Don't be too hard on Osborne: the bonus cap is horribly flawed

What will happen to bankers pay? Very little. To their risk taking? Very little. To, basically, anything? You guessed it.

In opposing the EU's cap on bankers' bonuses, George Osborne isn't just giving nakedly preferential treatment to the city. The chancellor does have some strong arguments on his side as to why the cap is a bad idea.

To recap, late on Wednesday, the EU parliament secured agreement to impose a mandatory 1:1 ratio of salary relative to "variable pay". That ratio can rise to 2:1 with shareholder approval (subject to 50 per cent quorum), but no further. Britain still has the option of pushing the move to a vote, but that would cross a rubicon in UK-EU relations: in the past, Britain, commonly an outlier in matters of banking policy, has pushed negotiations to the brink of formal vote and then taken a few ceremonial trade-offs in return for its approval. That way, it can truthfully say it has never been overruled by the EU.

Not only would forcing a vote we would definitely lose play terribly politically — George Osborne making his biggest-ever stand in the EU over the right of bankers to be paid exorbitant sums — it would also be a gift to the anti-EU wing of the conservative party, of which Osborne is, thankfully, not a member.

But while he shouldn't force a vote, the Chancellor has good reasons for being wary of the policy. There are three big concerns, two of which are legitimate, and two of which are shared by the chancellor (although not the same two).

The first is that the policy will do nothing for equality. Despite the fact that the cap on bonuses is sometimes phrased as tackling "high pay", it will, in all likelihood, increase pay. As Deborah Hargreaves writes:

Already base salaries in the banking sector have been rising sharply as regulators try and choke off the multimillion-pound annual bonus awards. The EU's plan could lead to more pressure for a rise in fixed pay.

Banks have increased salaries across Europe by 37% in the past four years in response to a crackdown on bonuses and pressure from regulators to claw back some rewards if bets go wrong later on.

The reasoning is fairly obvious. If you cap bonuses at the same level as salaries, and put no limit on salaries, it's clear what's going to happen.

Of course, that's fairly unlikely to be a motivating factor in Osborne's reasoning. If there's one thing the Conservatives are comfortable with, it's people getting filthy rich (although they seem to quietly ignore the "as long as they pay their taxes" part of Peter Mandleson's famous phrase). But it's an important argument against the bonus cap overall.

Not such a strong argument is that banks might flee the EU to avoid it. There is certainly going to be some pressure, because the cap has overreached such that it also affects international operations of EU-based banks. The name being bandied around is Standard Chartered, the London-based firm that does most of its work in emerging markets (back in the news at the moment over it's £110,000 fine in Taiwan). But the cap can't be both easy-to-evade and a motivation to spend time and money moving headquarters, and all indications are that it's the former rather than the latter.

But the biggest problem with the bonus cap is that it won't do anything to address the most important reason for its introduction: tackling risk in the banking sector. The model Osborne and the UK proposed instead was likely to be better in that regard: "our" desired cap would only hit cash bonuses. That would provide an incentive on banks to award increasing chunks of their pay pool in the form of stock options and the like, which encourage bankers to act in the long-term interest of their company, not merely boost their returns for that year to enhance their bonus.

In fact, it's questionable whether bonuses even encourage must risk-taking at all. Crooked Timber's Dan Davies demonstrates that, assuming a bonus is linearly related to performance, the bulk of the bonus encourages very little risk taking at all. Employees have a motivation to take risks if their performance is poor enough that they would get no bonus, but once they have some bonus, every further risk they take is as likely to decrease their income as it is to increase it.

Maybe, as the Guardian suggests, the bonus cap was worth it just to make bankers publicly admit that their high pay has little to do with their actual ability. But for any genuine policy aims, it seems unlikely to be as successful as its promotors hope.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Private renter poverty has doubled in a decade - so where's Labour?

The Joseph Rowntree Foundation named housing market failures as driving poverty. 

Labour’s economic policy task is enormous. It must find a coherent argument that addresses Brexit, the “left behinds”, and a nervous business community. But there is one policy area that should be an open goal – private renting. 

The number of private renters in poverty has doubled over the last decade, according to a new report from the Joseph Rowntree Foundation. Those most likely to fall into poverty are working families – there were 2.8m of these people in 2014-15, compared to 1m a decade earlier.

“Failures in the housing market are a significant driver of poverty,” the report noted, after finding more than 70 per cent of private renters in poverty pay at least a third of their income in rent.

This is particularly the case if you consider the knock-on effect - housing benefit. This benefit was frozen by George Osborne, meaning that by 2015 Shelter calculated rates had fallen behind actual rents in nearly 70 per cent of England. For families out of work, of course, housing benefit is also included in the benefit cap. 

Private renter poverty is easily characterised as an inner-city problem – the kind cherished by the “metropolitan elite”. But in fact, across Great Britain as a whole, roughly one in ten children under 19 lives in a family that is privately renting and claiming housing benefit. The highest percentage was in Blackpool, followed by the Essex coastal area of Tendring, followed by London boroughs. Private renting is a trend that affects both the Remain strongholds and the Leave coastal towns.

So far, Labour has been relatively quiet on private renting. During the summer’s leadership campaign, Jeremy Corbyn promised to introduce “rent controls, secure tenancies and a charter of private tenants’ rights” (a promise he repeated as part of a longer speech in November). But this is hardly a blockbuster campaign. 

And the challenges are great. A convincing renting policy must explain how Labour would deal with a reactionary letting market industry (including pensioner voters), whether renting should be a step to buying, or an end in itself, and how new council and social housing would be allocated.

Labour could also, though, tie a rent campaign into other trends - the growing army of self-employed that find it hard to prove their wages to a landlord or mortgage lender, the working families on frozen benefits, and the employers that find their employees priced out of the local area. And pissed-off tenants are not hard to find. 

If Labour doesn’t move soon on an issue that should be its natural home, the government may steal the keys. In the Autumn Statement, Philip Hammond helped himself to Ed Miliband’s 2015 promise to ban letting agent fees. The government has also set up a working group with members of the private renting industry. (Yes, the government may also be selling off social housing under Right to Buy, but if you never had the option of social housing anyway, this may pass you by.)

Fixing the housing market takes imagination and a steeliness to take on entrenched interests. But if Labour does come up with a solution, it could touch the lives of voters, both Leave and Remain. 

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.