Finance (No. 3) Bill

John Redwood Excerpts

Tuesday 3rd May 2011 Commons Chamber

[Chris Leslie]

Of course, the Liberal Democrats advocated the opposite of that before the general election. Obviously they had good, sound reasons to change their view rapidly over a weekend.

[Mr John Redwood (Wokingham) (Con)]

Will the shadow Minister say how much tax he thinks should be imposed on the banks, and how he would go about doing it?

[Chris Leslie]

As I said, we would repeat the bank bonus tax that we instituted last year, and we think that the bank levy needs to be more substantial.

The Government’s original design suggested that it would yield £3.9 billion—that was reported in The Observer, I think, back in November. Of course, that was why they panicked and decided that they would have to go back down to the £2.5 billion or £2.6 billion level. They stepped away from that original yield level.

Of course, we are not the Government; we are the Opposition, and we are not even allowed under the rules of order to table our suggested variants of the rate of the levy or the design of the clause. All that we can do for now is advocate a fairly urgent review of the general levels of bank taxation in this country.

--- Later in debate ---

[Mr Redwood]

I listened carefully to the shadow Minister’s speech, and it is quite true that the public mood is one of wishing to see both a just return on its forced investment in the banking industry and the banking sector—particularly the state-owned and subsidised banking sector—making its contribution to the recovery, in view of what happened in 2008 and 2009.

I remember in 2007 and 2008 being in dispute with the then Government, because I felt they were setting up a banking crisis that we could have avoided, but unfortunately my voice was not listened to; they did not take action on interest rates and money market conditions to prevent the crisis. When it started, I think I was the only MP who said, “Do not give all this money to the banks.” I felt it was wrong to buy shares in the banks and to support the bondholders. I thought we had a duty to the depositors and individuals who were tied up with the banks, but not to those who had financed and run the banks in those conditions. Unfortunately, the decision was made to embark on a massive subsidisation and share-buying programme, which the previous Government did. So we are where we are, and I think that we all agree that what we wish to do now is get the maximum value we can out of the banks that are subsidised or in state ownership, because that would make the public feel better about it. Surely, now is the time when those state-owned and state-subsidised banks should make their fuller contribution to the recovery, after their role in the recent crash.

[Chris Bryant]

I apologise in advance to the right hon. Gentleman if what I am about to say is an inaccurate representation of what he said in the past, but my memory is that he produced a report in which he argued there should be much less regulation of the financial services industry—in fact almost none—[Interruption.] He is shaking his head. I am sure he will be able to enlighten us by correcting me.

[Mr Redwood]

How many times will I have to deal with this idiotic canard that Labour dreamt up? The report was very clear: it said the then Government were not regulating cash and capital strongly enough, and it was a cash and capital problem that the banks had that led to the crisis. If the then Government had taken our advice, the banks would have been made to have more cash and capital at a much earlier stage of the cycle, so we would not have gone into the period of banking weakness during the credit crunch.

We also said that the mortgage regulation introduced by the then Labour Government was not fit for purpose, was useless and might as well be scrapped. Our case was proved extremely well, because it was the mortgage banks that crashed—the very banks that were the object of the extra regulation. The extra regulation was clearly regulating the wrong things. We were not against regulation: we said mortgage banks and other banks should be regulated, but it was vital to understand what the problem was. It was very clear in ’06 and ’07 that the problem was an excess of lending of poor quality. It was also very clear that the answer was more cash and capital, and that was what we recommended. It is a great pity that the then Government did not follow our advice.

[Graham Stringer]

I agree that it is clear that there was something wrong with the previous regulation, although I would not go along with the right hon. Gentleman’s argument entirely, but does he agree that there is a villain in the piece who hardly ever gets mentioned: the credit rating agencies that allowed the banks to sell snake oil to each other? Does he agree that we in this House should do something about that?

[Mr Redwood]

I hold no brief for the credit rating agencies, but nor have I prepared a case against them. I am sure the hon. Gentleman can make his own case and come up with his own remedies. In my view, there have been many villains in this historic piece, including the regulators, the Bank of England for its misconduct in the money markets, and the commercial banks that took advantage of ridiculously lax conditions and got themselves into a great pickle, which we had to sort out.

[Helen Goodman]

I am interested in the right hon. Gentleman’s argument, but does he seriously think we could have made significant changes to the way we regulated banks in this country without international agreement on the way banks are regulated?

[Mr Redwood]

Yes, I think we could, which is why I made that recommendation well before the credit crunch occurred. In ’06 and ’07, it was obvious to me and to some other commentators that things were getting out of control—indeed, it was quite common for Opposition parties in this House to say they thought there was too much credit about. I went a bit further and said that could be remedied by changing the way we regulated the banks. It was quite wrong to allow a bank to extend more credit when it only had a 4% tier 1 capital ratio. I remember that when I was a financial regulator, we lived in an era when banks needed twice or three times that amount of capital to be acceptable to the regulator. There was a clear diminution in standards at a crucial time, which fuelled the credit binge.

[Mr Kevan Jones]

I know that the right hon. Gentleman sometimes speaks at odds with his party, and he talked earlier about historical references. Was it not his party’s Government under Margaret Thatcher who deregulated the mortgage market, and is it not the case that up until the recent banking crisis hit, his party’s Front Benchers were talking about lighter regulation of the banking sector, not more regulation?

[Mr Redwood]

The Front-Bench team and I were at one on this issue: we were saying that what was needed were better regulation and less regulation. The Government were regulating too many things badly. As I have just explained, they were regulating mortgage banks in a way that allowed all, or at least several, of them to be crippled and caused a great many problems. The hon. Gentleman is quite wrong about Baroness Thatcher: much stricter controls over cash and capital were imposed throughout her period in office, and, of course, no major bank went down during that period. The same cannot be said of 2007-10, when the requirements were much laxer, as I highlighted in the report, and when we ended up with banks going down.

We are not here to debate past regulation, however; we are here to debate taxation. My purpose in sketching the history of this tragic situation is to express solidarity with all those who agree with the public mood, which is that we want to get a bigger return out of the banks, whatever we may think are the reasons why they are in their present position, but it is also to remind the House of a very important and salient fact, which is that two of the biggest banks are wholly or partially in state ownership or control. We are therefore talking about taxing ourselves in no small measure.

The issue before Ministers is a little more complicated than the Labour spokesman has suggested, because there are two ways in which we can get cash out of the banks: one is to tax them now on their stream of revenue, or their assets and liabilities in the case of the bank levy tax; the other is to move more quickly to sell off those assets back into private sector ownership and, I hope, proper private sector risk taking. If we are to get the maximum receipt, we do not want to be taking too much money out of the banks in the short term by way of taxation, because for every £1 of tax we take out of them, we lose £5, £10 or £15, depending on the multiple we sell them on when we come to sell them.

[Barry Gardiner]

The right hon. Gentleman is making a very coherent presentation, but does he not agree that if we do not want to be taking money out of the banks by taxing them, equally we do not want to see that money going out of the banks by way of bonuses paid to their high-end staff?

[Mr Redwood]

I hasten to correct the hon. Gentleman: of course I think we have to tax banks. We have to tax ourselves, and we need to tax the other banks in the system, as well as the state-owned ones, but we must also consider the balance of effects and the impact on shareholder value. I entirely agree with those who say that if a bank is state subsidised or largely state owned and is therefore in receipt of state money, it is surprising that it should be paying very large bonuses. It is even more surprising if the bank is loss-making, because although an individual employee in that bank may be able to say, “I personally made a profit to offset some of the losses,” the senior people in the bank are corporately responsible for the overall results. It is at the very least surprising if a loss-making bank is making rather big pay-outs, because that is taxpayers’ money and taxpayers’ wealth being paid out to those individuals, which, as the hon. Gentleman rightly says, is not then available to sell as a stream of profits when the shares are returned to the private sector.

[Hugh Bayley]

The right hon. Gentleman seems to be saying that it is important that the taxpayer gets the maximum value when the publicly owned portions of banks are put back on the market and floated, and I agree. Does he agree with me that it is therefore important that the mechanism at that time should not provide incentives for would-be shareholders such as shares being valued below their real market rate in order to encourage popular capitalism, but that the shares should be sold in such a way as to maximise the return to the taxpayer?

[Mr Redwood]

No, I do not necessarily agree with that, because I think that another way of returning value to the taxpayers who have supported the bank is to make those sorts of offer. However, I will wait to see what Treasury Ministers come up with before judging whether a measure is too generous or not generous enough, and how appropriate it is.

[Hugh Bayley]

My point is that if we maximise the return to the taxpayer, everybody in the country—rich and poor—gets a share of the benefit. If we put some of the value into creating lower-priced shares to boost popular capitalism, we spend our public money on only a small percentage of the population. Surely that is less fair than maximising the return and spreading the benefits across all taxpayers.

[Mr Redwood]

The hon. Gentleman is right that there are those two sides to the argument, but this is probably not the time or place to argue that through. We may have an opportunity to argue through how the bank shares are sold and the balance in the sale process when we get nearer to that point. The issue before us now is a taxation one. We are discussing the taxation of bonuses and the bank levy—the subject of the clause—and I agree with those who say that if we take too much out in bonuses in a state-owned bank, that detracts from the value that is available to sell.

Of course, the bank levy is not the means by which we can have any impact on bonuses. Interestingly, it was the previous Government who nationalised or bought shares in banks and signed off on all the original agreements for the top directors and executives. I believe that they included generous bonus terms at the time because, they said, they had to in order to have the talent needed. The criticism being made of the coalition Government now is that they took over those inherited contracts and lived with them, rather than broke them and disrupted the management of the banks, which I regard as a lesser charge than the one against the former Government of setting up all those contracts in the first place.

This should not be a party political issue. I regret some of the contracts that were incorporated at the time of the purchase of shares, but I regretted the whole purchase of shares because I thought it neither a particularly good deal for the taxpayer, nor a necessary deal to sort out the banking problem. I would rather have sorted that out more rapidly at the time, with managed administration or something else, than adopt this expensive way of putting all that money in. We are now trying to maximise the returns because we are where we are.

[Lorely Burt]

My right hon. Friend has partly answered the point I was going to make, but I wonder whether he could help me. What did the Labour party do to control the bonuses paid to loss-making banks when it was in government?

[Mr Redwood]

Labour Members would say that they could speak for themselves and that they imposed a bonus tax. However, as the hon. Lady is suggesting, they did allow very generous bonus conditions into the contracts for their state-owned or partly state-owned banks. Perhaps some would have come to a tougher judgment at that time, had they been in a position of power to do so.

The point I wish to make in this debate is simple. I hope that when Ministers are deciding the right level of the levy, they will weigh very carefully the important fact that we are, in part, taxing ourselves. I hope that within a few years, if not within a matter of months, as I would prefer, we will return those assets and get the money back that the taxpayers deserve.

--- Later in debate ---

[Mr Redwood]

I, too, would find forecasts helpful, but I understand the uncertainties surrounding what bank shares might be worth in one or two years’ time. There may even still be considerable uncertainties about how much profit the banks will deliver. It would be much easier to get value for taxpayers if these banks deliver reasonable profits.

The second point I wish to make is that the other disadvantage of a bank levy tax is that it is a tax on exactly the kind of activities that we really want banks to perform at the moment to fuel the recovery: it is a tax on lending money to businesses and individuals. The loans that we probably most want, if we are to get the recovery going more quickly, will be the riskier ones, yet they are exactly the kind of assets that the banks will own that will score more heavily for the levy.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

Does the right hon. Gentleman agree that we might want to deal with the banks’ behaviour in a more general sense and their impact on the economy? Might it not be worth considering a third way of dealing with the banks, particularly re-mutualisation of some of them? Might that be a way of getting banks that are more focused on their stakeholders, particularly the people to whom we might want them to lend, than on paying bonuses to people all the time?

[Mr Redwood]

I am always very happy to see ownership extended in ways that include that type of mutual, although the history of the mutual banking movement in the past 20 years provides no evidence that such banks were particularly good at reading the cycle or dealing with the capital problems—indeed, many of those institutions went to the markets and decided to exploit market opportunities because they had a capital problem that they thought they could solve by that route. It may be that we could go back to more traditional mutually owned banks with much more constrained balance sheets and activities, and that might be part of getting back to a more healthy banking sector. That is something that the market should decide.

I am firmly of the view that we need more competition and choice in the marketplace. One of the big errors was allowing banks that were too big. As a competition hawk, I was publicly very strongly against the takeover of HBOS by Lloyds; it was a great tragedy for Lloyds and for the country that that merger went through. We should have dealt with HBOS in other ways, which would have been less expensive. I was also a critic of the Royal Bank of Scotland takeover of ABN AMRO. Although the competition issues that raised were not as clear as the competition issues raised in the case of the Lloyds takeover of HBOS, I would have liked to have seen a tougher line taken. I hope that this period of change and reflection on banking, including how we tax it, can lead to a much more competitive structure. One of the ways of doing that would be to sell off some of the assets currently owned through Lloyds and through RBS in ways that created more banking challenge in the market.

[Mr Robinson]

The right hon. Gentleman wants to ensure that we get the maximum return possible when we bring the banks back into the market, and the whole House would agree with that. He referred to the need not to reduce by too much our prospects for doing that by reducing through an excessive tax charge the multiple applied to earnings in realising the sale value, but his point about therefore moderating any tax that might be imposed is specious and certainly does not allow him to invest the seriousness that he wants, given that the multiple used is nearly always a profit-before-tax multiple—certainly, it will always be adjusted for that if exceptional items are involved. For that reason, some people, with whom I would not agree, even opt for an earnings before interest, taxes, depreciation and amortisation—EBITDA—calculation for these purposes. The fact is that the quality of the earnings is more important here than any considerations about tax levels at any one point in time.

[Mr Redwood]

I do not agree with the hon. Gentleman about that. It is true that in the venture capital world EBITDA multiples are more common, although people would not give the same value or the same multiple to a highly taxed business as they would to a more lowly taxed business; but in the open share market in the major stock exchanges, it is more normal to look at price earnings multiples based on earnings net of taxation. There is no doubt that if more tax is taken out of a business, it is less valuable to its private owners—of course that must be true. The private owners are trying to buy a stream of profit or revenue and if some of that is taken in tax, the business will be less valuable.

I had just moved on to my final point, which is about the impact everything we are discussing has on economic recovery. I urge the Minister to bear in mind that the kind of tax proposed, if carried too far, can be damaging. It impedes banks making the sorts of loan and building up the sort of asset base that we want them to at a time of recovery. In addition, any given jurisdiction going too far could become a trigger for the bank’s moving some or more of its activities offshore or changing its arrangements in a way that it thinks would allow it to get around some or all of the tax impost. I would prefer that this tax had not been invented—there are better ways of taxing banks—but if we are to have such a tax, let us ensure that we have thought about two very important consequences of setting it too high: it might damage our own share values and it might damage lending for the recovery.

[Ian Lavery (Wansbeck) (Lab)]

The general public are outraged at the levels of bankers’ bonuses, which remain very high indeed. The Government were forced, as we are all aware, into multi-billion pound bank bail-outs during the financial crisis. Quite simply, people cannot understand why bankers and people employed in the financial institutions have been given billions and billions of pounds of taxpayers’ money at a time of great austerity.

To pay massive bonuses in the midst of a financial crisis is a national disgrace, as it is to pay massive bonuses at a time when public sector services are being destroyed and young people face an unprecedented attack via tuition fees, the abolition of the education maintenance allowance and changes in Sure Start. Last year, Barclays boss Bob Diamond and his two replacements at the head of the investment bank were paid an obscene amount of money: £28 million. The trio also received shares worth £40 million for past performance. That must have been some performance!

I have just done some calculations. The people who are now receiving redundancy notices in the public services—many council workers, nurses, doctors, police officers and the rest—would be lucky to have a bonus of £50 a week. That is £2,500 a year, £25,000 over 10 years and £125,000 over 100 years. So to make £1 million, they would have to live until they were 400. To make the £28 million that the Barclays heads were given, they would have to live to 11,200. That is highly unlikely—I am merely accentuating the point—but those figures are an absolute disgrace.