on track to ensure that from 2013 and in future years the levy will raise at least £2.5 billion.

The target yield was set out in this Government's first Budget, when we also announced our intention to make significant cuts to the main rate of corporation tax. We were clear at the time, as we are now, that the bank levy yield far outweighs the benefit that banks receive from the corporation tax change. Other sectors, including manufacturing, will benefit from the reduction in corporation tax, but the banks will not benefit because the bank levy rate increase will offset it.

Since our first Budget, we have gone further: we have announced additional reductions in the main rate of corporation tax, so that it now stands at 24%; and we will continue with the two further cuts planned next year and the year after. As a consequence, Britain will have a 22% rate of corporation tax—the lowest in the G7. To offset the benefits to the banking sector, and to maintain the same incentives on the banks to move to less risky funding, the increase in the levy rate in this clause takes into account additional cuts in corporation tax.

The Opposition’s amendment seeks to reintroduce the bank payroll tax, and, as I said earlier, this is not the first time that we have heard it suggested. The House disagreed with it last year, and now, as then, the Government believe that such a tax would be counter-productive and unnecessary. The tax was introduced in the last Parliament as a one-off interim measure ahead of changes in remuneration practices from corporate governance and regulatory reforms. As the previous Chancellor clearly stated, it could not be repeated. The net yield of this one-off tax, accounting for the impact that it would have on income tax and national insurance contribution receipts, was £2.3 billion—less than our annual target for the permanent bank levy. The previous Government told us that they would apply the bank bonus tax only until changes in remuneration practices were put in place.