The news about bankers' bonuses really is outrageous. The £828,000 bonus for Lloyds CEO, Eric Daniels, is especially shocking. He doesn't deserve a penny of that payout. Does the man have no shame?
Admittedly, Lloyds TSB was less vulnerable than some of its rivals when the financial crisis hit, but it was Daniels who led Lloyds into a merger with the disastrously managed HBOS. As a result Lloyds has needed massive government help and the shareholders prior to the crisis now own a much smaller proportion of the bank.
Normally, that would be an issue purely for the shareholders. But the reality is that Lloyds wouldn't have survived without government help. Yet Daniels thinks he deserves a chunky bonus!
He doesn't.
There's one obvious thing to do. A windfall tax on the banks. I first suggested doing this in October*, and I still think it's worth doing now.
You might argue that it's pointless given that the government is a major shareholder in Lloyds. In other words, a windfall tax would generate revenue for the government, but the share price would almost certainly fall if a tax was announced, and the value of the government's shares would fall as a result.
It's a reasonable point, but I'd impose the tax. The government isn't the only shareholder in Lloyds, so other shareholders would suffer too. If they don't want a tax, they should pressure Daniels to change his mind. A windfall tax would also give an important moral and political signal. Paying out big bonuses a year after the government stabilised the financial system is unacceptable.
Other banks
The argument for a windfall tax is even stronger when it comes to banks where the government doesn't own shares. The likes of Barclays and Goldman Sachs would have found life very tough if governments hadn't taken action last year. And as the financial system has recovered, it's frankly been pretty easy to make big money from investment banking in 2009. It's perfectly reasonable to tax some of that cash via a windfall tax.
Damaging the City
The big worry about a windfall tax is that it might drive financial businesses away from the City and damage the long-term health of the UK economy as a result. For that reason I said in October that we should only impose a windfall tax if we could do in concert with other G20 countries.
But the more I think about it, the more I think that's a rather wimpy approach. After all, this will just be a one-off tax. Will a tax for one year really drive away that much business? We should remember all the advantages that the City offers as a financial centre. I suspect the 50% top rate of income tax will be far more damaging....
The pre-budget report is next week. I very much hope that Alistair Darling will announce a windfall profits tax then.
What do you think? Let me know in the comments box below.....
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