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Coalition divides over 50p tax rate and banking reforms before Vickers report

Forget cuts for City pals, Chris Huhne tells Tories, while Vince Cable opposes David Cameron on timing of reforms

Coalition tensions have erupted over the 50p tax rate and the landmark report by Sir John Vickers to force banks to place a firewall between retail operations and their riskier “casino” investment arms.

As Vickers prepared to publish his report early on Monday, ministers were engaged in a tussle over the timing of legislation to implement his reforms, which will cost between £2bn and £10bn.

Vince Cable, the business secretary, wants the changes to be tacked on to the financial services bill, which is currently undergoing legislative scrutiny. David Cameron, who is nervous about jeopardising the City’s pre-eminent position, is keen to move more slowly.

Cable believes the legislation needs to be passed in the next 18 months, while Cameron’s preferred timeframe is closer to the next election in 2015.

The haggling over banking came as Chris Huhne, the energy and climate change secretary, warned George Osborne to “forget” any change to the 50p tax rate if such a move was designed to help the Tories’ friends in the City.

In some of his most outspoken remarks since confronting the chancellor over Tory tactics in the run-up to the AV referendum, Huhne warned that the Conservatives would fail to secure the necessary votes for a change unless there was a “cast iron” economic reason. Huhne told Prospect Magazine: “If the cut in the top rate of tax is just a way of helping the Conservatives’ friends in the City to put their feet up, then forget it. They are simply not going to get the votes in the House of Commons.”

The discussions about banking are taking place behind closed doors, though feelings are still running high. Lord Oakeshott of Seagrove Bay, an adviser to Cable who resigned as the Lib Dem treasury spokesman in the Lords over the lenient treatment of banks, indicated the strength of feeling when he said it would be wrong to leave banking reform out of the financial services bill, which is being used to break up the Financial Services Authority.

Leaving out such reform would be “like a disarmament treaty ignoring nuclear weapons”, according to Oakeshott. “The markets hate uncertainty and now we know that the government is accepting the Vickers proposals there’s an overwhelming argument to proceed as quickly as possible,” the peer added.

The Independent Commission on Banking, chaired by Vickers, will today call for banks to ring fence their high-street banking operations from their “casino” investment banking arms at a cost estimated between £2bn to £10bn. The Lib Dems like to point out that the pledge to set up the commission was the sixth item in the first section of the coalition agreement.

The Vickers commission was charged with finding ways to avoid another taxpayer bailout of the banks and enhancing competition on the high street after Gordon Brown cleared the way for Lloyds to rescue HBOS during the banking crisis even though it broke competition rules. The ICB will hand a major concession to Lloyds – which dominates the high street – by dropping its earlier proposal that it should sell more branches.

While the commission’s proposals are deeply unpopular with the banks, they do not go as far as the total separation Cable proposed in opposition. The business secretary will accept the proposals, to be published three days before the third anniversary of the collapse of Lehman Brothers, but wants them passed into law quickly.

The prime minister, who is instinctively wary of imposing costly changes on the banks as the British economy struggles to recover, has accepted the need for action. A meeting of the “quad” last Wednesday – the prime minister, his deputy, George Osborne and his deputy Danny Alexander, who were joined by Cable – agreed to endorse the commission’s central conclusion.

While Cable is pressing for the changes to be tacked on to the financial services bill, the Treasury is favouring a more cautious approach. It is suggesting a separate bill to implement the Vickers proposals later in this parliament. The prime minister is, if anything, even more cautious.

The Lib Dems are adamant that the legislation must be passed by the time of the next election. They fear that waiting for fresh legislation will allow the banks to regroup and press for further delay.

Danny Alexander highlighted coalition tensions when he took issue with his boss by strongly endorsing Huhne’s view that it would be wrong to abandon the 50p top rate of tax unless changes were introduced at the other end of the scale.

Alexander told Sky News: “I think the last thing we need at a time when everyone in the country is feeling the pinch, where we are asking people across all parts of the economy to help contribute to those efforts to deal with the economic problems, is to have a focus on the tax burden for the wealthiest. Our priority is to reduce the tax burden for people on low and middle incomes. That is why we have an agenda of lifting the income tax threshold.

“That is what we should stick to. I don’t think we should be focusing our effort on the wealthiest. It is right to say that those with the broadest shoulders need to bear their share of the burden at this difficult time.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds