Industry | 2009.10.31
Obama has got his pay tsar. So let's tax crazy profits here | Polly Toynbee
A fiscal measure from the second world war could be just the thing to curb executive extravagance and tackle the deficit
City analysts got it badly wrong – again. The economy has shrunk – again – and we are now in the longest recession in recorded history . The worst is still to come when public spending taps are turned off, public jobs are cut in tens of thousands, and services are pared to the bone.
Economists who have been treated as oracles, opining on tax rates (keep them low), bank pay (keep it high) or public spending (cut, cut, cut), can hardly see this recession. In their first fright they said this would be "the middle-class recession", hitting financial and professional classes hardest – cue reruns of Lehmans refugees with cardboard boxes. Not so, of course. Finance jobs have grown by 3.8% while manufacturing tanked, losing 8.5% of industrial jobs. Professional jobs grew by 3.6%, while lowly admin staff fell by 2%. But in the City an irrationally exuberant stock market bears no relation to the real economy: if the pattern follows previous recessions, this dead cat hasn\'t much bounce left, as traders rush for profits before it dives again.
Cheap money means highly leveraged short-term trading is back, with cheap borrowing to bet in the finance casino. Gillian Tett in the Financial Times warns that debt and derivatives markets have taken off again. She asks if 2008 was just a dress rehearsal for the real crash to come? Vince Cable calls the GDP figures a "cold blast of realism" for out-of-control finance. The addictive property bubble is back as London returns to peak prices. Here we go! How long before the next bust?
City euphoria is quite rational while their bonuses go unchecked. Lord Myners warned bankers this week that "exorbitant" bonuses would "not be tolerated" when their profits relied on taxpayers propping them up. What did he mean? So far, there is only the G20 agreement that delays bonuses.
Meanwhile, banks still won\'t lend to small businesses. Talking this week to several, I heard the same story of exorbitant fees and shocking interest rates throttling real production, while Adair Turner\'s "socially useless" financial products attract limitless bubble credit.
Even Richard Lambert, head of the CBI, has cold feet about insane boardroom rewards: "Pay and performance have not always been well aligned," he understated. If companies don\'t rein in, the politicians "will attempt to do the job for them" with windfall taxes or super income taxes that "make no sense". But he rightly warns of "growing public hostility." Yesterday, Incomes Data Services reported FTSE-100 top pay rose by 7.4%, with bonuses still over £500,000, noting that "salaries for FTSE-100 chief executives are rising twice as fast as salaries for shop floor workers".
Without political expression or leadership, public outrage skitters all over the place but it settles mainly – and probably deservedly – against the government of the day, which said nothing until recently about gross excess, and even now does little. Grotesque pay at the top has fractured all pay scales, leaking out to distort public sector management.
For example, where is Adam Crozier ? Royal Mail is in crisis yet in this week\'s interviews and at the knife-edge negotiations with the CWU, he is curiously absent. A more junior director went on to the Today programme, perhaps because Crozier\'s embarrassing £3m pay packet last year makes him a weak advocate for the management cause. Undoubtedly John Humphrys would ask him how he justifies his mighty swag to a striking staff on considerably less than the median. Unjustifiable top pay disables effective advocacy both with customers and staff.
Expect many more examples of this dysfunction. As the public sector is scourged with cuts and job losses, managerial calls for belt-tightening and sacrifice will get a dusty answer from workforces witnessing the pay gap widen. This week the local government minister Rosie Winterton told council chief executives to publish their full pay. Some 20 local authority executives are paid above the prime minister\'s £194,000. When it comes to pay freezes and shedding staff, the more the top dog is paid, the more recalcitrant the underdogs may be. It is unfair to pick on the public sector, since the distortions are less and all grades are paid less than equivalent private sector jobs. But they attract most opprobrium because the Tories and the Taxpayers\' Alliance have skilfully diverted attention away from boardrooms and banks on to public servants.
MPs feel unfairly treated in repaying expenses retrospectively – but they must: they forget how very few constituents have cleaners or gardeners, let alone paid for by their employers. MPs have reaped the undirected rage of the nine out of 10 who earn under £40,000 against the 10% in the top tax bracket who no longer realise how privileged they are. But MPs got their own inequality jolt this week when Iain Dale revealed that the new Parliamentary Standards Authority that will oversee their behaviour is, insanely, to be paid £208,000 a year – rather more than their basic £64,700. We also learned this week that PWC consultants winding up Lehmans are being paid £309 an hour, or £568,000 a year.
\'Learn to tolerate inequality," said Lord Griffiths , vice-chairman of Goldman Sachs, Mrs Thatcher\'s hyper-Hayekian economic adviser and lay preacher, speaking at St Paul\'s cathedral. At least he confronted the question head on: is that what people want? Someone should ask them. If President Barack Obama can have a "pay tsar", cutting cash salaries of bailed-out company executives by 90%, why can\'t we? Better still, a high pay commission, examining differentials, probing the dangerous madness of all this.
A tax inspector reminds me that in the second world war an excess profits tax prevented profiteering: it compared wartime with pre-war profits and taxed the difference first at 60%, then at 100%. This bank crisis has caused the greatest deficit since the war and an equal need for cash. This week the National Institute of Economic and Social Research said we need a 7p income tax rise, retirement at 70 by 2015 and a five-year public pay freeze – "or do without hospitals or heating in schools". That\'s a national emergency. Why not re-introduce an excess pay and profits tax until the deficit is down? Also, make excessive pay and expenses no longer deductible from corporation tax: why is first-class "executive" travel subsidised by the taxpayer sitting in second class?
I am told intense talks are in progress about Lord Myners\'s "not tolerating" exorbitant excess: wait for the pre-budget report, they say. It has become politically essential for Labour to act: what else is Labour for? Between gritted teeth, David Cameron would have to follow, or brand himself on the side of the bonus boys.
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]ma-economy-bonus-tax-recession
