Topic 5: Fiscal Measures - Linda Chung

Topic 5: Should an emergency super-tax be imposed to the bankers who are in steady recovery? But can this be a dangerous move as the banks are just starting to function again?

A year ago, the government poured huge amount of money to bail out the banks that were in disaster. This year, it seems that the banks are steadily moving into a much better situation. For example, according to recent researches, Barclays, HSBC and RBS could make £16 billion in windfall profits this year. Is it the time for the banks to pay back now? But can this be a dangerous move as the banks are just starting to function again? Nonetheless, the social anger which is fundamentally caused by the banking crisis will have to be dealt with.

We are undergoing the worst global recession since the second world war and we need to understand how we got into this economic crisis to begin with. Only then can we find the right package of fiscal solutions.

We know that the recession in the UK was first triggered by the collapse of the sub-prime housing market in the US. Commercial banks had gone into lending to buyers with poor or no credit history tempted by high risk and high rewards. With relaxation in banking rules, these mortgage assets were sold on to other banks so the risk was passed on. In the meanwhile bankers earned handsome fees and were given large bonuses.

When interest rates went up many borrowers, who should not have been lent money to begin with, defaulted on their home loans. European banks were also affected where they were exposed to the US property market or had themselves started lending recklessly such as Northern Rock granting mortgages at up to 125% per cent of the value of the properties. They were clearly expecting the property boom to continue but as with all booms, there come busts. Now Northern Rock, RBOS and Lloyds TSB have all had to be bailed out by the UK taxpayer.

Recently we read that many banks including Barclays, HSBC and Goldman Sachs have made size-able profits. This is in a way no surprise as the Governments on both sides of the Atlantic have been pumping billions of dollars and pounds to stimulate the economy and have supported banks that have grown too big to fail.

Prime Minister Gordon Brown had approved the printing of money (so-called 'Quantitative easing') to ensure that there is enough liquidity to allow banks to carry on lending. It is however debatable how much of the £175-200 billion has filtered through to businesses and ordinary people.

I believe that the current crisis should be a golden opportunity to change banking practice and the old City culture of high reward for short term gains. Vince Cable Liberal Democrat Treasury Spokesman has proposed a super tax that is a 'windfall tax' on the banks that have become profitable. This is morally justifiable because the State effectively stands as Guarantor for banks and it is a question of the banks paying a fair fee for the privileges that they enjoy.

On the other hand, bankers must not be rewarded for failure (eg Sir Fred Goodwin) nor should they be tempted by large bonuses to perpetuate the culture of greed or high risk high reward that is damaging to the economy as a whole.

We have seen that the public is angry with the bonus culture of banks and have every right to be. The recession is causing hardships at many levels, there is high graduate unemployment and some local Councils are cutting front-line services in order to save costs which in turn push many people closer to the poverty line.

Banks have now become very international and ideally we need to work co-cooperatively with other governments such as through the G20 or the EU to implement new policies. Recently PM Gordon Brown suggested a transaction or 'Tobin' tax as a means of raising revenue and curbing speculative trading. This was however not well received by the US and will be difficult to implement unilaterally.

Another option is to use Northern Rock, RBS and Lloyds TSB which have been nationalised to set a standard of behaviour, stopping or restricting bonuses. There must however be the political will to do so and I fear that the Labour, or a Conservative government, are so close to the City that they would be happy to allow things to go back to business as usual.

Liberal Democrats on the other hand would like to see more fundamental changes with fairer taxes (taking the lowest earners out of the tax bracket altogether) as well as more effective banking regulation. In addition current loopholes such as the lower rate of tax for capital gains for shares (taxed at 18% instead of 40% or 50% from next year for income) need to be plugged. We also need to work co-cooperatively with Europe and the rest of the world and must not isolate ourselves by becoming too Euro-sceptic.

In conclusion I believe that we need a whole package of measures to rescue us out of the current crisis and a windfall tax and curbing the bonus culture may only be two such measures. The real problem is the over-reliance on the City and the financial sector by our present Government. Only by a change of priorities, from helping bankers and millionaires to helping ordinary people, will we be able to bring about a Fresh start for Britain.

Related Links

• You can read this article in Chinese here.
• Find out more about the Chinese Shadow Parliament here.