The lifting of the cap on bankers’ bonuses, as announced by then-chancellor Kwasi Kwarteng in the mini-budget of 23 September, will go ahead, the Treasury has confirmed.
Despite reversing almost all tax policies announced in the “growth plan”, new chancellor Jeremy Hunt did not mention the bankers’ bonus plan in his announcements yesterday.
A Treasury source has said the plan to remove the cap was going ahead. It is understood the Prudential Regulation Authority (PRA) will hold a consultation on the plans later this year.
It had been assumed by many that lifting bonuses would go the way of the 45p top rate of income tax, ditched by Kwarteng soon after the mini-budget amid strong criticism.
But Jeremy Hunt did not mention any reversal of the policy, austensibly introduced to boost growth through a post-Brexit shake-up of the rules covering the financial sector.
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Labour MP Siobhain McDonagh asked Hunt following his statement to MPs: “When the Chancellor dismantled ‘Trussonomics’ overnight, why on Earth did he decide to carry on boosting bankers’ bonuses in the heart of a cost of living crisis?”
Hunt argued that the cap hadn’t worked and said the government would get more tax from rich bankers by removing the cap. Currently, bankers’ bonuses are capped at double their annual salary, which Kwarteng had claimed deterred talented workers from living and working in the UK.
But bankers themselves have said that surveys had shown that lifting the bonus cap wasn’t among the priorities of the financial services sector and that an unregulated bonus culture had previously led to short-term decision making.
Finance sector analysts say that firms’ pay committees would have to consider whether reducing salaries in lieu of higher bonuses would lure more talented executives. They would have to consider the risk that a return to a bonus culture was partly responsible for the excessive risks taken by the sector in the lead-up to the 2007-08 financial crisis.
The TUC said City bonuses had increased at more than twice the speed of wages since the 2008 financial crash.
The union body said its analysis found bonuses in the finance and insurance sector were now worth, on average, around £20,000 a year – their highest level on record.
“Ministers are holding down the pay of millions of key workers, while lining the pockets of City financiers,” said Frances O’Grady, the TUC’s general secretary.
The Labour Party has previously said the government’s decision to lift the cap will do nothing to support growth.
Andrew Sentance, a former member of the Bank of England’s rate-setting Monetary Policy Committee, said lifting the cap sent a “rather confused signal when people are being squeezed in terms of the cost of living, and the government is trying to encourage pay restraint in the public sector”.
The only other employment-related mini-budget policy to survive the new chancellor’s suite of U-turns was the reversal of the national insurance rise of 1.25%.
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