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George Osborne: bonuses will make the credit crunch worse

The Chancellor’s tough words in opposition are all but forgotten as the government backs away from c

David Cameron has pulled back from curbs on bankers' bonuses or a tax on the banks, according to reports this morning (£).

The Centre for Economics and Business Research predicts that bankers will receive £7bn for 2010, down from £7.3bn for 2009 – a difference that will appear negligible to most of the public, and insulting as the rest of the population faces pay freezes, wage cuts and redundancies.

This backtracking from any serious confrontation over the banks is being portrayed as a blow to Vince Cable and Nick Clegg, both of whom have been vocal advocates of a clampdown on bonuses.

Yet it was not just the Liberal Democrats who were noisy critics of bonus culture while in opposition. Here is George Osborne, speaking in October 2009:

I am today calling on the Treasury and the FSA [Financial Services Authority] to combine forces and stop retail banks – in other words the banks that lend directly to businesses and families – paying out profits in significant cash bonuses. Full stop.

Strangely enough, now that he is in power, the Chancellor seems somewhat less concerned about taking this urgent action.

He and Cable are said to be working on a face-saving deal to be announced in the next month. It will focus on greater transparency, and on increasing lending to first-time buyers and small businesses. The strategic shift in emphasis away from clamping down on bonuses and towards more lending is misleading.

In fact, Osborne also had some thoughts on this, in the same 2009 speech:

It was a year ago that I first warned that the money taxpayers provided to support bank lending must not be diverted into bonuses. A year later, the banks are making billions in subsidised profits.

But instead of using these profits to lend more and get credit flowing again, the banks are threatening to pay out billions in cash bonuses instead. If this happens it will make the credit crunch worse.

We need to take emergency steps to support bank lending and move the economy forward this winter. The banks have to understand that we are all in this together.

Yes. Quite.