Fight Racism! Fight Imperialism! 220 April/May 2011

In a moment of remarkable frankness, Mervyn King, Governor of the Bank of England, said that government spending cuts are the fault of the City of London and expressed his surprise that this had not generated more public anger. On 1 March 2011 he told the Treasury Select Committee that: ‘The price of this financial crisis is being borne by people who absolutely did not cause it…Now is the period when the cost is being paid, I’m surprised that the degree of public anger has not been greater than it has.’ The billions spent bailing out the banks and the consequent public spending cuts, he said, were the fault of the financial services sector.

These are strong words coming from such an establishment figure. Like the August 2009 comments of Lord Turner, head of the Financial Services Authority, on the ‘social uselessness’ of some banking activities and the destabilising role of the City of London, they were simply ignored or rapidly dismissed. Neither of these City gentlemen can accept that the uncontrolled and speculative activities of the financial services sector in the main imperialist countries are necessary features of a parasitic and decaying capitalist system of which British capitalism is the prime example. The primary concern for any British government, whether Labour, Tory or LibDem, must be that the City of London remains a dominant centre of world finance, the financial arm of British imperialism.1 DAVID YAFFE reports.

Bankers in command

The banks are on a roll. While the vast majority of British people face cuts in their standard of living, for the banks it is back to business as usual. In 2010 the big five banking corporations – Barclays, HSBC, Lloyds Banking Group (LBG), Royal Bank of Scotland (RBS) and Standard Chartered – made combined pre-tax profits of £22.9bn, more than double their profits in 2009 of £11.3bn. The government had sought to assuage the public anger against the banking corporations felt throughout the country by negotiating an agreement with them to lend more to business, to be more transparent on pay and to curb their bonuses. The deal between the government and the UK’s four largest banks, Barclays, HSBC, LBG and RBS (plus Santander on lending) is called Project Merlin. It was announced by the Chancellor George Osborne on 9 February 2011.

Project Merlin has no bite. It presents the banks with no serious challenges. Any decisions on ‘reform’ of the banking system, such as the separation of retail and investment banking, are being left until after the Vickers report in autumn. Lord Oakeshott, LibDem Treasury spokesman in the House of Lords, stepped down after describing the agreement as ‘pitiful’. The banks can clearly call the shots. In 2010 the donations by the financial services sector to the Conservative Party’s election campaign were £11.4m, more than half of the party’s total funding.

The banks have agreed that total bonuses for their UK-based staff will be lower than they were in 2010. But do not be deceived. This is a major concession to Barclays and HSBC which have the majority of their bankers outside the UK. The agreement also says that bonuses will be linked to performance and there will be no reward for failure. Most of the banks have now reported their 2010 profits, and the pay and bonuses of their executive bankers. The results demonstrate the overwhelming arrogance and contempt that the UK banks show towards the rest of the population facing the brunt of the economic crisis. When Bob Diamond, chief executive officer of Barclays Bank, told the Treasury Select Committee in January that he thought ‘the period of remorse and apology for banks’ needs to be over, he meant it – as the results for Barclays Bank so bluntly demonstrate. The 2010 results for the UK’s largest banks are listed below.


Barclays paid only £113m UK corporation tax in 2009, a year when it made record profits of £11.6bn. The bank has 30 subsidiary companies in the Isle of Man, 38 in Jersey and 181 in the Cayman Islands – all tax havens. In 2010 its profits were much lower at £6.1bn. Yet Bob Diamond, its chief executive, and Jerry del Missier and Rich Ricci, the two co-heads of Barclays Capital, the investment banking arm, received nearly £30m in pay and bonuses for 2010 and another £77m for past performance, almost £107m. Diamond’s bonus alone was £6.5m, about 260 times the UK average annual income. His total pay, shares and bonuses amounted to £22.8m. The other two received more than £40m each. The average payout to each of the bank’s 231 most senior staff was £2.4m (Financial Times 8 and 14 March 2011). So much for Project Merlin.


HSBC group profits were $19bn (£12bn) in 2010, well up from $7.1bn in 2009. The five highest paid senior executives received just over £12m (Project Merlin transparency rules), with Stuart Gulliver receiving a £5.2m bonus in shares on top of his £970,000 pay. If traders are included among the five highest paid senior executives (Hong Kong transparency rules), the pay and bonuses of the top five come to more than £34m. 280 of HSBC’s senior employees each earned on average just over £1m (The Guardian 8 March 2011).

Lloyds Banking Group

LBG is 41% owned by the taxpayer. In 2010 it made a profit of £2.2bn, its first full-year profit since the financial crisis. The outgoing chief executive received a bonus of £1.45m in addition to his £1.1m salary and he could also take away the £6m shares he already holds. Nine of its employees received more than £3.4m each. The bank paid no corporation tax due to previous losses. Around 26,000 jobs have already been shed by the group to cut costs by £2bn a year (The Guardian 26 February 2011). In mid-March, LBG announced a further 570 job cuts. Bankers are getting multi-million payouts as thousands of bank workers lose their jobs.

Royal Bank of Scotland

RBS, 83% owned by the taxpayer, made a loss of £1.1bn in 2010. It made a loss of £3.6bn in 2009 and a record loss of £24bn in 2008. Despite this, more than 100 bankers at RBS were paid over £1m each last year, as total bonus payouts reached £1bn. Stephen Hester, the chief executive since 2008, was offered and accepted a £2m bonus in shares on top of his £1.2m salary. He will also receive £4.5m in shares through a long-term incentive plan, bringing his total payout to £7.7m. In all, this bailed-out bank has given shares worth £28m to nine of its top executives. 323 of its ‘code staff’, seen as crucial to running the business, shared pay of £375m, an average of £1.1m each (The Guardian 25 February, 9 and 18 March 2011). These are the rewards for failure. Bankers are clearly in command.

The banks have returned to lending practices that were widespread in the period before the financial crisis, with investors buying increasingly risky corporate debt that promises high yields. Demand is growing for ‘synthetic’ financial instruments that allow investors to take positions in the US junk bond market without owning the underlying securities. These instruments, created using credit derivatives, are similar to transactions linked to the US mortgages which were widespread before the financial crisis. Private equity groups and hedge funds are borrowing massively as they try and sustain the returns to their wealthy investors (Financial Times 8 and 14 March 2011). Such developments are laying the foundations for a new global financial crisis once the next economic downturn gets underway.

Austerity begins to bite

The living standards of millions of working people in Britain are falling, well before the impact of the major spending cuts and tax rises due in April 2011. CPI annual inflation was 4.4% in February, up from 4.0% in January. The RPI, which includes various housing costs, was higher at 5.5%, up from 5.1%. With average pay growing only 2.2% annually this already represents a sizeable decline in real incomes.

Unemployment rose 27,000 in the three months to January reaching a 17-year high of 2.3 million, 8% of the workforce. The number of unemployed 16-24 year olds rose by 30,000 over the same period to reach 974,000, 20.6% of the age group. This is the highest figure since records began in 1992. Public sector employment fell by 45,000 in the last quarter of 2010 to just under 6.2 million, with 24,000 of these jobs lost in local government. Over a year, from the fourth quarter of 2009 to the fourth quarter of 2010, 132,000 jobs were lost in the public sector, including 66,000 in local government. A further 400,000 public sector workers are expected to have lost their jobs by 2014-15 once the £113bn fiscal squeeze of spending cuts and tax rises, already announced in last June’s emergency Budget,2 have taken their toll.

The poorer sections of the working class are already being hit hard by the economic downturn. The latest official statistics show that GDP fell by 0.6% in the final quarter of 2010, compared with the original estimate of a decline of 0.5%. All main sectors of the economy saw negative growth except the public sector, which grew by 0.7%. When the spending cuts, and benefit and tax changes really get underway and public sector growth goes into reverse, the economic situation will rapidly deteriorate. Middle-income public sector workers in particular, earning between £20,000 and £35,000 a year, will see their situation quickly worsen as they are hit hard on four fronts – inflation, public spending cuts, tax rises and job losses. They will be gradually joined by millions of other ‘middle class’ workers as government austerity measures unravel.

Public anger will turn against the ConDem government and its arrogant and rapacious friends in the City of London, and Mervyn King could get a nasty surprise.

1 See ‘Parasitism remains at the heart of British capitalism’ FRFI 210 August/September 2009 and ‘Britain: parasitic and decaying capitalism’ FRFI 194 Dec 2006/Jan 2007 on See also our new FRFI pamphlet No Cuts – Full Stop! Capitalist crisis and the public sector debt.

2 See ‘Coalition declares class war’ FRFI 216 August/September 2010 on our website.

The Budget: deceit, illusions and ruling class arrogance

The government is sticking to its economic plans to make the working class pay for the financial crisis. All the significant decisions were made in the June 2010 emergency Budget and the October Comprehensive Spending Review (see FRFI 216 and 218). This latest Budget on 23 March had little of real substance. This did not prevent the Chancellor, George Osborne, futilely declaring he was moving on from ‘rescuing the nation’s finances and paying for mistakes of the past’ in his first Budget to ‘reforming the nation’s economy’ for ‘enduring growth and jobs in the future’.*

The facts show a quite different reality. This budget for growth, based on the ‘robust independent figures’ of the Office for Budget Responsibility (OBR), showed anything but enduring growth. Lower than expected growth for 2010, 1.3% against last November’s forecast of 1.8%; lower than expected growth for 2011, 1.7% against 2.1%, and for 2012, 2.5% against 2.6%. All this before the £81bn public spending cuts planned from April 2011 take their toll over the next four years. The word ‘growth’ occurred some 23 times in his Budget speech, as though its mind-numbing repetition would turn it into reality. Worse still for Osborne, the head of the OBR declared that the policy measures in this Budget would not change the pro­spects for growth over the life of this parliament. He said the likely growth-enhancing effects of the relatively expensive cuts to corporation tax and fuel duty would be minimal. Slower than expected growth and higher than expected inflation will result in £47bn increased public sector borrowing over the next five years.

Osborne offered a further carrot to his LibDem friends in the Cabinet by increasing the tax threshold from £7,475 to £8,105 from April 2012. But the benefit will be almost completely eroded with national insurance and tax thresholds increasing by the CPI rate of inflation and not the higher RPI from 2012.

Osborne has no shame. Unbending in his austerity measures, he is taking away the top-up element of the winter fuel allow­ance for pensioners.  He says ‘we’re all in this together’, while giving a strong signal that the 50p tax rate on those who earn £150,000 or more will soon be removed, because it ‘would do lasting damage to the economy if were to become permanent’.

Finally Osborne has an ambition to rebalance the British economy with the country becoming a world leader in advanced manufacturing etc. At the same time he wants the City ‘to remain the world’s leading centre for financial services’. This is the empty rhetoric and illusion of a Chancellor way out of his depth.

David Yaffe

* All quotations from the Budget speech 23 March 2011.