Financial sector should pay the bank bail-out loss
Finally the chancellor is to admit what this blog has long been warning. Rather than result in a profit for taxpayers, the bank rescues will leave us with a large loss. The point now is who pays?
Distributing blame is easy but the bail-outs – at least in the early stages – were agreed in haste to prop up the financial system and details like the taxpayer cost (or Goodwin’s pension) were secondary. Not rescuing the banks was not an option.
Yet the cost of almost £60bn is £1,000 for every man, woman and child in the country or about £2,500 per household. It is a more than the government collects in corporation tax each year and as much as it spends on housing, the environment, industry, agriculture, training and transport added together.
It is more than the stockmarket value of Royal Bank of Scotland before the credit crunch.
It was clear as soon as the government announced its investments in RBS and Lloyds that it was overpaying for its shares. It was clear as soon as new capital was injected into Northern Rock that it would never be recovered. It is almost certain that the sums the government collects for insuring banks’ toxic assets will exceed the write-offs and it is likely that when quantatative easing is unwound the purchased assets will be sold at a loss.
So who should pay for those losses? It can be argued that the burden should fall on everyone because we all gain from a functioning banking system – one that protects savings, pays wages and allows credit-card payments. But fairness suggests that the cost should fall on those that benefit most.
Unfortunately, it is impossible to impose a tax specifically on the bankers – from branch tellers to chief executives – who owe their jobs, bonuses and pay-packets to the rescue. It is also self-defeating to impose a windfall tax on the banks, knocking their value and thus increasing the losses when the state owns so much of the banking sector.
Yet government – this one and its successors – must never forget that the banking industry exists only because of the state’s intervention. That means not only the nationalised banks but also those that shunned state help but which would have fallen with the others if the Treasury had not acted.
And not only do banks owe their survival to the state rescues; the whole financial services industry ought to be grateful for the government aid.
At some point, those debts have to be called-in to offset the state’s price of saving the system. Sums like £60bn must not be allowed to become lost in the economic ether. Someone must pay and the financial services industry should accept that when that sector recovers, its profits will be disproportionately taxed.
