The financial sector isn't the powerhouse of the UK economy. It's more like a Wendy house

HMRC figures show a drastic reduction in Corporation Tax contributions since the financial crash – on average just £3.3billion a year, even when the paltry Bank Levy is included. To put this in context, the finance sector shelled out £14 billion in bonuse

Five years ago today, following a frantic weekend of negotiations, during which Alistair Darling later admitted cash machines were within hours of being switched off, the Government announced that British banks would be part-nationalised to stave off collapse. We bought an 82% stake in RBS and 40% in Lloyds/HBOS at a combined cost of £37 billion. 

It was part of a wider bailout package which cost £132.89 billion of public money – the equivalent of £2,000 from each man, woman and child in the UK. Former Governor of the Bank of England Mervyn King quipped a year later: "To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many.”

Half a decade later and the situation has changed little. According to the most up-to-date figures from the National Audit Office, £118.86 billion (or 89 per cent) of the original bailout is still outstanding. The interest payments alone cost the public purse £5 billion a year. Whilst some of the costs are recouped through the Government charging banks interest and fees, the NAO estimates it has still amounted to “a transfer of at least £5 billion from taxpayers to the financial sector” since the crisis.

There are others reasons the many are still propping up the few. Take for instance the 'too-big-to-fail' subsidy, whereby banks can borrow money cheaply because creditors know the Government (read: taxpayer) will bail them out if things go wrong. It's worth a fortune - £235 billion to Britain's four biggest banks between 2008-2011, according to research by the New Economics Foundation.

Or look at financial service's incongruous exemption from VAT. It's understandable that some items are VAT-free, for example: children's clothes, public transport, medical and funeral costs; but why are we exempting the services of a derivatives trader? According to HMRC itself, this anomaly costs us another £5bn a year. The International Monetary Fund has warned this special treatment of the banking sector means it is under-taxed and has allowed it to grow “too large”. 

Banks have also become adept at gobbling up public money intended for the real economy. This not only artificially inflates their profit and pay, but acts as a tourniquet on growth. Despite having drawn down £17.6bn since the Funding for Lending Scheme began just over a year ago, banks' lending to business contracted by £2.3bn.  

The cumulative effect is that banks live in a welfare dependent bubble, cushioned from feeling the effects of the crisis they caused. Financial sector growth has far outstripped the rest of the economy since the crisis: in 2012 for example, if you take out the fines and the one-off costs of adjusting to regulatory changes, the profits of the five biggest banks' rose 45% to £31.5 billion. The economy virtually flat-lined during the same period.

Yet whilst the financial sector likes to think of itself as the powerhouse of the UK economy, in terms of the tax it pays, it's more of a Wendy house. HMRC figures show a drastic reduction in Corporation Tax contributions since the financial crash – on average just £3.3billion a year, even when the paltry Bank Levy is included. To put this in context, the finance sector shelled out £14 billion in bonuses to top staff last year alone.

Meanwhile, the public have paid in service cuts, job losses and tax rises. Government spending will be cut by 9.1%, £141bn in real terms, during the course of this Parliament, chronically impacting on the poorest who rely on services most. Whilst the top rate of tax was cut, giving millionaires a tax break, the VAT increase to 20% has been shown to hit the poorest 10 per cent of the population more than twice as hard as the richest 10 per cent.

This stark injustice has prompted other countries to take action. It is the explicit reason why Germany, France, Italy, Spain and seven other European countries are implementing the Financial Transaction Tax of between 0.1% - 0.01% on stocks, bonds and derivatives that will raise up to £30 billion. It is the only policy to have emerged post-crisis that will ensure those responsible pay to clean up the mess they caused.

Unfortunately, the UK Government has not only refused to join in, but has taken the proposal to the European Court of Justice. It's a worrying indictment of their priorities, compounded two weeks ago when they launched another legal challenge, this time against the EU banker bonus cap. This was followed by news that the Government is scrapping the 1 per cent pay rise due to NHS staff in April. As an example of misplaced priorities it is difficult to beat.

Unless of course you look at ministers’ treatment of the poorest – the bedroom tax, benefit cap and punitive sanctions for those who miss Job Centre appointments - these policies are all signs that the coalition is determined to end what they call ‘the something for nothing’ culture. It’s a shame they won’t apply the same logic to bankers.

A protestor from the 'Robin Hood Tax Campaign,' dressed as 'Robin Hood,' holds a fake budget box above the Houses of Parliament. Image: Getty

Simon Chouffot is a spokesperson for the Robin Hood Tax campaign and writes on the role of the financial sector in our society.

Photo: Getty Images
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The future of policing is still at risk even after George Osborne's U-Turn

The police have avoided the worst, but crime is changing and they cannot stand still. 

We will have to wait for the unofficial briefings and the ministerial memoirs to understand what role the tragic events in Paris had on the Chancellor’s decision to sustain the police budget in cash terms and increase it overall by the end of the parliament.  Higher projected tax revenues gave the Chancellor a surprising degree of fiscal flexibility, but the atrocities in Paris certainly pushed questions of policing and security to the top of the political agenda. For a police service expecting anything from a 20 to a 30 per cent cut in funding, fears reinforced by the apparent hard line the Chancellor took over the weekend, this reprieve is an almighty relief.  

So, what was announced?  The overall police budget will be protected in real terms (£900 million more in cash terms) up to 2019/20 with the following important caveats.  First, central government grant to forces will be reduced in cash terms by 2019/20, but forces will be able to bid into a new transformation fund designed to finance moves such as greater collaboration between forces.  In other words there is a cash frozen budget (given important assumptions about council tax) eaten away by inflation and therefore requiring further efficiencies and service redesign.

Second, the flat cash budget for forces assumes increases in the police element of the council tax. Here, there is an interesting new flexibility for Police and Crime Commissioners.  One interpretation is that instead of precept increases being capped at 2%, they will be capped at £12 million, although we need further detail to be certain.  This may mean that forces which currently raise relatively small cash amounts from their precept will be able to raise considerably more if Police and Crime Commissioners have the courage to put up taxes.  

With those caveats, however, this is clearly a much better deal for policing than most commentators (myself included) predicted.  There will be less pressure to reduce officer numbers. Neighbourhood policing, previously under real threat, is likely to remain an important component of the policing model in England and Wales.  This is good news.

However, the police service should not use this financial reprieve as an excuse to duck important reforms.  The reforms that the police have already planned should continue, with any savings reinvested in an improved and more effective service.

It would be a retrograde step for candidates in the 2016 PCC elections to start pledging (as I am certain many will) to ‘protect officer numbers’.  We still need to rebalance the police workforce.   We need more staff with the kind of digital skills required to tackle cybercrime.  We need more crime analysts to help deploy police resources more effectively.  Blanket commitments to maintain officer numbers will get in the way of important reforms.

The argument for inter-force collaboration and, indeed, force mergers does not go away. The new top sliced transformation fund is designed in part to facilitate collaboration, but the fact remains that a 43 force structure no longer makes sense in operational or financial terms.

The police still have to adapt to a changing world. Falling levels of traditional crime and the explosion in online crime, particularly fraud and hacking, means we need an entirely different kind of police service.  Many of the pressures the police experience from non-crime demand will not go away. Big cuts to local government funding and the wider criminal justice system mean we need to reorganise the public service frontline to deal with problems such as high reoffending rates, child safeguarding and rising levels of mental illness.

Before yesterday I thought policing faced an existential moment and I stand by that. While the service has now secured significant financial breathing space, it still needs to adapt to an increasingly complex world. 

Rick Muir is director of the Police Foundation