Pre-Budget report: Some of these are proposals you could have banked on

Published on Wednesday 9 December 2009 21:32

WATCHING the PBR and just listening to the figures – such as an anticipated 78 per cent net debt in 2014-15 – is daunting. Putting off big changes to the public sector until 2011 is a gamble. With some becoming jittery over the health of the UK economy, specifically our public-sector deficit, we will have to wait and see how the markets for UK government bonds respond in the coming days.

For the banks, the Treasury's worst-kept secret of a tax on bonuses came to pass. This is a populist move, set to appease public sentiment. I understand that, but would make a couple of points. One is that, in this most international of industries, differences in pay and bonus systems between jurisdictions mean that individuals and streams of work can easily move out of the UK and into other financial centres, who are only too eager to take business away.

That can lead to significant cuts in the overall tax take for the Treasury (see this week's PWC report showing that financial services contributes over 12 per cent of total Treasury tax income). This is not an attempt to call anyone's bluff – it is just a fact. Financial services is a major industry in the UK, and here in Scotland our industry benefits from London's position as the world's leading financial services centre.

Our banks are already signed up to the G20 and FSA guidelines on long-term structures to non-cash bonuses, and if we continue to bring in additional penalties we need to understand where that might take our business, and the affect that reduction in business may have on our economy.

Another point of course is that the vast majority of people in the industry do not receive bonuses of anything like 25,000. They do a good job, working in an industry that is constantly (if understandably) under attack. And they worry about the long-term effect on their jobs.

Of course the damage done internationally by the industry has to be recognised, and major changes were absolutely in order, but a piecemeal approach is in real danger of adding further damage to the industry in the UK, rather than adding to the many ongoing improvements and changes that are being made right now. The worst scenario would be for the UK government to hit the banks so hard that the industry simply moves out, through drift as much as through dramatic relocations, taking away with it the jobs that would never be involved in the high bonus issue in the first place.

More generally, we note the significantly reduced estimate of government support for banks – down from 50bn to 10bn. Still a huge sum of course, but it shows the work the senior teams at LBG and RBS have done to tackle it.

We note the employers' pension change, and the freeze on higher rate income tax. Given the intensely difficult fiscal position, both moves are perhaps not unexpected. And the national insurance increase is a guaranteed route to add to Treasury coffers.

Overall, the PBR had a firm eye on next year's general election, bashing the bankers and kicking the difficult public-sector decisions into the long grass.

Our concern is for the UK's international competitiveness. Let's hope it is not impaired by these decisions.

&#149 Owen Kelly is chief executive of Scottish Financial Enterprise