Wednesday, 9 February 2011

Government cuts taxes for banks - and bashes the rest of us

By Michael Burke

With great fanfare George Osborne has announced an increased of £800mn in the bank levy, up to £2.5bn. The BBC reports that the banks are ‘furious’ at bringing forward the rise in the levy

If so, it cannot be because of the financial costs. Even at the higher tax levy, the measures represent a tax cut for the banks compared to Labour’s modest taxes on banks and bonuses last year amounting to £400mn. In context, the output of the financial sector had recovered to a level equivalent to an annual £54bn in Q3, while bank bonuses are expected to be approximately £6bn over the next few weeks. Crucially, the four most profitable banks are expected to report profits of over £24bn in the current financial year, nearly 10 times the Osborne levy. This represents an increase of over 10% in profits in the previous year.

In addition, despite the claim that ‘we are all in this together’ corporate tax rates are being cut in stages from 28% currently to 24%. Since the excessive charges of the banks make them the most profitable section of capital, the main beneficiaries of these further tax cuts will be the banks.

Instead, the pantomime is played out so that George Osborne claims to be acting tough on the banks – yet refusing either to cut bonuses or instruct them to increase net lending. If there is any genuine annoyance in banking circles it only arises because a minor irritation is unexpectedly caused by a government so thoroughly representing banking interests.

Yet the populist grandstanding should come as no surprise. Labour is now consistently ahead of the Tories in the opinion polls – and still the bulk of the cuts has yet to come. The much more dangerous counterpart of the Tory response is the pandering to racism and Islamophobia in David Cameron’s speech proclaiming the ‘end of multiculturalism’.

The entire debate on banks and the deficit obscures the central fact that the bank bailout is a large multiple of the public sector deficit caused by the recession. The Office for National Statistics (ONS) has long delayed an assessment of the true cost of the bailout, arguing that Royal Bank of Scotland (RBS) and Lloyds - the two banks which have effectively been nationalised- were too large and complex to quantify. But in December 2010 the ONS finally published its estimate of the total cost of the bailout for the first time, including both Lloyds and RBS.

The numbers are dizzying. The debt of the public sector is £889bn, which is 59.3% of GDP . This is still below the Maastricht Treaty limit of 60% of GDP, and is one of the lowest in the EU. However, the bank-related debt is an additional £1,434bn, taking the total to 154.9% of GDP – one of the highest in the EU. Whereas the public sector debt was built up over decades the bank debt has all been incurred since 2008 and represents £25,000 in debt for every British citizen.

It is frequently argued that the bank debt is an investment, that there will be a positive return on the funds provided to the banks. But both the current share price of RBS and Lloyds is still more than 10% below the government’s average purchase price. Even if there is an eventual recovery in the share price (and they rose after Osborne’s announcement), there is a huge opportunity cost in not using those government funds for productive investment.

The key source of this weakness is the previous and now poorly-performing loans of the banking sector. The response of the banking sector is to hoard capital, and they are now awash with it. Socialist Economic Bulletin has previously shown the huge spare lending capacity of the banking sector, and this would exist even if there are a series of extreme events including ‘double-dip’ recession, government defaults and a renewed collapse in house prices . But the refusal to lend leaves the banks dribbling losses on their previous loans, which only reinforces their unwillingness to lend, in a vicious circle. At the same time the management of the state-owned bank RBS is actually more exercised by its own privatisation.

The way out of the banking crisis and the economic crisis is the same: instructing the banks, starting with the state owned banks, to lend for productive investments. This would both increase their profitability, to the benefit of taxpayers, and boost growth to the benefit of all. And any backsliding bank management in the state sector could simply be replaced by its main shareholder, the government.

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