Catching up with the banks

The banks have been calling the tune for more than three years and they continue to do so, in spite of Chancellor George Osborne’s bid to pre-empt his Budget and impose an additional £800m levy.

There were also wider considerations behind the Chancellor’s move. It offered him cover ahead of his first Treasury exchanges yesterday with Ed Balls, the recently-promoted Shadow Chancellor. It also allowed Mr Osborne to take some of the sting out of the, frankly, obscene bonuses that are being ratified.

While the Chancellor has certainly been more proactive than his Labour predecessor, this levy suggests that it is less likely that Project Merlin will come to fruition – a deal that will see banks rein in bonuses, and increase business lending, in return for slightly less punitive taxes.

It will be disappointing if an agreement is not reached, given that the banking industry per se now has social responsibilities following the benevolence of taxpayers at the height of the credit crunch. The sector’s financial position is also, if Mr Osborne is to be believed, far healthier than previously envisaged.

Yet, while Britain must remain a viable location for banks – they remain the biggest payers of corporation tax in the country – it will be in the interests of the Government, business and the banks if Project Merlin is finalised. In short, the country will be unable to produce the levels of economic growth required to pay off the deficit until mechanisms are in place to help successful small businesses expand, create new jobs and reduce Britain’s over-dependency on the public sector.

Having repeatedly delayed publication of his growth strategy, Mr Osborne should use his forthcoming Budget to announce how he intends to regulate the banks and encourage small companies to flourish. He can begin by announcing whether his newly-acquired £800m should be a deficit down payment, or whether it could yield an even greater return if this money was used to create new enterprise zones that could become catalysts for growth.