The government prepares to “stand idly by” on bankers’ bonuses

Nick Clegg waters down his rhetoric and gives no indication of measures to enforce restraint in payo

On Radio 4's Today programme this morning, Nick Clegg appeared to confirm speculation that the government is backing away a big confrontation with the banks over excessive bonuses – if only through his reticence.

Let's just recap. A month ago, the Deputy Prime Minister was full of fiery rhetoric, telling the Financial Times:

The banks should not be under any illusion, this government cannot stand idly by.

They don't operate in a social vacuum. It is wholly untenable to have millions of people making sacrifices in their living standards, only to see the banks getting away scot-free.

Yet today, this was substantially watered down:

I totally accept that the kind of sky-high numbers bandied about in the City of London sound like they come from a parallel universe to most people. State-owned banks have to be sensitive. The British public are the shareholders of those state-owned banks. We are entitled to say – as the government has – that they must be sensitive.

Asked by the show host James Naughtie what action the government would take to force the banks to listen, Clegg refused to give any solid answer, simply saying "they have to listen to us because they're state-owned".

Lest we forget, the coalition agreement pledged "detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector". But in a marked contrast to his words in December, Clegg appeared to deny – or lay the ground for denying – the need for further action:

We're in discussion with the banks, and we've already done a great deal as far as the banking system is involved . . .

It's worth remembering that new rules have already dramatically changed the way bonuses are structured.

The new rules that he is referring to are reforms from the EU and the Financial Services Authority, meaning that at least half of bonuses now have to be paid in shares, and between 40 per cent and 60 per cent cannot be cashed in for several years.

But the idea that making employees into shareholders will reduce their risk-taking behaviour is misguided. Lehman Brothers is a case in point – employees there were large shareholders, but that did not stop them from hastening its collapse. Moreover, even if the gratification is delayed, it still exists. Shares can be cashed in eventually, and the incentive for irresponsible risk remains.

Even if the bonus pool is smaller than last year's, the sums involved will still feel like an insult to ordinary people bracing themselves for the full pain of the government's austerity programme.

Clegg may still feel a personal distaste for large bonuses, but his words today indicate that "standing idly by" is precisely what the government will be doing.

Samira Shackle is a freelance journalist, who tweets @samirashackle. She was formerly a staff writer for the New Statesman.

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.