We have covered the issue of bank bonuses in previous blogs. See for example: Banking on bonuses? Not for much longer (November 2009); “We want our money back and we’re going to get it” (President Obama) (January 2010); and Payback time (Updated April 2010). But the issue has not been resolved. Despite public outrage around the world over the behaviour of banks that caused the credit crunch and about banks having to be bailed out with ‘taxpayers money’ and, as a result, people facing tax rises and cuts in public-sector services and jobs, bankers’ pay and bonuses are soaring once more. The individuals who caused the global economic crisis seem immune to the effects of their actions. But are things about to change?
The Committee of European Banking Supervisors (CEBS) has confirmed tough new guidelines on bank bonuses applying to all banks operating in the EU. The CEBS’s prime purpose in recommending restricting bonuses is to reduce the incentive for excessive and dangerous risk taking. As it states in paragraph 1 of the Guidelines on Remuneration Policies and Practices:
Whilst institutions’ remuneration policies were not the direct cause of this crisis, their drawbacks, nonetheless, contributed to its gravity and scale. It was generally recognized that excessive remuneration in the financial sector fuelled a risk appetite that was disproportionate to the loss-absorption capacity of institutions and of the financial sector as a whole.
The guidelines include deferring 40–60% of bonuses for three to five years; paying a maximum of 50% of bonuses in cash (the remainder having to be in shares); setting a maximum bonus level as a percentage of an individual’s basic pay; appointing remuneration committees that are truly independent; publishing the pay and bonuses of all senior managers and ‘risk takers’. Although they are only recommendations, it is expected that bank regulators across the EU will implement them in full.
So will they be effective in curbing the pay and bonuses of top bank staff? Will they curb excessive risk taking? Or will banks simply find ways around the regulations? The following articles discuss these issues
Articles
Bankers’ bonuses to face strict limits in Europe BBC News, Hugh Pym (10/12/10)
Bankers’ bonuses to face strict limits in Europe BBC News (10/12/10)
Europe set to link banking bonuses to basic salaries The Telegraph, Louise Armitstead (10/12/10)
Some bankers may escape EU cash bonus limit moneycontrol.com (India) (11/12/10)
Banks to sidestep bonus crackdown by raising salaries Guardian, Jill Treanor (10/12/10)
Bonuses: When bank jobs pay Guardian (11/12/10)
Bank bonuses (portal page) Financial Times
Committee of European Banking Supervisors (CEBS)
CEBS home page
CEBS has today published its Guidelines on Remuneration Policies and Practices (CP42) CEBS news release (10/12/10)
Guidelines on Remuneration Policies and Practices (10/12/10)
Questions
- What are main objectives of the CEBS guidelines?
- Assess the arguments used by the banking industry in criticising the guidelines.
- In what ways can the banks get around these new regulations (assuming the guidelines are accepted by EU banking regulators)?
- What conditions would have to met for a remuneration committee to be truly independent?
- How likely is it that countries outside the EU will adopt similar regulations? How could they be persuaded to do so?
A two-week international climate change summit opened in Cancún, Mexico, on 29 November. But will the talks make any progress in tackling global warming? Will mechanisms be put in place to ensure that the previously agreed ceiling of 2°C warming is met?
After the largely unsuccessfuly talks in Copenhagen a year ago, hopes are not high. But a likely rise in global temperatures of considerably more than 2°C could have disasterous global consequences. Indeed, new evidence suggests that even a ceiling of 2°C may be too high and that, as temperatures rise towards that level, domino effects will start that may become virtually unstoppable. As Andrew Sims in the Guardian article notes:
This is the problem. Once the planet warms to the point where environmental changes that further add to warming feed off each other, it becomes almost meaningless to specify just how much warmer the planet may get. You’ve toppled the first domino and it becomes virtually impossible to stop the following chain of events. Honestly, nobody really knows exactly where that will end, but they do know it will end very, very badly.
The following podcasts and articles look at the importance of reaching international agreement but the difficulties of doing so.
Podcasts and webcasts
Post-Copenhagen, a Cancun compromise? Reuters (30/11/10)
Climate change ‘Dragons’ Den’: What are the options? BBC News, Roger Harrabin (29/11/10)
Cancun climate change summit seeks new emissions deal BBC News, David Shukman (3/12/10)
Can nudge theory change our habits? BBC News, Claudia Hammond (29/11/10)
Articles
Cancún climate change conference 2010 Guardian, (portal)
Q&A: Cancún COP16 climate talks Guardian, Shiona Tregaskis (8/10/10)
72 months and counting … Guardian, Andrew Simms (1/12/10)
Cancún climate talks: In search of the holy grail of climate change policy Guardian, Michael Jacobs (29/11/10)
Cancún and the new economics of climate change Guardian, Kevin Gallagher and Frank Ackerman (30/11/10)
Facing the consequences The Economist (25/11/10)
UN climate talks low on expectation BBC News, Richard Black (29/11/10)
Expect little from Cancun talks The Star (Malaysia), Martin Khor (29/11/10)
Don’t let us down: UN climate change talks in Cancun Independent, Jonathan Owen and Matt Chorley (28/11/10)
Cancun and Climate: Government Won’t Act, But Business Will Time Magazine: The Curious Capitalist, Zachary Karabell (28/11/10)
At Global Climate Change Talks, an Answer Grows Right Outside Huffington Post, Luis Ubiñas (29/11/10)
Cancun climate change talks: ‘last chance’ in the snakepit The Telegraph, Geoffrey Lean (29/11/10)
Climate Change Talks Must Deliver After Record Weather Year Scoop (New Zealand), Oxfam (29/11/10)
World climate talks kick off in Cancun DW-World, Amanda Price and Axel Rowohlt (29/11/10)
On international equity weights and national decision making on climate change Vox, David Anthoff and Richard S J Tol (29/11/10)
Climate treaties all bluster, no bite The Age, Dan Cass (10/12/10)
Conference website
UNFCCC COP16/CMP6: Mexico 2010 Official site
Questions
- What would count as a ‘successful’ outcome of the climate change talks? Why might politicians interpret this differently from economists?
- What can governments do to internalise the externalities of greenhouse gas emissions?
- What insights can game theory provide into the difficulties of reaching binding climate change agreements?
- What are likely to be the most effective mechanisms for getting people to adapt their behaviour?
- Can nudge theory be used to change our habits towards the environment?
- Explain the use of equity weights in judging the effects of climate change. Are they a practical way forward in devising environmental policy?
On November 11, the government published a White Paper on welfare reform. Central to the proposals is the replacing of the range of out-of-work benefits, housing benefit and tax credits with a single universal benefit. The system will be introduced for new claimants in 2013 and for those currently on benefits sometime after 2015.
When the unemployed find work, the benefit will be withdrawn at a rate of 65p of each £1 earned. At present, because of the complexity of the system, some claimants on multiple benefits can find that the withdrawal rate is almost 100%. When income tax is added in, the tax-plus-lost-benefit rate does sometimes exceed 100%. Thus some people find themselves in a poverty trap, whereby it’s not worth getting a job. It’s financially benefical to stay on benefits.
The other crucial element of the proposal is to deny people benefits who turn down a legitimate job.
a. Failure to meet a requirement to prepare for work (applicable to jobseekers and those in the Employment and Support Allowance Work-Related Activity Group) will lead to 100 per cent of payments ceasing until the recipient re-complies with requirements and for a fixed period after re-compliance (fixed period sanctions start at one week, rising to two, then four weeks with each subsequent failure to comply).
b. Failure to actively seek employment or be available for work will lead to payment ceasing for four weeks for a first failure and up to three months for a second.
c. The most serious failures that apply only to jobseekers will lead to Jobseeker’s Allowance payment ceasing for a fixed period of at least three months (longer for repeat offences). Actions that could trigger this level of penalty include failure to accept a reasonable job offer, failure to apply for a job or failure to attend Mandatory Work Activity.
The following podcasts and articles look at the details of the proposals and discuss their merits and drawbacks,
Podcasts and webcasts
Not going to work if you can is ‘not an option’ ITV, part of speech by Iain Duncan Smith (11/11/10)
IDS: Staying on benefits ‘irrational choice’ BBC Today Programme, Chris Buckler, Iain Duncan Smith Smith (11/11/10)
Iain Duncan Smith unveils new benefits system BBC News (11/11/10)
Welfare reform success ‘far from certain’ BBC Today Programme, Norman Smith (11/11/10)
Articles
Benefits system overhaul ‘to make work pay’ BBC News (11/11/10)
At-a-glance: Benefits overhaul BBC News (11/11/10)
Benefits explained: A basic guide to entitlements BBC News (11/11/10)
Is welfare reform doomed to fail? BBC News, Norman Smith (11/11/10)
A bold and principled approach to benefits Telegraph (11/11/10)
Reshaping the benefits system The Economist, Blighty blog (11/11/10)
Unemployment benefits shake-up ‘a fair deal’ Independent (11/11/10)
Tougher welfare sanctions spark ‘destitution’ warnings Independent (11/11/10)
Iain Duncan Smith: it’s a sin that people fail to take up work Guardian, Patrick Wintour, Randeep Ramesh and Hélène Mulholland (11/11/10)
Preacher Duncan Smith aims for holy grail of welfare policy Guardian, Randeep Ramesh (11/11/10)
Documents, official information and data
Universal Credit: welfare that works Department for Work and Pensions, Links to White Paper (11/11/10)
Benefits and financial support Directgov
Economic and Labour Market Review (see tables in Chapters 2 and 6), National Statistics
Questions
- Explain what is meant by the ‘poverty trap’ (or ‘welfare trap’).
- Summarise the reforms to benefits proposed in the White Paper.
- Examine whether the Coalition government’s proposal for a universal benefit will lead to greater fairness.
- Will a withdrawal rate of 65% provide a strong incentive for people out of work to take a job?
- Why may some be paying a combined tax-plus-lost-benefit rate of 76%?
- Why is there an inherent trade-off between making work pay (and thus eliminating the poverty trap) and keeping the cost of welfare benefits down? Would reducing the level of benefit be an appropriate answer to this trade-off?
- One aim of the benefits reform is to reduce unemployment. What type of unemployment is likely to be affected?
- Find out the current level of unemployment and the level of job vacancies and, in the light of this, comment on the likely effectiveness of the policy in reducing unemployment (a) shortly after the new system is introduced; (b) over the longer term.
Lord Browne of Madingley, the former chief executive of BP, has been conducting a review of higher education and its funding in England. The report was published on Tuesday 12 October. At present, student fees are capped at £3290 per year. From the academic year 2012/13 Browne recommends that the cap be removed, allowing universities to charge what they like (or what the market will bear). It is anticipated that, under these circumstances, universities would typically charge around £7000 per year, but some universities could charge much more – perhaps more than £12,000 for courses in high demand at prestigious universities. Universities would receive reduced funding from the government, through a new Higher Education Council, and the funding would vary by subject, with ‘priority’ subjects, such as science, technology and medicine, being given more. It is anticipated that total government funding for teaching to universities in England would be only just over 20% of the current level.
Browne recommends that universities that charge more than £6000 a year would have to pay a proportion of the extra income to the government as a levy for supporting poorer students. Those that charge more than £7000 would have to demonstrate that they were widening access.
Students would not need to pay any of the fees upfront (although they could do if they chose). Instead, they would receive a loan to cover the full fee. They would also be eligible for an annual loan of £3750 to cover living expenses. In addition, students from households with incomes below £25,000 would be eligible for a cost-of-living grant of £3250 on top of the loan. with household incomes above £25,000 the size of this grant would diminish, and disappear with household incomes above £60,000.
Students would begin paying back their loan after they graduate and are earning more then £21,000 per year (the current figure is £15,000). The amount that graduates would be required to pay back would rise sharply as earnings increase. For example, with an income of £30,000 per year, the graduate would be required to pay back £68 per month; with an income of £60,000 the monthly payment would be £293. Interest would accumulate on the unpaid balance at a rate equal to inflation plus 2.2%. For those earning below £21,000 threshold, it would accumulate at the rate of inflation only.
Not surprisingly, there have been mixed reactions to the recommendations from universities. Some universities have argued that competition will mean that they would not be allowed to charge the approximately £7000 fee that would be necessary to make up for the reduction in direct government funding. Predictions of closures of university departments or closures or mergers of whole universities are being made. Other universities have welcomed the ability to charge significantly higher fees to help their financial position.
The reactions from prospective students have been less mixed. With students starting in 2012 set to graduate with debts in excess of £30,000 and many with much higher debts, the Browne Review report makes bleak reading.
So who are the gainers and losers and what will be the benefits to higher education? The following articles look at the issues.
Note that the government has subsequently decided not to follow Browne’s recommendations fully. Annual fees will be capped at £9000 and the government expects that fees will typically be £6000.
Articles
Lord of the market: let competition and choice drive quality Times Higher Education, Simon Baker (14/10/10)
In the shake-up to come, no guarantees for anyone Times Higher Education (14/10/10)
Browne review: Universities must set their own tuition fees Guardian, Jeevan Vasagar and Jessica Shepherd (12/10/10)
Cable ‘endorses’ tuition fee increase plan BBC News (12/10/10)
Browne review at a glance Guardian, Jessica Shepherd (12/10/10)
Foolish, risky, lazy, complacent and dangerous NUS news, Aaron Porter (12/10/10)
Student debt: the £40k question for Lord Browne (includes two videos) Channel 4 News, Aaron Porter (8/10/10)
Blind spots in education proposals Financial Times letters, Philip Wales (14/10/10)
Tuition fees: securing a future for elitism Guardian, comment is free, Carole Leathwood (13/10/10)
NUS Scotland president Liam Burns condemns English tuition fee plans Courier (13/10/10)
Lord Browne review: round-up of reaction Telegraph (12/10/10)
University of Leeds responds to Lord Browne’s review of university funding Academia News (12/10/10)
Browne Review: Scrap university fees cap Chemistry World (12/10/10)
Invisible hand of market takes hold Financial Times (12/10/10)
A personal perspective on the Browne Review Progress Online, David Hall (12/10/10)
Tuition fee increases will be capped, says Nick Clegg BBC News (24/10/10)
Webcasts and podcasts
Students to face ‘unlimited fees’ BBC News, Nick Robinson (12/10/10)
Lord Browne interviewed by Nick Robinson BBC News (12/10/10)
Aaron Porter and Steve Smith on university funding and fees BBC Daily Politics (12/10/10)
University proposals create ‘two-tier system’ BBC Today Programme, Professors Roger Brown and Nicholas Barr (13/10/10)
The report and the NUS and IFS responses
Securing a sustainable future for higher education Independent Review (12/10/10)
Browne Review home page Independent Review
Initial Response to the Report of the Independent Review of Higher Education Funding and Student Finance (the Browne Review) NUS, Aaron Porter (10/10/10)
Graduates and universities share burden of Browne recommendations Institute for Fiscal Studies (12/10/10)
Questions
- To what extent will the proposals in the Browne review result in a free market in university courses?
- To what extent will competition between universities drive up teaching quality?
- Identify any market failures that might prevent an efficient allocation of university resources?
- To what extent will Browne’s proposals result in a fair allocation of resources between graduates and non-graduates, and between those who graduate under the new system and those who graduated in the past?
- Identify any externalities involved in university education. In what ways might these externalities be ‘internalised’?
In his speech to the Conservative Party conference, the Chancellor of the Exchequer, George Osborne, announced that from 2013 child benefit would not be paid to any household where one or both parents had a high enough income to pay tax at the 40% rate. This means that if either parent earns over £43,875, they will receive no child benefit for any of their children. If, however, neither parent pays tax at 40%, then they will continue to receive it for all their children. Thus if both parents each earned, say, £43,870, giving a total household income of £87,740, they would continue to receive child benefit.
Not surprisingly, people have claimed that it is very unfair to penalise households where one person earns just over the threshold and the other does not work or earns very little and not penalise households where both parents earn just below the threshold. So what are the justifications for this change? What are the implications for income distribution? And what are the effects on incentives? Are there any people who would be put off working? The following articles look at these questions.
Articles
How benefit cuts could affect you Guardian, Patrick Collinson and Mark King (5/10/10)
Q&A: Child benefit measures will be messy Financial Times, Nicholas Timmins (5/10/10)
Cameron Defends Cut in Child Benefits for Stay-at-Home Mothers Bloomberg Businessweek, Thomas Penny and Kitty Donaldson (5/10/10)
Three million families hit by child benefit axe Telegraph, Myra Butterworth (5/10/10)
George Osborne’s child benefit plans are characterised by unfairness Telegraph letters (5/10/10)
Child benefit: case study Telegraph, Harry Wallop (5/10/10)
Child benefit cuts ‘tough but necessary’ say ministers BBC News (4/10/10)
Child Benefit Changes – Should Parents Take a Pay Cut? Suite101, John Oyston (5/10/10)
No such thing as an easy reform BBC News blogs: Stephanomics, Stephanie Flanders (5/10/10)
Child benefit saga: Lessons to be learned BBC News blogs: Stephanomics, Stephanie Flanders (6/10/10)
Speech
Higher rate taxpayers to lose child benefits from 2013: extracts from speech BBC News, Nick Robinson (5/10/10)
Our tough but fair approach to welfare Conservative Party Conference Speech, George Osborne (4/10/10)
Data and information
Child Benefit: portal HMRC
Child Benefit rates HMRC
Income Tax, rates and allowances HMRC
Questions
- Assess the fairness arguments for not paying child benefit to any household where at least one person pays tax at the 40% rate.
- For a family with three children, how much extra would a parent earning £1 below the threshold have to earn to restore their disposable income to the level they started with?
- What incentive effects would result from the proposals? How might ‘rational’ parents respond if one parent now stays at home and the other works full time and earns over £43,870, but where both parents have equal earning potential?
- What income and substitution effects are there of the proposed changes?
- Discuss other ways in which child benefit could be reformed to achieve greater fairness and save the same amount of money.
- What are the arguments for and against tapering the reduction in child benefit as parents earn more?