UK Pre-Budget Report

Proof we’re not alone on the fiscal crisis front: The UK Pre-Budget report. The UK government plans to reduce its deficit from 12.6 percent this year to 12 percent next year and then gradually to 4.4 percent in 2014-15. One highlight of the statement: An immediate 50% supertax on bankers’ bonuses paid between now and April. Bankers, apparently, are furious and were seen crying into their Dom Perignon all over the City of London.

21 replies on “UK Pre-Budget Report”

“Bankers, apparently, are furious ….”

A nation weeps. Indeed several nations weep. Perhaps they’ll all decamp to Dubai.


@ Karl

the bankers bonus is actually ridiculous. It’s an arbitrary tax aimed at the one world class industry left in Britain, meted out to both those who recieved support and those that didn’t. It’s gonna raise next to nothing (the govt forecast of £500mn is equal to seven hours of govt spending apparently), and the banks have already found ways around paying it anyhow. Some analysts reckon it’ll actually become revenue negative because of the ways the banks are going to tackle it. The only affect of this is to tell the rest of the world that the UK is more interested in populist spin than actual reform of the financial system. It’s also gonna tell the rest of the world that there’s far better locations to base your human and financial capital, and that the UK doesn’t want it based there anymore.

I spoke with a few guys in London before i headed home, and they’re not that worried about the personal financial impact of this, they just think that the Labour Party has gone f***ing insane. Interestingly though, they all thought today’s UK budget was a joke and full of spin, but that ours was a serious and impressive one in comparison.

Gosh Eoin, and there was me thinking that the whizz-kids of Wall Street and the square mile having wrecked the financial system meant we weren’t going to have to cringe before them anymore, that finance had got too big, that financial globalisation and innovation were under a cloud, that the bonus culture associated with all this was unhealthy… but now I hear that finance is “the one world class industry left in Britain” and a tax on bonuses in an industry still living on state-supplied life-support is the definition of insanity and unseriousness!

The banker tax is not as a big a joke as the Brians’ domicile tax. Any guesses as to the revenue it will raise? The bidding starts at 0.

The lack of respect shown on this blog to your betters is shocking! Shocking!

It is all a game except that there have been massive malinvestments that had been foreseen and stated by a few. What a waste. It really does reflect on the intellect of those responsible for governance.

Some banks are completely out of the loop and exist in the black economy, while others exist in the grey economy, using their facilities to put money offshore. I suspect this is what the Obama initiative on tax havens is aimed at. They know what is coming and will act to rretrieve large movements, akin to confiscating gold. They also seem to have EU co-operation on this. It might also be a precursor to legalization of currently proscribed substances in case the carbon tax fails at Copenhagen. As the USA has been ruled by gangsters since Reagan, this may lead to some strife … as they say.

As if any banker is going to end up paying anything. It’s just a sop to the public to make it look like they’re doing something. The bankers know that (but are cued to make the right gnashing of teeth, renting of garments-type noises) and the UK government know that. Sadly, a good chunk of the public will buy it.

@Frank Galton – I will take your zero and raise you (minus) -15 million as they will no doubt set up an admin unit and a special task force and maybe even a quango to run this thing and will have to spend money on not being able to collect this tax.

@ James Conran

Q1. how much money do you think it will raise?
Q2. as a one off measure, do you think it will change the bonus and risk taking culture in the banking sector?
Q3. how many banks will reconsider re-domiciling their trading operations to another jurisdiction as a result of this?
Q4. will the long term impact of this measure be positive or negative for the UK economy?

The financial industry, for all it problems over the last couple of years, remains a huge employer, a huge salary payer, and a huge tax payer. One of the reasons why the UK govt ultimately decided not to “ban” bonuses was because they realised how much tax they earn from them. This “bonus levy” is a pure political spin decision and will do nothing to change the financial system other than by encouraging it to move to another country.

@ Frank Galton

My bid. Minus €50mm.

When the “patriots” change there nationality because they have been asked to contribute. They’ll buy trophy houses through nominee companies and occasionally visit the old sod for sentimental reasons and to laugh at the peasants.

@Bond. Eoin Bond
The only part of your post which actually made sense was the first sentence
“the bankers bonus is actually ridiculous.” Ironically I guess judging by the tenor of the rest. I gotta hand it to you though – defending the indefensible is a thankless and hazardous occupation.

Can one hope that more austerity in Britain would lead to a strengthening of sterling?


The recent Goldman Sachs praise of Ireland largely focussed on the Irish public’s willingness to accept fiscal adjustment. The public mood is very important. Populist measures are necessary when the population are carrying the can. Also, it is an Aristotelian principle that in order to maintain stability within a state one must not allow one class to be seen to benefit unfairly at the expense of another class, particularly when that other class is the poor.

@ Aidan

i tell you what, how about you have a go at answering my 4 questions above? There’s far better and less populist ways of fixing the problem with the bonus culture in the banks. The super-tax will in certain cases actually reduce the capital bases of the banks.

Apparently France is gonna bring in a super-tax on bonuses now.

Prediction: some Uk-based banks seriously start looking at re-locating operations to Ireland unless the get a firm committment that the super-tax won’t be renewed next year.

I really hope you’re wrong there – we’re in enough trouble with our own banksters.

@ Eoin

“Prediction: some Uk-based banks seriously start looking at re-locating operations to Ireland unless the get a firm committment that the super-tax won’t be renewed next year.”

Better introduce a super-tax here before they move then.

After all if they start operating their casinos here (and under Irish regulation) our current “bank” problems will look like a picnic when the next bubble bursts.

Britain is experiencing precisely 70 years later the political equivalent of the “phoney war” from Sep. ’39 to May ’40 and this bank bonus tax is simply a diversionary tactic. All the hard decisions are being postponed until after next May’s election.

It is for bank shareholders, ultimately, to decide on bonuses. As a substantial shareholder in some banks the UK Government is pinned by a cleft stick. It wants these banks to rebuild margins and capital so that it can divest its shares asap, but this runs counter to its reluctance to give away public money in the form of bonuses. Therefore it has decided to have a whack at all bank bonuses.

Governments should be more concerned about the lack of competition that generates the excessive revenues out of which bonuses are paid. And they, collectively, should be more concerned about the international imbalances that fuelled the excessive leverage and risk-taking.

I expect this bank bonus tax will be a 9 day wonder and get lost quite quickly in the endlessly churning news cycle.

@ Eoin

Q1. how much money do you think it will raise?

It’s not designed solely for the purpose of raising money.
George Soros neatly summed up the true nature of banker’s bonuses in the aftermath of the self induced destruction of their companies; “hidden gifts’ from the state. What the state gives, the state is entitled to take back, if it is not used for the state’s purposes.”

Q2. as a one off measure, do you think it will change the bonus and risk taking culture in the banking sector?

It will, provided it is accompanied by tight regulation, enforcement and prosecutions.

Q3. how many banks will reconsider re-domiciling their trading operations to another jurisdiction as a result of this?

Are you kidding, where in the world do you think these blackguards would get the sweetheart deal they are getting here.

Q4. will the long term impact of this measure be positive or negative for the UK economy?

Positive, because it will begin to show these people which side their bread is buttered on and boy do they need that spelled out for them.

Listening to Joan Burton’s budget response yesterday I was reminded of the day our banker’s appeared before the representatives of the people at the Dail Committee. They treated that forum with an arrogant distain that was difficult to watch. To see Mr. Sheehy and Mr. Boucher strutting around when one considers the pain and hurt they have caused for tens of thousands of retired people in this country who had invested their money in bank shares, only to see the value of their life savings wiped out.
As Ms. Burton pointed out “they stonewalled, stonewalled, stonewalled on any questions they didn’t want to answer.

I find it nauseating in the extreme that a these men think they can now slink away with their millions, after totally destroying the wealth of their shareholders and having run their companies into the ground.

I hope I am right in detecting that over the past few weeks Mr. Lenihan seems to be finally getting the measure of these people.
They need to be reminded that they are operating under a license granted under Central Bank Act 1971 and Statutory Instrument Number 395 of 1992″ and this licence can be withdrawn by the Irish government at any time.

Martin Wolf wrote a piece in the FT in November in which he said; “Windfall taxes are a ghastly idea. They are a sop to prejudice, a burden on risk-taking and a form of arbitrary confiscation. No sensible person should support them. So why do I now find the idea of a windfall tax on banks so appealing? Well, this time, it really does look different.
First, all the institutions making exceptional profits do so because they are beneficiaries of unlimited state insurance for themselves and their counterparties. Second, the profits being made today are in large part the fruit of the free money provided by the central bank, an arm of the state. The state is giving the surviving banks a license to print money.”
And he goes on ..

Simon Nixon wrote in the WSJ in October; “A windfall tax is blunt, arbitrary and something supporters of free markets usually instinctively avoid. Even so, following news that Goldman Sachs Group has already set aside a $16.7 billion bonus pool for 2009 the case for windfall taxes on banks that pay giant bonuses is becoming unanswerable.”

That’s more than the total amount of the IMF rescue fund for the Ukraine, absolutely incredible.

These bankers have bluffed Mr. Lenihan over the past year telling him that “you can’t do without us, the economy needs a functioning banking system.”
Yes it does, but it doesn’t need to be run by people like you, because you have bankrupted your banks and that’s not the sort of track record that’s going to get the Irish economy back on its feet.

Dermot Desmond spoke of the need for a new banking force in Irish banking; why not have him put that together. He has lots of rich friends like Mr. McManus, Mr. Magnier and Mr. Lewis, all who have plenty of banking and commercial experience and would be well capable of helping out the Irish economy in its hour of need.
They could also put a man like Denis Brosnan in charge and I don’t say this just because I am a fellow Kerryman but if Mr. Brosnan was given that responsibility I can tell you one thing for damn sure he wouldn’t ‘destroy the wealth of his shareholders’ and he would never bankrupt the company,’ just ask any Kerry Group shareholders.
The company he built has survived the recession intact, if you bought shares in Kerry Group at the beginning of 2003 for €11, you could sell them this morning for €21.50.
If you bought shares in AIB at the beginning of 2003 for €14 you would get €1.37 for them this morning, if you could find a buyer.

It’s time to cast these rapacious Pharisees from our midst Mr. Lenihan.
You made a good start yesterday, now hold on to your NAMA funds and round up some real Irishmen who won’t let the country down and give them the money instead. I can guarantee you’ll get a much better result than you will from the bankrupts you are currently dealing with.

Yes you can Minister, YES YOU CAN.

Speaking of Dail responses to the budget; I was a bit disappointed in Mr. Bruton I thought he was unsure of himself and lacked a bit of steel. I thought Joan Burton did well and said much that needed to be said, even if she did go on a bit long. I thought Mr. Morgan of Sinn Fein got off to a flying gallop and he also said much that needed to be said. You can see why Sinn Fein are getting a foothold in the poorer urban areas and one would imagine that they are going to do well in the trying times ahead.

Finally, I criticised you in my book Mr. Lenihan but I changed my opinion of you yesterday. You did what needed to be done and you did it well. Although I must say that I don’t share your view that “The worst is over,” I would be in agreement with Ms. Bruton and Mr. Morgan on that one.

The actual position is a tightening in FY 2009/10 of £415mn. This is more than accounted for by the bank payroll tax of £550m in this year (Table 1.2, pp.10-11, PBR). Otherwise there is a tiny net expansion. This is followed by a loosening of £1,240mn in FY 2010/11, and an additional £2.5bn for the war against Afghanistan. Only in the subsequent two years is there any real fiscal contraction, of £3.5bn and £5.1bn resectively.

Of course, all of this is likely to change shortly after the outcome of the next general election. Whether the policy is right is a different matter. But in timing and relative size, it is nothing like Ireland’s unique contractionary experiment.

It looks like the tax on bankers’ bonuses is only the tip of the iceberg as far as increased taxation in the UK is concerned. Darling has also put VAT back up to 17.5 per cent and (not mentioned so far on this thread) has increased PRSI by 1 per cent (0.5 per cent each for employers and employees) from 1 April 2011. I think (although I’m not certain) that this is on top of a similar 1 per cent increase in PRSI from the same date that he announced last year. Overall, in contrast to Ireland, the response from the business community in the UK has been very negative.

As far as Ireland is concerned, the main effect will be on inflation. As the CSO figures published this morning show, harmonised inflation (HICP) is still falling in Ireland. In the UK, harmonised inflation is taking off. The gap between the harmonised inflation rates in Ireland and the UK in November was almost 5 per cent. Given the VAT and excise changes announced yesterday, the gap could easily reach 8 to 10 per cent in the first half of next year. This is bound to lead eventually to interest rate differentials between the two countries as well.

@ JohnTheOptimist

apparently Darling wanted to in fact raise VAT up to 18% but was persuaded to up the NI rate instead. As you said, this years super-tax is only the start of tax hikes in the UK, and apparently they’d rather tax income than spending. Not a great pro-growth argument.

@ Greg,

Not too sure if moving a back office constitutes “relocation of a bank” to another juristiction etc.

For a company to move its tax centre it has to be a substantial move. Many of these British Banks employ thousands of employees and have thousands of clients in the U.K. Their main centre of operations is therefore in the U.K.

If a British Bank was just to move a back office to Dublin with about 30 staff etc then Her Majestys Inland Revenue would see through this. It’s just a tax dodge etc. However there is no way would it wash in a court of law.

That’s what all the fuss is about about, these companies in the Cayman Islands just rent a room in a building for a postal address to avoid corporation tax etc. No wonder there is a clampdown on this sort of evasion by the US administration.

In addition if it were to be see as Ireland poaching companies from the UK then there would be a serious political fallout between Westminster and Dublin. I just can’t see it happening.

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