Pat McFadden
Main Page: Pat McFadden (Labour - Wolverhampton South East)Department Debates - View all Pat McFadden's debates with the HM Treasury
(12 years, 7 months ago)
Commons ChamberAt first glance it might seem as though youth unemployment and bank bonuses are separate issues, or that if they are linked it is only at the level of an argument about fairness or equity. But that is not the case. The level of reward at the very top of the financial services industry is not just an argument about fairness or equity, although it is certainly that; it is something that has a material effect on the functions carried out by our financial institutions, including the level of lending available to the economy and, thus, the capacity for job creation in it.
I should make it clear that I am talking about bonuses at the very top. We should not forget that the vast majority of people who work in the financial services industry receive ordinary salaries, and that if they do get a bonus it is of a modest amount to which no one would object.
Indeed, we all value the employment created by our financial services industry, but there is a broader problem, which we all know. In recent years we will have all met businesses that cannot find the funding that they need to keep going or, in some cases, to expand, grow and employ people. Sometimes that is because the price of credit rises so much that the business in question cannot afford it, but sometimes it is because the credit is not available on any terms.
No Government can second-guess every individual lending decision, but there is no doubt that access to finance has become a barrier to the creation of employment. This Government’s answer was to get together with the banks in the Merlin agreement, which was based on gross lending, not net. Let me give the House one politician’s verdict on such agreements. He said:
“This would be completely letting the banks off the hook. It’s perfectly possible for banks to achieve a gross lending target while withdrawing capital from small to medium-sized businesses.”
He went on to say that, in agreeing to gross lending targets, the previous Government allowed the banks to run rings around them. I am of course quoting the current Business Secretary, who had that opinion on gross lending agreements before he came into office—and then supported exactly the same thing.
The right hon. Gentleman subsequently pirouetted and said that the Merlin project had not worked, telling the House last month:
“The Merlin project certainly did not succeed in its central objective, which was to achieve growth in gross lending by banks.”—[Official Report, 8 December 2011; Vol. 537, c. 397.]
The banks’ argument is that they are under conflicting pressure both to increase the amount of capital that they hold and to lend more to business. They tell the public and they tell us politicians that we can have either safe and secure banks or more lending, but not both; and that brings us back to bonuses.
The hon. Member for Bury St Edmunds (Mr Ruffley), who is no longer in his place, referred to the evidence, given last week to the Treasury Committee by the new regulatory body responsible for financial stability, which suggested that that was not the case at all.
Does my right hon. Friend wish to comment on the sudden enthusiasm of Conservative Members for regulation, given that, when regulation was proposed by the previous Government, they were not keen on it at all?
There are many quotations from Conservative Members calling for less regulation during the previous Government’s period in office, but I refer to the Treasury Committee evidence from Mr Robert Jenkins, a former Credit Suisse trader who is now a member of the Bank of England’s Financial Policy Committee. He recently made a speech in which he said:
“The truth is that banks can strengthen their balance sheets without harming the economy. They can do so by cutting bonuses, by curtailing intra-financial risk-taking and by raising term debt and equity.”
As the hon. Member for Bury St Edmunds said, last week Mr Jenkins told the Select Committee that if the banks reduced the bonus pot by £1 billion, that would make available £20 billion more for small businesses.
This weekend, the banks hit back at that estimate. The Sunday Times was briefed, by an industry insider who clearly has a thing or two to learn about rapid rebuttal, that the real figure if bonuses were cut would not be £20 billion but only £13.5 billion. That argument is based on whether we apply the capital and regulatory rules that exist at the moment or those that may come in future. But whether the figure is £13.5 billion in future or £20 billion at the moment, the argument is clear: reward is an issue not only about fairness, but about the function that we want the banks to have in the economy.
Of course it is galling for a nurse on a pay freeze to be paying for a crisis that they did not cause and then to see a seven-figure bonus, but it is more than galling—the truth is that we have been presented with a false choice between restoring the capital position of banks and supporting lending in the economy. There is not an automatic trade-off between levels of safety and levels of funding once we take into account issues of reward at the top. Put simply, less money in excessive pay at the top would make more available for the lending we need to create jobs. That is why youth unemployment and bank bonuses are linked.
I have one final thing to say. In the coming days, we are going to hear a lot about what top bankers are entitled to contractually; no doubt that argument will be wielded by Ministers. However, contracts are not the only thing that matters. Context matters too, and the context is the greatest squeeze on family living standards since the war. That should be taken into account by the bankers themselves as we decide on restraint on bonuses.
The banking industry is hugely important to this country, but its relationship with the public has been broken. It is time to repair that relationship, and there is no better place to start doing that than in striking a better balance between reward at the top and the job that we want the banks to do—to lend in the real economy.
The motion links the issue of bankers’ bonuses and youth unemployment. With my constituents in Bristol West, I agree that the levels of both are currently excessive.
I shall deal with bonuses first. Executive pay is meant to be the reward for company growth and shareholder return. Over the past decade, executive pay has gone up by an average of 13.6% each year, but the growth in the index of the top 100 companies on the London stock exchange has gone up by only 1.7% each year. Executive pay has vastly outstripped the underlying growth in the companies over which the directors have presided.
Bonuses, of course, are usually the worst manifestation of spectacular reward—sometimes for just modest return for the company’s shareholders, or even a paltry return. Even worse, they can be a pay-off for corporate failure. Today my right hon. Friend the Secretary of State for Business, Innovation and Skills announced the Government’s action to deal with that excess in the boardroom. The boardroom is the place where that excessive behaviour should be tackled and reined in, and shareholders need to take action in shareholder meetings.
The coalition Government will implement or consult on 10 of the recommendations of the High Pay Commission. Taxes, of course, have a role to play, but it is a subsidiary one. The behaviour itself needs to change. Under the previous Chancellor of the Exchequer, the right hon. Member for Edinburgh South West (Mr Darling), the bonus tax was a failure according to the terms that he used to describe it when he announced it in the Budget. It was meant to curtail behaviour in the boardrooms of banks, but it failed completely.
At that time, the underlying rate of income tax and national insurance on the recipients of bonuses was 41%; under the coalition Government, the figure is 52%. When we factor in employers’ national insurance, we see that roughly two thirds of the value of a bonus comes back to the Treasury. In addition, the permanent bank levy will raise £2.6 billion for each subsequent year of this Parliament, which is more in net terms than the bonus tax raised under the Labour Government.
The previous Government were, of course, in office for 13 years. They had ample opportunity to do something. I sat through five Queen’s Speeches, in each of which a raft of legislation was announced by Her Majesty, but not once did I hear of an attempt to tackle corporate greed. Indeed, I would say that the Labour Government, certainly for their first eight years, positively encouraged corporate greed. We just heard from the right hon. Member for Wolverhampton South East (Mr McFadden). The Cabinet Minister to whom he reported in the latter years of the Labour Government, Lord Mandelson, said famously that he and new Labour were
“intensely relaxed about people getting filthy rich”.
It was the Labour Government who gave a knighthood to Mr Goodwin.
I have heard that quotation twice today and I think that it is time to complete it. Lord Mandelson went on to say,
“as long as people pay their taxes”.