Bankers’ bonuses: optics are less important than outcomes for Truss

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Good morning. Today’s note is on Britain’s cap on bankers’ bonuses, which the government is considering scrapping. There are a number of reasons why Liz Truss is minded to do it, but one important factor is that it is a rare Brexit dividend. Some thoughts on all that below.

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Inside Politics is edited by Georgina Quach. Follow Stephen on Twitter @stephenkb and please send gossip, thoughts and feedback to insidepolitics@ft.com.

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Lifting the cap

Kwasi Kwarteng is considering an end to the bankers’ bonus cap, George Parker, Stephen Morris and Daniel Thomas reveal. Here’s a handy reminder of how the cap, introduced by EU legislation in 2014, works:

[It] limits year-end payouts to twice a banker’s salary. For example, if a bank wanted to pay someone £3mn in London, it would need to pay that person a salary of at least £1mn.

The problem with the cap is that it increases the fixed costs of employing a banker in London as opposed to New York and as a result has implications for the competitiveness of the UK’s financial services industry.

The argument for the cap is that performance-related pay incentivises risky behaviour. This is a bit of a sticky wicket for supporters of the cap, in that while we can clearly demonstrate the increased fixed costs created by the cap, we can’t satisfactorily prove that the cap has done anything for financial stability more broadly. 

If you’re Kwasi Kwarteng, given the difficulties that the UK’s exit from the EU has created for our financial services industry, anything that allows you to establish a competitive advantage with the rest of the bloc is not to be sneezed at. (The Treasury’s official response is that they don’t comment on speculation — if you believe that, I have an NFT to sell you.) 

What about the politics? The consensus in Westminster is that it is a Bad Look for the Tories to be “giving bankers a pay rise” at the same time as using pay restraint on nurses, teachers and police officers. 

That in and of itself is one reason why ditching the cap may appeal to Truss: her private criticism of a host of Conservative politicians is their belief that rightwing economics has to be done by stealth and under cover rather than argued for through force of conviction. 

I’m also not convinced the political consensus is right on this one. Yes, anything that can be spun or described as increasing the amount that bankers earn (though the restriction on bonuses is not as simple as that, in any case) brings back to the fore all those perceptions voters have about how the Conservatives are the party of the rich. But it also brings back anxieties that Labour is a party of higher taxes for essentially everybody, and that Labour’s definition of “the rich” includes practically everybody. 

In general, my view is that any opposition party, be it the Conservatives or Labour, is never wise to talk too much about taxes. One of the advantages of being an incumbent government is a greater ability to set the terms of political debate. When a Conservative opposition talks about tax cuts, a Labour government can turn it into a conversation about public sector cuts. When we have a Conservative government and a Labour opposition, the Tories can turn it into an argument about broad-based tax rises, which is never a comfortable debate. The politics of a row about bankers’ bonuses is probably a wash as far as the red vs blue battle is concerned.

But ultimately, the biggest political problem for the Conservatives isn’t whether they are seen as the party of the rich — a ship that has not just sailed, reached the new world, wiped out much of the indigenous population and established a global superpower — it’s that the UK public realm is in a terrible state.

Millions face either long waits for healthcare or have to pay out of pocket for private alternatives. Outside of murder and speeding, most crimes go unpunished. Schools face huge staffing and cost pressures. It’s more important, frankly, that Truss and Kwarteng find the extra revenues and the necessary reforms to fix public services than any of the domestic political rows they might have to have about bankers’ bonuses or any other route they take to increase growth and therefore tax revenue.

Now try this

I went to the cinema last night. Long-term readers may ask “what’s new?”. Well, the difference this time is I went to see the premiere of Skandal!: Bringing Down Wirecard, the documentary that tells the true story of the FT’s investigation into the Wirecard fraud. It’s brilliantly put together and has a great soundtrack, too.

It arrives on Netflix on Friday.

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