Mr Redwood’s contribution to the Second Reading of the Finance Bill, 18 April 2012

Mr Redwood: I remind hon. Members that I am an adviser to an industrial company and a small investment management business. I am not a tax adviser, so I feel able to participate in this debate.

I was interested in the Opposition amendment and it turns out to be rather disappointing, for a number of reasons. It asks the Government to produce a report

“on how the additional revenue…would be invested to create new jobs and tackle unemployment.”

As phrased, it does not actually ask for a report on how a bank payroll tax would work, although that is perhaps what Labour Members wanted, too. Interestingly, the Opposition have shifted from wanting a bank bonus tax—a tax originally described as a “one-off” and clearly aimed at very high earners in certain kinds of investment bank, which everybody loves to hate at the moment—to wanting in this amendment a general bank payroll tax. I ask them to think about what that means, because most of the people on the payrolls of our leading large banks are, of course, modestly remunerated. This payroll tax would give a further incentive to bank directors and managers to try to get rid of personnel they are employing, because if we tax something, we clearly do not like it. The Opposition say that they do not like payroll, so they are trying to tax payroll.

Owen Smith: I am grateful to the right hon. Gentleman for giving me this opportunity to clarify the wording—[ Interruption. ] No, there is no “Ah ha” moment, I am afraid. The wording we have used reflects the wording used by the OBR to describe the temporary bank payroll tax. It is no more than that.

Mr Redwood: It is worth teasing these things out, because I think we have had confirmation from the Opposition that they have in mind a general payroll tax, which would hit people other than the very high earners in investment banks. The amendment does not say “a bonus tax for investment bankers”, for example; it says a “payroll tax”. One therefore has to assume it would affect conduct.

Owen Smith: With the greatest respect, either the right hon. Gentleman misunderstood what I said or he is deliberately misrepresenting what I said—mischievously, I suggest. We were not intending to do anything other than replicate that which we have done previously, so a bonus tax is what we were talking about. The language adopted in the amendment is reflective of that used by the Government and the OBR—that is all.

Mr Redwood: Well, I think we are very grateful for that clarification. We await the details that, unfortunately, we did not get from the Opposition about how they would target the measure, whom they have in mind, how much those people would have to earn and how much bonus they would get. The point rests on perhaps a narrower base than the words in the amendment lead one to infer. One has to assume that the tax will lead banks to employ fewer people.

The tax that the Government have adopted also has consequences. They have decided to get extra money out of the banks by taxing the size of their balance sheets. I think the Government might be right that that is a slightly better way of doing things than taxing personnel costs because it is more general, but that too has adverse consequences. All taxation has adverse consequences as well as some positive uses. The Government tax encourages banks to shrink their balance sheets because they do not wish to pay too much tax. What does that mean in normal language? It means they want fewer deposits and less share capital and that they want to lend less money to people because the way to reduce the tax burden is to have less taxable capacity in the United Kingdom. The tax therefore has a cost. I do not disagree with what the Government are doing: I understand the awful financial situation that the country finds itself in and I can see how this tax is more popular than many others, but let us not pretend that these things are costless. At a time when we need more growth and more loans of a suitable kind to people who can afford to pay them back in order to create demand and more loans to smaller and medium-sized enterprises at a time when they need to grow, taxes on banks are not terribly helpful.

I am enough of a politician to know that banks are very unpopular and that it is an easy hit for politicians who want to improve their own popularity to take a position against the banks, so I am being something of a foolish hero by standing up and saying that not all banks are bad and that quite a lot of people who work for banks are perfectly decent people doing a decent job. The banking service that is supplied around the country to small and medium-sized enterprises and to you and me, Sir Roger, is very necessary, and sometimes it is well handled and well conducted.

There is a dreadful run of debate in this country that everything to do with the word “bank” is evil and wrong, that it serves the banks right and that everything has to be directed against them, but we have to work with the banks—the good, the bad and the indifferent—because we need them to be on the side of economic growth and recovery to tackle the very real problem that the Opposition have identified in the second part of their amendment—tackling unemployment. We need to get unemployment down, and one way of doing that is by having a strong banking sector working closely in partnership with the small and medium-sized enterprise sector and with those people who have a reasonable income and might want to borrow more to buy things and create demand.

Kelvin Hopkins: The right hon. Gentleman glosses over the fact that the banking system has two distinct components. There is the banking for ordinary people and small businesses and then there is the casino component, which is about gambling with vast sums of money—often our money—and often losing it by the billion. That is the bit of banking we are complaining about, not the retail banking that looks after our money and ordinary working people’s money.

Mr Redwood: If it were that easy to make the distinction and to close down or punish the one and reward or encourage the other, I am sure the outgoing Government would have done it. The fact that they did not implies that in office they realised the situation was far more complicated. When we consider the complications of a large conglomerate bank—as it happens the taxpayer should have a lot of knowledge about them because we are the forced owners or part-owners of two such banks—it is immediately obvious to any sensible analyst that the activities of the investment bank are deeply integrated with, and related to, those of the normal commercial bank; for example, in their service for small and medium-sized enterprises. A small or medium-sized export business may need forward currency cover or trade finance and credit, or it may have an investable surplus. It may need all kinds of services that go well beyond the basic banking that the hon. Gentleman was trying to describe—just having a current account to make payments and a simple savings account. The world is much more complicated than that. If we are to survive and compete in a global world with international trade, we need to be able to handle its requirements.

Mr George Mudie (Leeds East) (Lab): I do not share the right hon. Gentleman’s confidence that the banks are so optimistic, and that they are so ambitious to provide loans that will get jobs for the million youngsters who are out of work. The Government signed up to Merlin scheme for loans to small businesses, but were badly let down by the banks who did not live up to their part of the agreement. This year’s Budget wheeze is the loan guarantee scheme, which is supposed to get jobs for youngsters. The Treasury Committee took evidence and accepts in its report that the scheme will not provide additional lending for firms; it is only a method for lowering current rates, so why is the right hon. Gentleman so confident?

Mr Redwood: I do not think I expressed any confidence on the subject at all. The hon. Gentleman, the Government and I are in agreement that past levels of lending have been inadequate. That is why the Government have come forward with yet another scheme to try to encourage more lending, which I should have thought everyone in the House would want them to do. If the hon. Gentleman wants to know why there has been too little lending in the last couple of years, there are two simple reasons. The first is that after the crash the banks were forcefully regulated not to lend more—[ Interruption. ] The hon. Gentleman says that is nonsense, but their problem is obvious. The banks were told by the regulator that they needed to hold more cash and capital relative to their lending; the only way they can do that, especially the nationalised ones, is to keep lending down. They are not in a position to raise more money because the taxpayer does not want to put more money into RBS at the moment, and I entirely agree with the Government’s view that we should not be doing so. There is thus a regulatory squeeze on the amount of lending.

The banks would say that the projects are not out there. I am not so sure. The hon. Gentleman and I probably know of financeable propositions on which we would like to see the banks rise to the challenge. We hope that will be possible with the new scheme, but under the Opposition amendment we would spend any revenue that might be raised from what they call a payroll tax, although it is apparently a bonus tax on new jobs and tackling unemployment. We do not know exactly how much they have in mind; the amount would probably be quite modest, as it was from their bonus tax. If the banks see another bonus tax coming in this climate, there will be even fewer bonuses to tax, but the Opposition may welcome that.

Mr Dave Watts (St Helens North) (Lab): Is it not right that the people who caused financial problems and hardship for many families and created mass unemployment pay a fair amount of tax to compensate for the damage they did to the economy? Is that not exactly what the amendment would provide for?

Mr Redwood: Many people would think that the outgoing Government had a lot of responsibility for the crash, along with their professional advisers, the quangos and the Bank of England, who apparently did not see it coming. They had very light regulation in the lead-up to the credit crunch and then very tough regulation. [ Interruption. ] Labour Members feel there is some justice in my response, as they are getting very heated, but we are straying rather far from amendment 5.

The point of the amendment is that the Labour party wants to raise an unspecified amount by taxing unspecified people who apparently earn more than Labour thinks is good for them. The Opposition would spend that on youth measures, and they want the Government to come back with a report on how that money could be spent.

My hon. Friend the Member for Staffordshire Moorlands (Karen Bradley), who rightly said that she could support a bank levy to try and get the deficit down, was speaking sense, but this, as she will have realised, is not the proposition of the Labour Opposition. They do not want to get the deficit down. They want to find another pot of money to increase spending. I am with them in their aim of reducing youth unemployment. We will make much more progress in reducing youth unemployment if we have stronger banks able to finance a more vigorous recovery. I urge the Government to work more strongly on that. The more money they take off the banks in taxes, however tempting that is, the less the banks will be able to lend to people to get the recovery going, so the proposal could be self-defeating.

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8 Comments

  1. Nick
    Posted April 19, 2012 at 4:25 pm | Permalink

    : Is it not right that the people who caused financial problems and hardship for many families and created mass unemployment pay a fair amount of tax to compensate for the damage they did to the economy? Is that not exactly what the amendment would provide for?

    ===============

    No. They don’t.

    Tucked away at the end of a pensions bill, MPs have exempted their payoffs and expenses from tax and investigation from HMRC.

    Come on, how about admitting to the true scale of government debts, pensions included?

  2. RDM
    Posted April 20, 2012 at 2:38 pm | Permalink

    John,
    Are you saying that if I (an unemployed contract Project Manager with many years developing Technology solutions) went to a Bank (in Wales), I would be given any consideration at all? The Coop will not be supporting the Guarantee scheme at all, my Bank.

    All I want you to consider is that the Regions do not get the same service from the Banks as more entrepreneur areas as the South East and London. They want collateral and a strong position, First charge or control of the asset. They are not analysing Risk at all!

    When we last discussed the Banking System, you seemed to believe that more competition is the answer. I agree to a point, but it not enough, especially for the Regions, and Regional Politics.

    I believe that there needs to be a different type of Bank as well. A Relationship based bank, or a way for a startup to issue a 10yrs Bond, or a Development Bank, or whatever. What I’m trying to get at is that Technology needs time and support to develop before a product can be produced. But also; there are a number of Gas extraction opportunities within the Valleys, not just Fracking Shale beds, but old coal mines. Which Bank or Fund would be interested? A Development bank or Relationship Bank, etc, (it’s MO as used within Germany and USA) would be targeting strategic, or creating/supporting new, industries. So they could take a longer term position (Equity) of a Coalmine Gas or Technology startup.

    Politically; I do not believe that the Conservative party can afford to rely on Trickle Down economics, between individuals or Governments (Dev and Local). We need to sure that the British has access to the British Banking Systems, a benefit of the Union. Also; if I was a Company with spare cash, I would be investing within the growth areas, the BRICs. Far too much uncertainty within the Euro area. If we did try to rely on Trickle Down, then we are heading for a federated Britain, and then into a federal Europe (Euro).

    Regards,

    RDM.

    • A Different Simon
      Posted April 20, 2012 at 5:44 pm | Permalink

      Your choices as a small company if you decide you have to finance by issuing equity to the market are poor too .

      In particular AIM needs to be reformed yet the LSE and regulator don’t seem to see it .

      The regulatory requirements surrounding rights issues are much more stringent than those surrounding placings .

      This is ostensibly for the protection of retail investors but is in practice for the benefits of insiders ; who typically dump their heavily discounted shares into the following pump within days . So much for investors pre-emptive rights .

      People need a certain amount of regulatory certainty in order to be able to invest with confidence – not regulation designed to shaft them .

    • A Different Simon
      Posted April 21, 2012 at 12:35 pm | Permalink

      RDM ,

      Where are they going to find the Mr Mainwarings capable of deciding to make an unsecured loan ?

      The banks have spent the last almost 20 years trying to exorcise them from the industry .

      With all these things you can’t just flip a switch and bring them back once the culture which created them has been destroyed .

  3. forthurst
    Posted April 20, 2012 at 7:13 pm | Permalink

    Increasing the taxation of banksters may be a good idea. The same approach could also be employed with burglars, drug dealers, muggers, and paedophile pimps who as far as I’m aware, entirely escape the attentions of HMRC.

    There is a very serious issue when serious crime is going uninvestigated and unpunished. The criminal banksterism that lay at the heart of the 2008 crash and still afflicts banks balance sheets today has been almost entirely ignored whilst taking place in London. Recently, a financial organisation help itself to the assets deposited by clients for safekeeping in order to pay off debt from prinicpal trading and there has nor been a murmur from the authorities.

    • Conrad Jones (Cheam)
      Posted April 23, 2012 at 11:26 am | Permalink

      Apparent Banking Fraud is merely a Symptom of a Systemic Fault with our money system.

      Preventing Banks from Creating Money when they create Loans would solve many problems of the Financial Sector. Wild speculation by Banks is encouraged in a System where a Private Institution can create debt Based Money in the hope that a gamble pays off before the Reserves necessary are required. Base Money lags behind Credit Money (M4).

      Return Money Creation to the Government (i.e. the Public) and the Economy will fix itself. Regulation would be simple, if a Bank is found counterfeiting then they suffer the same consequences as you and I. At present Banks can legally Counterfeit money through credit creation, neo-classical economics help hide the fact by excluding money creation from their mathematical models which is why they failed to predict a crisis in Banking, Credit and Money.

      Many Economics course today are said to not reflect the real world as far as credit creation is concerned and how Banks actually source the money for their loans. A Bank does not need any extra money to make a loan – it looks for the reserves weeks later. Name any other business that can do that with our money? The root of the problem is the money supply.

  4. Conrad Jones (Cheam)
    Posted April 23, 2012 at 12:22 am | Permalink

    Government Advisers are neo-classical economists.
    Do neo-classical economists understand how the economy works? They certainly didn’t predict the Crisis.

    “Many people would think that the outgoing Government had a lot of responsibility for the crash, along with their professional advisers, the quangos and the Bank of England, who apparently did not see it coming”

    Yes – agrreed.
    When Labour came to power, credit expansion accelerated – which provided a very strong illusion of well being in the economy. Their advisers were economists schooled on the theory of neo-classical economics.

    The Conservative Party also used the tool of allowing increased credit expansion (through reduced Bank regulation) to provide liquidity in the Economy which REDUCED the need for the Government to borrow money. Their advisers were economists schooled on the theory of neo-classical economics.

    Steve Keen (Professor of Economics at Sydney University), was one of the few Economists to predict the Economic Crisis of 2007/2008. Along with others – he was rediculed and laughed at. Peter Schiff also tried to warn of Sub Prime Mortgages – http://www.youtube.com/watch?v=jg0R4GKV7X4).

    Steve Keen believes that the neo-classical model of the Economy is flawed becasue it does not include Credit Creation. Banks are regarded as simple intermediaries between Patient (Money Holders prepared to wait before they spend) to Impatient (people who don’t have money and wish to spend now). He argues that because the Neo-Classical models also simplify Supply and Demand to a single Individual and a single Product or Service when modelling an entire economy (which contains millions of alternative products and services and millions of people). If Steve Keen is right – it is then no wonder, that the neo-classical economists did not see a crisis coming that involved Banks, Credit and Lending.
    http://www.positivemoney.org.uk/2012/04/steve-keen-at-inet-video/

    Simon Dixon has also made some clarifications on how Banking and Investment works in the UK.
    http://www.positivemoney.org.uk/2012/04/tedx-talk-changing-the-rules-of-banking/

    Here’s a question which you might find interesting – Do you believe that a Bank requires adequate Reserves before making a loan or can it wait 2 weeks and find those reserves then ?

    Putting this another way – does M4 money lag or lead Base Money (M0)?

    If M4 leads M0, this means that the Bank of England is lead by the Private Banking Sector. Could George Osborne answer this question? Could Alistair Darling answer this question ? Or even Gordon Brown (The Iron Chancellor) ?

    Can you answer this question Mr Redwood – Does base money lead lending?

    Perhaps your Researchers at the House of Commons could answer this question.

  5. Conrad Jones (Cheam)
    Posted April 23, 2012 at 1:53 am | Permalink

    Here’s another question Mr Redwood,

    If we increased tax earnings from non-productive investments (such as Land Price rises and reduced Housing Market Subsidies), and did not tax productive work – what do you think would happen to the GDP of the UK? Our balance of trade might go up perhaps?

    Why is there a need to tax the Bonus of an Individual from a Private Company? Surely the best solution would be to withdraw tax payer funding altogether, from that Private Firm – then if the Private Firm wants to go Bankrupt, it can. Isn’t this admitting that there is a fundamental flaw at the heart of the Financial System which draws money away from Productive enterprises into speculative investment funded by massive Government Subsidies?

    Higher Mortgage costs – through out of control lending due to tax payer help; leads to less disposable income which has a downward pressure on prices and reduces the probability of recieving a loan from a Bank to create a productive business as the profits are directly related to disposable income of the economy.

    Banks cannot win at the moment as they are all seen as parasites – which is not true; and the solution to a lack of money in the system has been greater regulation thereby motivating Banks to lend less, which further reduces the money supply, reducing Jobs and disposable income. Once Banks reduce lending, Government’s start Austerity Measures, which worsens the problem even more.

    You missed an opportunity in this Finance Bill debate by not discussing the importance of how money is created and not suggesting how the Bank of England could be used to provide a Debt Jubilee in the system. A Debt Jubilee would be similar to QE, except that the money would go to everyone – except the Banks. People in Debt would have to pay down their debt with this new money, those not in debt, would have additional spending power, so Savers and Borrowers would both benefit. A similar plan was used in Germany in 1953, Germany is now the strongest economy in Europe.
    http://www.cadtm.org/The-Marshall-Plan-and-the-Debt

    If Banks are unpopular – then it is due to ignorance of the monetary system – the monetary System is at the heart of the problem so why won’t Politicians discuss the true systemic problems and the flawed models of neo-classical economics? It seems that Politicians and Banks are happy with being blamed for the Financial Crisis so long as they do smoke screen the true reasons behind it.

    The UK Economy is fast becoming a House of Cards, it only requires one of those Cards to fall over to bring the whole structure down. The Financial Crisis is only one of the problems that we are facing – if we cannot restructure the monetary system, then we will not be able to solve other problems, such as Energy and Food Resources. A Flaky money supply compounded with lack of Fuel and increased Food prices is the type of Future we have at present. The Government announced that there might be a Fuel Tanker Strike and there were instant queues. Fuel Prices rose even further.

    Discussing how much Tax a Bank Executive gets is going to become more and more irrelevant. What you should be discussing is where that Bonus money originated from.

    Why does the Government issue Treasury Bonds but not Issue Currency – except when it goes directly into a Bank’s reserve Account? The Maastricht Treaty perhaps?

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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