Rishi Sunak is in office but Liz Truss remains in power. That’s the line that Labour are pushing on today’s announcement that the cap on bankers’ bonuses will be abolished next week. The change was initially announced by Kwasi Kwarteng in the infamous mini-budget of September 2022. It was one of the few measures to be retained when Chancellor Jeremy Hunt replaced Kwarteng at the Treasury on the grounds that it did not have an impact on state finances, unlike her tax cuts.
Labour are naturally keen to suggest that this shows that Sunak has not moved the Tories on from the Truss era. Darren Jones, the party’s Shadow Chief Secretary, was quick to condemn it as an indictment of the ‘out of touch Conservative government’ saying that ‘Rishi Sunak is marking his anniversary of becoming Prime Minister by pushing ahead with Liz Truss’ plan to axe the cap on bankers’ bonuses. When Truss says jump, Sunak says how high.’
Such rhetoric ignores the sound arguments for such a move. Since the cap was introduced by the EU nine years ago, successive Conservative ministers have grumbled about it but declined to lift it for fear of the political reaction. This is despite the fact that in 2013 the UK government lodged a legal challenge with the European Court of Justice to try to stop the measure being introduced in the first place. Now, nearly ten years on, the unintended consequence of the cap has been to increase bankers’ salaries as a workaround.
The Financial Conduct Authority has thus welcomed today’s move on the grounds that fixed yearly payments, rather than variable bonuses, pushes up a firm’s fixed costs and limits their ability for manoeuvre. City bosses contend that the cap stops them from adjusting to poor financial performance and that it makes the UK a less attractive place in which to do business. It’s worth remembering too that Britain’s tax base is unusually reliant on a small number of very well-paid people: the top 0.1 per cent of earners contribute 12 per cent of all income tax.
Difficult politics but sensible economics: today’s decision is very much in keeping with how Rishi Sunak’s team see themselves, ahead of the Prime Minister’s anniversary in Downing Street tomorrow.
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