George Osborne suggested he could withhold government work from miscreant banks – now it is time for action
“They had a culture of gaming – and of gaming us,” banking regulator Andrew Bailey told MPs last year. He was referring to Barclays, but his phrase sums up an entire banking culture, as the latest shenanigans over bonuses show.
For those not following the story, let us recap. It emerged this week that Goldman Sachs planned to defer paying its staff bonuses until after the start of the new tax year, in April. That would enable its lavishly paid bankers to pay less on their hand-out since the top rate of income tax is due to fall from 50% to 45%. That, let us not forget, is the rate George Osborne cut so as not to inconvenience Britain’s highest earners. Since the average pay for a Goldmans staff member was confirmed on Wednesday as £250,000 (average, mind: the disbursements for investment bankers in the City would run far higher), workers would doubtless appreciate their employer’s foresight. Shareholders would lose nothing from the little wangle; it was merely the public purse that would be bilked of precious millions. Naturally, the scheme is entirely legal: it saunters up to the limits of law, but goes no further. This is what bankers’ gaming looks like.
The best description of this state of affairs was provided by Mervyn King. “I find it depressing,” he told the Treasury select committee, “that people who earn so much seem to think that it’s even more exciting to adjust the timing of it to get the benefit of the lower tax rate … knowing this must have an impact on the rest of society, when even now it is the rest of society that is suffering most from the consequences of the financial crisis.” The opprobrium of the Bank of England governor, the hostility of the press, and the invitation from the Treasury to visit and explain themselves eventually persuaded the Goldmans management to lay off the loophole wizardry.
Up until that eleventh-hour U-turn, the entire situation smacked of the inevitable. It was inevitable that firms would look for a way to take advantage of the year-long notice the chancellor gave them of a change in top-rate tax. Mr Osborne has his own gaming habit, but in his case the game is to political rather than financial ends – and he is more cack-handed about it than any top banker. Last spring, he announced the super-tax cut with great flourish, as evidence of his pro-business attitude. The move, made in that omnishambolic spring budget, left the Treasury wide open to the tax-avoidance industry. It was inevitable that the pay consultants would dream up precisely such schemes and tout them round the City. And it was inevitable that, of all the banks, Goldmans – with its legendary contempt for public opinion – would think them a good idea.
What was not inevitable was that this week’s spate of moral suasion would work. Not long ago the bankers might have brushed it aside as naive, and sheltered behind claims about immutable laws of the market. But, as we also saw recently with Starbucks’ voluntary tax payment, times are changing, and shame is, perhaps, becoming more of a concern in the boardroom. The inventive economist Paul Ormerod has his own prescription for tackling outrageous behaviour by top bankers (and others) – not inviting them to Buckingham Palace garden parties. That, he suggests, would signal social disapproval of misbehaviour. Maybe. But that’s to trust an awful lot to actors playing their part and the script going to plan. Mr King has a nice line in banker attacks; one hopes that his successor, Mark Carney, will keep up this Threadneedle tradition, but one also fears that the former Goldmans man will struggle to raise the necessary ire. And it was sadly inevitable that Mr Osborne did not follow his governor’s lead and criticise the scheme – not even on a no-names, no pack-drill basis.
Such tax avoidance may be legal but that doesn’t mean the Treasury is without any sanctions. It could simply withhold government work from any miscreant banks (or other businesses). This is what Mr Osborne suggested he would do in his pre-budget statement last month. Less talk, chancellor, much more action.