Are bankers' bonuses soaring?

19 June 2013

This article has been updated. See below.

Bank regulation and bonuses were the topic of the day at Prime Minister's Questions:

Ed Miliband: "The fact is that bonuses in the City were up by 64% in April—and why? Because the Prime Minister has cut the top rate of income tax from 50p to 45p. People took their bonuses in April, and were given a massive tax cut as a result."

David Cameron: "In 2012-13, City bonuses will be 85% lower than they were in 2007 and 2008, when those two [Miliband and Balls] were advising, or working in, the last Government, and had responsibility for regulating the City."

The Daily Mail also took an interest, reporting that: "Bonuses in the City soar by 64%: Miliband accuses government of allowing bankers to delay payouts until top rate of tax was cut".

So are City bonuses on the rise? A quick look to the latest Office for National Statistics (ONS) Labour Market figures reveals where Miliband's numbers are from. The Average Weekly Earnings series provides figures for bonuses, broken down by industry.

There's actually no measure of bonuses for "the City". The closest we can get is for "Finance and Business Activities". Sure enough, the data shows that April 2013 saw an unprecedented jump in bonuses for this sector - 64% on March as Ed Miliband claims, although these are only nominal figures:

Why the rise?

Ed Miliband suggests it's down to cutting the 50p top rate of tax to 45p, as those receiving bonuses could avoid the higher rate by waiting for the 50p band to expire in April. While there's nothing in the data that would allow us to establish the reasons behind why people might move their own bonus payments, the explanation offered by the Labour Leader is very plausible. The ONS themselves reported in their latest release that:

"Some businesses responding to the Monthly Wages & Salaries Survey have reported that they paid bonuses in March last year but in April this year."

The Office for Budget Responsibility (OBR) also alluded to this, although suggested the effect wasn't as large as the Government might have feared:

"Financial bonuses may have fallen by less than we expected and fewer people than we thought may have pushed income into 2013-14 to take advantage of the cut in the highest income tax rate to 45p."

So to an extent, Ed Miliband is taking a fairly unusual month to make his headline "64%" drop, although it does highlight the effect that the withdrawal of the 50p tax rate had.

That's not the City

Unfortunately, this measure isn't very precise. While it might be tempting to reduce this to "bankers' bonuses", the reality is that much more than banking is being covered here. 'Finance and Business Services' includes anything from real estate, to scientific or technical activities, to administrative services.

A better measure for the banking sector would involve stripping out these other industries. There is one way of doing this - the ONS publish a separate dataset on purely "Financial and Insurance Activities". Unfortunately, we can only get annual figures that are comparable, and again these aren't adjusted for inflation:

This is perhaps a clearer picture of how the finanical sector has fared in recent years when it comes to bonuses.

What isn't clear, however, is where the Prime Minister's "85%" drop from 2007 and 2008 comes from. The figures do show that 2007/08 was the 'heyday' for large cash-terms bonuses for bankers but the drop doesn't look as steep as David Cameron is making out.

We've contacted Downing Street to get a source but no one was available to check it out. We'll update when we learn more.

The Prime Minister's source

We've now learnt via Downing Street that the Prime Minister's claim comes from the Centre for Economics and Business Research (CEBR). Last Autumn they released their latest estimates and forecasts for 'City bonuses' dating back to 2003 and up to 2017 (shown on the right).

The 85% comes from comparing the total 'bonus pool' for 'City jobs' since 2008. In 2008 (ostensibly the calendar year), a total of £11.6 billion was estimated to have been paid out, compared to forecasts of just £1.6 billion in 2013.

That's a far steeper drop than implied by the ONS figures. To see why they vary we need to consider the differences between the datasets.

One key difference here is that while the ONS data is updated to April 2013, the CEBR estimates are still those made in Autumn last year, so we might expect future revisions to the CEBR's forecasts to account for the unusual activity in 2013, amongst other things.

Another is that the ONS estimates are obtained via a survey, while the CEBR explained to Full Fact that its estimates and forecasts come from their own internal modelling which utilises some of the same ONS data.

Crucially here, the CEBR's definitions differ from the ONS's. While the average bonus figures take a broad definition of "finance and business services", or even "financial and insurance activities", the CEBR try to detect only "City-type jobs", defined as:

"jobs in the wholesale financial service sector in the whole of London. This is the conventional definition and includes jobs in areas like Canary Wharf and excludes jobs in the City that are not in the wholesale financial services sector (though some lawyers and accountants who work exclusively on City deals are included)."

So we're left in a difficult position. On the one hand the CEBR's definition seems more relevant to the conventional understanding of what "the City" is. On the other hand the ONS data is more up-to-date, clearly accounting for the recent deferral of bonuses, and is publicly available in great detail.

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