Osborne fires warning shot on bank bonuses

Chancellor George Osborne tried unsuccessfully to veto an EU cap on bonuses last year, arguing it might inflate basic pay (DAVID JONES/PA)

George Osborne, the shadow Chancellor, will call today for the Treasury to step in to prevent retail banks from paying excessive cash bonuses to their senior staff.

If they are to be rewarded, they should be given shares in the business, while the cash that would have been paid them should be used instead to increase the volume of credit in the economy, he will say.

Mr Osborne's proposal applies only to retail banks, not to those operating in the "casino economy" – whose huge bonuses for senior staff are also a target of public anger – and only to "significant" cash bonuses.

Even so, his words are a sign that bankers cannot count on being given an easier ride by a Conservative government than they have been under Labour.

Gordon Brown also reiterated his promise yesterday of a reform of the banking system, in a podcast that was the Prime Minister's first response to Friday's news that the country is officially in the longest recession since records began.

He promised that the recession would be over before the year is out.

In a speech on "Britain's Economic Future", at the west London offices of Reuters news agency, Mr Osborne is expected to say: "Britain is still in this recession because our economy is starved of credit and starved of confidence. We urgently need an injection of both. This is a credit crunch and needs credit solutions to get lending going again to businesses, to save existing jobs and create new jobs."

He will add: "The banks are making billions in subsidised profits. But instead of using these profits to lend more and get credit flowing again, they are threatening to pay out billions in cash bonuses instead. If this happens, it will make the credit crunch worse.

"It is time for the Government to act – and act decisively. I am calling on the Treasury and the Financial Services Authority to combine forces and stop retail banks paying out profits in significant cash bonuses. Full stop.

"Then the cash that would have been paid out should be put onto banks' balance sheets explicitly to support new lending."

In Mr Brown's podcast, posted on the Downing Street website and on YouTube to mark the 80th anniversary of the Wall Street crash, the Prime Minister issued a public warning to credit card companies. "We are announcing measures to make the credit and store card companies clean up their act to get you a fairer deal," he said.

"Sharp practices by lenders – such as hiking interest rates on existing debts without explanation, sending out unsolicited credit card cheques and raising credit card limits without being asked – these sharp practices should end."

Mr Brown pledged that he would press forward with this international cooperation at Thursday's European Council summit in Brussels, when EU leaders "need to plan to further mobilise our resources in support of businesses and jobs."

He added: "We are also continuing to act on unfair and excessive bonuses being paid in the banking system that your money helped to save. We must bring financial markets into closer alignment with the values that everybody holds: hard work, responsibility, integrity and fairness.

"My pledge to you is to make reform of the financial sector a reality and to see Britain's economy return to growth by the turn of the year."

But the former Chancellor Ken Clarke forecast yesterday that any recovery would be "feeble" and that whoever was in government after the election would be preoccupied with nursing the economy back to health.