HSBC hands allowances to hundreds of bankers to avoid EU bonus cap

Britain's biggest bank awards staff 'fixed pay allowances' to side-step restriction on bonuses imposed by Brussels

A defiant HSBC is handing its chief executive, Stuart Gulliver, allowances worth £32,000 a week – on top of his £1.2m salary – to get around the EU's cap on bonuses, in a move that is expected to be replicated by the other high street banks.

HSBC became the first UK bank to reveal how it will sidestep the pay restrictions imposed by Brussels, as it further fuelled the debate over City pay by also revealing that 239 of its bankers received more than £1m last year. Gulliver, the boss of Britain's biggest bank, hit out against the new rules, which restrict bonuses to 200% of salary even with shareholder approval, but the TUC accused HSBC of "soaraway boardroom greed".

The £1.7m "fixed pay allowance", paid in shares every three months on top of Gulliver's salary, will ensure he is paid a minimum of £4.2m a year, up from £2.5m now. Similar allowances, in shares that cannot be sold for five years, are being handed to 111 top bankers at HSBC, while another 554 are to be handed extra payments in cash.

The move prompted Labour to call for a repeat of its bonus tax while the Robin Hood Tax campaign said the payments bolstered its argument for a tax on financial transactions.

"HSBC haven't so much circumvented rules on bonuses as driven a coach and horses through them. The only way to rein in bankers' remuneration is to make banks pay their fair share to society," a Robin Hood Tax campaigner said.

The TUC general secretary, Frances O'Grady, said: "It would be great if banks put the same effort into lending to small businesses and investing in infrastructure as they do to getting round EU rules on boardroom bonuses."

HSBC's response to the Brussels bonus cap was contained in its annual report, which showed profits rose 9% to $22.5bn (£13.6bn) in 2013, when its bonus pool for staff rose 6% to $3.9bn.

A year ago HSBC made $20.6bn profits and paid 204 of its staff more than £1m, although its shares were among the biggest fallers in the FTSE 100 index of blue chip shares on disappointment that the profit rise was not greater.

However, the rise in bonuses at HSBC was in contrast to Barclays, which increased them by 10% even though its profits fell 32%. HSBC said its dividends to shareholders were up 11% while staff costs were down 6%. Barclays is among the banks – including the bailed-out Lloyds Banking Group and Royal Bank of Scotland – that are expected to follow HSBC by handing out allowances to top staff as they respond to the EU cap on bonuses, which affects payouts to be made this time next year.

The disclosures by HSBC came as the pay-setting committee of RBS prepared to meet to confirm the bonus pool for its 120,000 staff. The size of the pot, expected to be £500m, will be announced on Thursday, when the 81% taxpayer-owned bank is expected to report losses of £8bn.

"We don't want to do this at all," said Gulliver, whose total pay and bonuses in 2013 were £8m, up from £6.3m the previous year. He stressed his maximum potential pay each year would fall to £11.4m from £13.8m to counteract the rise in the fixed part of his pay. Gulliver, who started his career at HSBC more than 30 years ago as a currency dealer, also receives £79,000 for the use of cars in Hong Kong and accommodation there worth £229,000.

George Osborne is taking legal action against the Brussels cap and Gulliver said the bank would revert to its previous schemes if this was successful.

"We had a compensation plan here that the shareholders liked but sadly because of the EU directive we've had to change. This isn't something we would have wanted to do … It's much more complicated," Gulliver said.

The Bank of England's Andrew Bailey has warned the cap could lead to a £500m rise in fixed salary costs at the big banks and make them riskier. Andrew Tyrie, the chairman of the Treasury select committee who also chaired the parliamentary commission on banking standards, said: "A crude bonus cap does nothing to incentivise higher standards. What we need is a fundamental reform of the bonus culture including much longer deferral and much greater scope for clawback, as the banking commission proposed."

HSBC – which after a £1.2bn fine in 2012 is subject to tough restrictions imposed by the US authorities – risked further controversy over pay by revealing that its chairman, Douglas Flint, who in the past has not received bonus payments, is line for new share awards because of his role in "intense regulatory change". The move could allow Flint to receive maximum pay of £4.6m a year, up from £2.4m.

Gulliver has taken the axe to costs since being promoted to chief executive three years ago, cutting 40,000 roles and pulling out of 63 countries or businesses. The bank – one of the highest dividend payers in the FTSE 100 – said that the government's bank levy on its balance sheet had cut its dividend by $0.05 per share as it had cost $904m last year, while it had set aside another $395m for misselling payment protection insurance and products to small businesses. From the start of this year, the bank has changed the way it pays the staff in its retail division to remove the link between sales and bonuses, with a view to cutting misselling bills.

Despite the controversy over the cap, Gulliver gave a clear commitment to remaining in the UK, although the bank generates less than 10% of its profits here. Some 70% of its business is generated in Hong Kong and the Asia-Pacific region, and Gulliver said that 208 bankers in London would receive the three-monthly allowances compared with 395 outside the UK. It employs 254,000 people, 46,000 of them in the UK.

In total the bank has 1,318 employees whose bonuses must be capped under the new rules – those regarded as taking and managing risks – but just over 650 will receive no extra allowances.

In more than 600 pages of documents, the bank also gave further breakdowns of staff pay, revealing for the first time the number of staff paid more than €1m – some 330 – and that 192 bankers defined as key staff received an average pay deal of $1.5m (£900,000).

Barclays has told staff affected by the cap that they will receive the payments, called role-based allowances, each month alongside their salaries but has yet to disclose how much its chief executive, Antony Jenkins, will receive. Jenkins has turned down a potential bonus of £2.7mon top of his £1.1m salary but still stands to receive at least £4m from long-term share plans due to be released next month.

The new boss of RBS, Ross McEwan, has waived his payout. António Horta-Osório, the boss of Lloyds, is receiving a £1.7m bonus on top of his £1m salary, a £500,000 pension contribution and a payout from a long-term incentive plan that could total £2.9m – half the potential sum – when it is formally revealed next month.

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Royal Bank of Scotland set to report up to £8bn losses for 2013

Unscheduled trading statement to reveal bank, 81% owned by taxpayer, hit by extra £2.9bn over conduct and mis-selling issues

Royal Bank of Scotland is facing a row over its pay policies after a fresh hit for legal bills and mis-selling scandals put the bailed-out bank on track to report up to £8bn in losses for 2013.

Even though its nine-strong top management team said they would waive any bonuses, given the scale of the losses, the bank gave the strongest indication yet it would sidestep the EU bonus cap by asking shareholders' permission to pay bonuses worth 200% of salaries – double the size of the restriction imposed by Brussels.

Chairman Sir Philip Hampton insisted RBS had to keep paying competitively. He spoke at a hastily convened conference call caused byan unscheduled trading statement in which the 81% taxpayer-owned bank revealed it would incur an extra £3bn of losses for conduct-related matters over the US sub-prime mortgage crisis and mis-selling o fpayment protection insurance and interest rate swaps.

The additional costs come on top of £4.5bn losses from the creation of a mini-bad bank inside RBS and, according to estimates, could drive the bank to losses of around £8bn by the time it reports full-year results at the end of next month.

If the loss is on that scale it would mean RBS has incurred more than £40bn of losses since its 2008 bailout – almost as much as the £45bn taxpayers pumped in to rescue it.

The move appears to push back any prospect of chancellor George Osborne selling off any of the taxpayers' stake, even as he prepares to press ahead with the sale of Lloyds Banking Group as soon as next month.

The extra £3bn includes £1.9bn for various claims and past conduct issues facing the bank – most likely the potential cost of a settlement over sub-prime mortgages in the US – plus £465m for PPI mis-selling, another £500m for interest rate swap mis-selling, and another unspecified £200m. The latest costs bring the total PPI bill to £3.1bn and swaps mis-selling to £1.3bn.

Ross McEwan, who took over as RBS chief executive on 1 October from Stephen Hester, had already said he would not take a bonus for 2013 and now the rest of his eight-strong executive committee will also forgo their multimillion-pound payments.

The New Zealander, promoted from running the retail bank after Hester's sudden departure, said the scale of the costs incurred from past mistakes had not been expected at the time of the bailout.

"This is about leadership. I know this team is not responsible for the past mistakes but we are the leaders running the company now and have to show we take accountability seriously," he said, in reference to the move to block bonuses for the top management team.

But the bank may face hurdles in its plans – still being finalised – over pay in light of the EU bonus cap that comes into effect for bonuses paid this time next year. The cap restricts bonuses for the most senior staff to 100% of salary, but can be lifted to 200% of salary if shareholders approve.

Hampton said: "We obviously need to be sensitive to our shareholding structure and the political and media issues around that, but the ability to pay competitively we think is fundamental to the prospect of getting to where we need to be."

Labour has already called on Osborne to use the state shareholding to stop such a request if it is made and UK Financial Investments, which looks after the taxpayer stake, is thought to be considering abstaining if it is put to the annual meeting in May.

Lord Oakeshott, the Liberal Democrats' former Treasury spokesman in the Lords, called any such bonus proposals "preposterous" and called on the government to nationalise the Edinburgh-based bank.

"Taxpayers are having to sign a never ending stream of blank cheques to cover disastrous long-term management at RBS while the bank's still failing to lend," Oakeshott said.

Andrew Tyrie, chairman of the Treasury select committee, stressed the need for the bank to lend to small business customers. "RBS is still paying a heavy price for past misconduct. So too are its customers and taxpayers. It is crucial for the recovery that lending, particularly to SMEs, is not constrained as a result," Tyrie said.

Payments of as much as £5.6m promised to Hester will not be affected.

McEwan said the losses related to a period at the time of its bailout when RBS was the biggest bank in the world. "The scale of the bad decisions during that period means that some problems are still just emerging. The good news is we are now a much stronger bank and can manage these costs while still supporting our customers," he said.

The unexpected statement came at 4pm following a board meeting and 30 minutes before the market closed, leaving the shares closed 2% lower at 332p – representing a £15bn loss on the taxpayers' stake.

Nathan Bostock, who has quit as finance director to join Santander, said there would be a "substantial loss" but would not be precise.

The announcement was made to coincide with a deadline by US regulators to file the results of one of its US arms.

Standard & Poor's said the bank's credit rating was unaffected but the key capital ratio will be among the lowest of its peers.

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Sale of Lloyds Banking Group stake left Treasury £230m down

National Audit Office has scotched claim by George Osborne that Treasury made a profit of £60m from selling Lloyds shares

Taxpayers took a hit of at least £230m through the sale of a stake inLloyds Banking Group, the National Audit Office said on Wednesday, in a report that contradicts government claims that it a made a profit on the privatisation of the bailed-out institution.

On the day the 4.2bn shares in Lloyds were sold in September George Osborne tweeted: "Confirm have sold 6% of Lloyds shares at 75p. Profit for taxpayer & important step in plan to get their money back and repair economy."

The independent state auditor cast doubt upon the claim that a profit of £60m had been secured from selling off 6% of the state-owned stake in the bank, after it examined the borrowing costs incurred by the government when it bailed out the banks in 2008.

"Taking account of the cost of borrowing the money to buy the shares, there was a shortfall for the taxpayer of at least £230m," the NAO said.

Even so, it concluded that the transaction represented value for money. It said the Treasury should take the cost of financing the bailout into account when deciding whether to hold on to shares in Lloyds rather than selling them. The government is yet to sell off any of its 81% stake in Royal Bank of Scotland.

Its calculations could suggest that if the remaining 33% stake in Lloyds were sold off at a similar price and in a similar way then the loss to the taxpayer on the bailout could amount to £1.5bn.

The NAO's calculations show the Treasury could have claimed a higher profit of £120m – using a lower average buying price of 72.2p a share rather than 73.6p – by taking into account fees paid by Lloyds to the Treasury.

The chancellor has said that the next tranche of Lloyds shares is likely to be sold off to the public. The NAO said the move was ruled out in September because it would have taken six months to conduct a share sale this way and might not have produced the best return for taxpayers.

The NAO report, which backs the decision to sell the Lloyds shares and the way the sell-off was conducted, sheds some light on the processes considered by UK Financial Investments, which looks after taxpayer stakes in the bailed-out banks.

The financial secretary to the Treasury, Sajid Javid, focused on the NAO conclusion that the sale was value for money. He said: "The proceeds from the sale have reduced the national debt by over half a billion pounds but, as the NAO also rightly points out, the country has had to pay a high price for the extra debt it has taken on because of the financial crisis."

The NAO said that during 2012 and 2013 UKFI was approached by three potential purchasers and informal discussions took place but no deal concluded. Instead UKFI had concluded a sale to institutional investors was the best option.

Executives from UKFI have previously revealed that they ruled out selling the stake at a price above 75p because demand would have fallen away and it would have required selling 60% of the shares to institutions seen as shorter-term investors, such as hedge funds.

Such short-term investors ended up with 20% of the shares sold after approval from the chancellor. The NAO attempted to analyse if the shares that had been bought had been quickly sold on and found that while one institution had reduced its shareholding by about 10%, there had been no change in two institutions' holdings, and one institution had increased its holding by about 20%.

Amyas Morse, head of the NAO, said: "The programme of sales of the taxpayers' holdings of bank shares has got off to a good start. Sale options were reviewed thoroughly and UKFI looks to have got its timing right. The sale took place when the shares were trading close to a 12-month high and at the upper end of estimates for the fair value of the business".

António Horta-Osório, the boss of Lloyds Banking Group, was handed a £2.3m share bonus last month because of the rise in the bank's shares which closed last night at 76p.

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George Osborne announces fresh attack on welfare budget

In challenge to Labour, chancellor tells MPs billions will need to be shaved from welfare to avoid deeper departmental cuts

A fresh attack on Britain's welfare budget was announced by George Osborne as he told MPs he would prefer to cut benefits than slash the size of the state to its smallest since the 1940s.

In a calculated challenge to Labour in the runup to the next election, the chancellor said many more billions would need to be shaved from welfare to avoid deeper cuts in spending by Whitehall departments.

"Welfare spending can't be excluded from the difficult decisions," the chancellor told a hearing of the Treasury select committee into last week's autumn statement. This showed that the government's plan to balance its books by 2018-19 would require an acceleration in the cuts to departmental budgets from 2.3% in the current parliament to 3.7% between 2016 and 2019.

The Office for Budget Responsibility, charged with forecasting the economy and the public finances for the Treasury, said that would leave day-to-day spending by government at its smallest share of national output at least since modern records began in 1948. On current plans, cuts to government departmental budgets will be 8% by the end of the current financial year and reach 20% by 2018-19.

"That assumption is based on an erroneous assumption about what the political system would do," Osborne said as he announced that next year's budget would be held on 19 March. "On current plans that is what it shows, but the next government will want to undertake further reductions in the welfare budget. If it does that you don't reach the 1948 number."

The chancellor sees welfare as one of the defining political issues at the next election in 2015, and believes his hardline approach will create difficulties for the Labour opposition.

While refusing to put a precise number on the size of the welfare cuts, Osborne accepted they would run into "many billions" of pounds. The Institute for Fiscal Studies (IFS), the UK's leading thinktank on government spending, has said welfare cuts or tax increases totalling £12bn will be needed to avoid a stepping-up of the cuts to government departments.

Osborne said he agreed with the IFS analysis, adding that politicians had to be honest with the public. The chancellor said his priority was to protect spending on education and science. "We shouldn't be cutting these things because we are not prepared to deal with the welfare budget.

"I don't think all the savings need and should be made within the departments. I think we should make a balanced judgment about where government spends its money and, yes, we have got to make difficult decisions to save money further in Whitehall but we should accompany that with savings in the welfare budget."

In a two-hour appearance in front of backbench MPs, Osborne made it clear that he would call time on the government's Help to Buy subsidies for house purchases after three years and denied that the scheme was helping to create a bubble in the property market.

The committee's chairman, Andrew Tyrie, asked the chancellor to respond to allegations that he was "adding vodka to the punch bowl just as the party gets going" by giving state-backed guarantees for the first 20% of home loans up to a value of £600,000.

But Osborne said the Bank of England's new Financial Policy Committee had been given the powers to "take the punch bowl away" if the recent recovery in the property market threatened to get out of hand.

"The early evidence from Help to Buy is that three quarters of those taken out are not living in London and the south-east," said the chancellor. "The average house purchase that they have been looking for is £160,000 – that's below the national average. In other words, it is dealing with exactly the families we want it to help."

Challenged over falling living standards in the current parliament, Osborne blamed the "calamity" of 2008-09, when the UK suffered its "worst recession in modern history and the biggest banking crisis in its entire history".

Although figures from the Office for National Statistics show that inflation has continued to erode living standards since the recession ended in 2009, Osborne said: "The country is poorer as a result of what happened in 2008-09."

Meanwhile the new head of sovereign debt ratings at Fitch said the agency would not be in a hurry to upgrade Britain's debt rating to the coveted AAA.

In an interview James McCormack said the economic rebound this year had been "a pleasant surprise for everyone" but settling questions over its sustainability enough to win back the top-notch rating was "going to take some time".

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Economic recovery is based on repeating the sins of the past

Pick-up in the economy is not the result of sticking to austerity as chancellor claims – it's what you get when you keep interest rates low

The growth numbers were revised higher. Public borrowing figures look less atrocious than they did at the time of the March Budget. Hard-pressed households will welcome having a pound a week knocked off their domestic energy bills as winter sets in.

For George Osborne, it was a blessed relief to be able to upgrade his forecasts, something he has not been able to do since moving in to the Treasury in 2010. But he was pushing his luck when he claimed that the pick-up in the economy was the reward for sticking to austerity.

For a start, the government has not stuck to the plan but has eased the squeeze in response to an under-performing economy. Nor is it the case that growth has resulted from virtue, a very Germanic view in which economics is a branch of moral philosophy in which countries that behave in an upright fashion get their just deserts.

Britain's recovery, by contrast, relies on repeating the sins of the past. Growth is not the result of the government's belt-tightening; rather, it is what you get if you keep interest rates at 0.5% for five years, then top things up with incentives for banks to lend for property purchase and state-backed incentives for people to take out home loans. Austerity ensured this bog-standard UK economic recovery was delayed and is weaker than it normally would have been. The chancellor was keen to point out that net borrowing was lower than forecast in March 2013, but forgot to mention that at £111bn it will be a lot higher than the £60bn estimate made in June 2010.

Osborne also skated over the lop-sided nature of the recovery. The main reason the independent Office for Budget Responsibility is now expecting national output to grow by 1.4% in 2013 rather than the 0.6% predicted in the Budget is that consumers are spending more. Projections for business investment and exports – the two sectors that were supposed to lead to a rebalancing of the economy – have been cut since the spring.

This pattern of growth can be sustained in the short term. With the pound at its highest level in five years, imports become cheaper and inflation falls. That means that household budgets stretch a bit further and the Bank of England is under no immediate pressure to raise the cost of borrowing. The housing market will be cooking with gas from now until the general election in 2015.

There has, though, been no underlying improvement in the economy. Growth has been brought forward from future years, helping to cut borrowing in the short-term but leaving the structural budget deficit – the bit unaffected by the ups and downs of the economic cycle – unchanged. Balancing the books will take until 2019, four years later than Osborne promised in 2015. Austerity will continue deep into the next parliament.

Osborne sketched out the message the government will be delivering week in week out between now and the election: don't be tempted to hand control of the economy back to the people who made such a mess of things in the first place. The chancellor's narrative is potentially a powerful one given that opinion polls suggest the public believes that the deep recession of 2008-09 was caused by Labour profligacy.

But it only works if three conditions are met. The first is that consumers keep spending at a reasonable lick despite the fact that prices will continue to rise faster than wages deep into 2014. Lower inflation should help but there is a risk that consumers will be more cautious than the OBR expects.

The second condition is that business investment kicks in to give the recovery a second wind. The OBR says companies will increase spending on new plant and machinery by 5% in 2014 and 9% in each of the three subsequent years. This looks like an heroic assumption. Likewise, the UK's share of world trade fell steadily even when exports were boosted by a fall in the value of the pound. Sterling's rise spells bad news for the balance of payments and for growth.

Finally, there's the assumption that at some point in the next year or so, rising living standards will boost Government popularity. At some point in 2014, earnings should start to rise more quickly than prices but probably not until the second half of the year. But voters may be slow to show any gratitude. In 2010, Osborne said it would take until 2013 for real wages to return to their pre-recession 2008 levels. He now says it will take until 2018. Truly a lost decade for living standards.

George Osborne kicked off his statement by boasting that Britain is the fastest growing major economy in the world. This lasted less than two hours. No sooner had the chancellor sat down than Washington announced that revisions to America's output data meant that Uncle Sam led the way in the third quarter of 2013.

The chancellor will be hoping that the rest of his package stands the test of time a little better. It may not.

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UK manufacturing recovery in full swing as new orders boom

PMI rose to 58.4 in November, with new orders at a near-20 year high and thousands of new staff taken on last month

Manufacturers enjoyed a jump in demand that pushed growth to its fastest rate for more than two years and saw the sector take on thousands of new staff last month.

New orders were the strongest for almost 20 years and job creation accelerated, according to the Markit/CIPS UK Manufacturing PMI survey. Encouragingly for the government's push to rebalance the economy, export orders also picked up.

The closely watched report comes as a timely boost to Chancellor George Osborne as he prepares to present his autumn statement plans for growth, spending and taxes on Thursday.

The headline activity index rose to 58.4 in November from an upwardly revised 56.5 in October. That was its eighth month above the 50-mark that separates expansion from contraction and was well ahead of the consensus forecast for 56 in a Reuters poll of economists.

The news sent the pound to a five-year high against a basket of other major currencies as traders bet an accelerating UK recovery would see interest rates rising sooner than the central bank has been suggesting.

Rob Dobson, senior economist at survey compilers Markit commented: "UK manufacturing continued to hit the high notes in November. The Manufacturing PMI struck a fresh two-and-a-half year peak as production and new orders rose at, or close to, 19-year record rates. The sector is on course to beat the 0.9% increase in output seen in the third quarter.

"Sustaining the recovery remains the key and the news here is also positive. The manufacturing expansion remains broad-based by sector, demand from the domestic market continues to surge higher and new export orders are rising at a clip close to October's 32-month high."

As activity and orders picked up, firms took on new staff at the fastest pace for more than two years.

Markit said manufacturers were creating around 5,000 jobs a month across all parts of the sector and all sizes of firms.

James Knightley, economist at ING Financial Markets said the job creation pointed to unemployment falling faster than the Bank of England is predicting. That could see interest rates rising sooner than the central bank has suggested, he said. Policymakers are waiting for unemployment to drop to 7% before they will consider raising borrowing costs from their current record low.

Kinghtley said the job creation suggested in manufacturing report "supports our view that the unemployment rate will drop below 7% late 2014/early 2015". He also highlighted a robust production reading and strong orders from the eurozone.

"Taking it all together it implies that the UK economy is looking in good shape with interest rate rises looking increasingly probable from early 2015," he added.

The survey follows forecasts from manufacturers' organisation EEF that the sector will grow faster than the wider economy next year. The group thinks the sector probably contracted by 0.1% this year but will grow 2.7% next year while UK GDP rises 2.4%. The EEF's latest survey suggested firms are more confident about investing and hiring staff over the next year but they feel the export outlook is still uncertain thanks to problems in some emerging markets and sluggish growth in the key market, the eurozone.

Economists said the manufacturing report marked a strong start to the monthly trio of PMI surveys from the three main sectors. Tuesday sees the release of the construction report while the closely watched survey from Britain's dominant services sector on Wednesday is expected to show that strong growth continued in November.

"If [the manufacturing PMI] is followed by robust construction and, especially services, surveys, it will look very likely that GDP growth in the fourth quarter could at least match the 0.8% quarter-on-quarter expansion seen in the third quarter," said Howard Archer, at IHS Global Insight.

"Much will depend on how well consumer spending performs in the fourth quarter, as there have been some signs that consumers have taken a breather after spending at a robust pace in the third quarter."

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UK manufacturing sector to grow faster than economy next year

Industry report gives buoyant forecast for UK manufacturing, predicting 2.7% growth compared with 2.4% for economy

Manufacturing will grow faster than the overall UK economy next year but much-needed business from overseas markets is looking shakier, according to an industry report published on Monday.

The buoyant forecast from UK manufacturers' organisation EEF marks a turnaround for a sector the government has repeatedly championed as an engine for growth, but which has struggled to emerge from recession.

News that orders and output are now rising and that UK factories plan to ramp up hiring and investment will be welcomed by George Osborne as he prepares to outline his latest plans to boost the recovery in his autumn statement this week.

But EEF's latest survey with accountants BDO showed exports were weaker than expected in recent months on the back of slower growth from some emerging markets and sluggishness in the eurozone, the UK's most important market.

EEF chief economist Lee Hopley said: "Over the course of the year we have seen a definite turnaround in prospects for manufacturing and this looks set to continue into next year. This increased confidence is evident in companies looking to increase their headcount and, most importantly for balanced growth, step up their investment.

"However, uncertainties in the global economy remain and a sustained recovery is not secure. As a result, growth must remain a priority for government over the remainder of this parliament, starting with the autumn statement this week."

The group, which has 6,000 member companies, says the risk comes from an uncertain export outlook. But it still thinks the sector will grow by 2.7% in 2014 compared with 2.4% for the economy overall. EEF thinks that this year the manufacturing sector will have contracted 0.1% while the wider economy grows 1.4%.

While that still puts that manufacturing sector in recession this year, the prediction marks a significant upgrade from the last estimate of a 0.5% decline. The group said that reflected a run of improving news. Its own quarterly survey showed a majority of firms reporting growth in both output and orders, though these measures slipped back from highs seen over the summer. Within the sector, the strongest results came from motor vehicle and electronics companies.

A separate report on Monday echoes recent optimism about new jobs being created by the private sector. Business lobby group the CBI says medium-sized businesses are helping to drive the recovery but that the government must do more to help them access finance, find skilled workers and get support to export.

Despite accounting for less than 2% of the private sector, medium-sized businesses have created jobs at twice the pace of large companies, the CBI said. They added 185,000 jobs between March 2010 and March 2013, a rise of 4.1%, and now employ 16% of the UK's total workforce.

Medium-sized firms, classed as having 50-499 staff and a turnover of £10m-£100m, have also grown their turnover by 7% – more than double that of smaller firms and large companies. They now contribute more than £300bn to the economy, but the lobby group says government support could boost that significantly.

"This hugely positive picture is reflected up and down the country where medium-sized businesses are major local employers, in many cases helping to offset public sector job losses during the downturn," said CBI director general John Cridland.

"With better access to a range of growth finance options, improved training and research support, and help to break into new export markets – these firms could be worth an extra £20bn to our economy by 2020."

Article Source : http://www.guardian.co.uk
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Manufacturers urge George Osborne to cut energy costs for business

Lobby group EEF calls on chancellor to scrap green taxes as part of series of measures which it says will support recovery

Britain's manufacturers have called on the chancellor to cut business energy costs to support the economic recovery.

Energy prices for UK businesses are rising faster than in other countries, squeezing manufacturers' margins and threatening to choke off investment, the EEF manufacturing group said.

The lobby group said increased costs not borne by competitors in other countries could determine whether companies invest in workers or materials and whether they do so in Britain or elsewhere.

The warning from business comes as figures show household finances suffering their biggest squeeze since April after a series of large price rises by energy suppliers.

In its submission before George Osborne's autumn statement next month, EEF urged the chancellor to sweep away planned green taxes in the name of economic growth.

EEF called for support for energy-intensive industries to be extended from the financial year 2015-16 to 2020-21.

It also said the carbon price floor – a tax on fossil fuels used to generate electricity – should be frozen and then reduced and that increases to the carbon price and the climate change levy should be scrapped.

Its chief executive, Terry Scuoler, said: "With government policies on climate change set to add as much as 50% to the electricity prices paid by industry by 2020, it must act now to stop planned rises in energy taxes and set out a long-term commitment to compensate energy intensive industries. Without this, we risk losing out on the investment in new technology and jobs that our economy desperately needs."

Energy costs have risen to the top of the political agenda after the Labour leader, Ed Miliband, pledged to freeze prices and reorganise the market if his party wins the next election. With incomes barely rising and business margins squeezed, rising energy bills threaten to be a drag on spending and investment.

The Markit household finance index for November showed a sharp drop in households' available cash as prices for essential spending rose faster than stagnant wages. The outlook for household budgets also worsened with 42% of those surveyed expecting to be worse off in a year.

Tim Moore, an economist at Markit, said: "November's survey highlights yet another setback for UK household budgets as weak pay trends and energy price rises appeared to overshadow recent positive news about labour market conditions. With pay falling further behind living costs, households saw the fastest fall in their cash available for discretionary spending since April."

The gloomy outlook followed a report by the government's National Audit Office that predicted household energy costs would increase faster than inflation for 17 years.

In its other recommendations to the chancellor, EEF called for a stronger national infrastructure plan with commitments to specific projects and more investment to unclog Britain's most congested roads. It also urged Osborne to boost funding for apprenticeships and to delay any new legislation and regulation until 2015 to give businesses a break from red tape.

EEF said the measures were needed to make further progress "rebalancing" the economy towards exports and making physical goods and away from domestic consumption – a goal Osborne set himself when he pledged to support a "march of the makers".

Recent official figures showed manufacturing output increasing faster than expected though the loss of 1,800 shipbuilding jobs cast a cloud over the news.

Scuoler said: "We are now seeing signs of a stronger recovery and industry is becoming more ambitious on investment and exports. But we are still some way off from securing the balanced and sustained recovery we need to generate lasting improvements in prosperity and living standards."

Article Source : http://www.guardian.co.uk
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Royal Bank of Scotland faces further fines over sub-prime mortgage crisis

UK Financial Investments outgoing chairman says RBS has been forced to hold more capital because of potential penalties

Royal Bank of Scotland is still facing potentially painful penalties from the US authorities over the sub-prime mortgage crisis, the Treasury select committee of MPs was warned on Tuesday.

Already hit by a £390m fine for rigging Libor and in discussions with regulators over an investigation into potential currency rigging, the bank has been forced to hold more capital by the Bank of England because of the possibility of further fines, MPs were told by Robin Budenberg, the outgoing chairman of UK Financial Investments (UKFI).

Budenberg, who was challenged about the influence the Treasury has over the body which was set up look after the stakes in the bailed out banks, said mortgage trading was one of the outstanding issues RBS faces. He made reference to JP Morgan, which has paid £8bn to settle a number of regulators' claims it missold mortgages. "We've asked them where they feel their exposures are and clearly there are a range of regulatory issues that are pending," Budenberg said.

Earlier this month RBS admitted it was holding more capital and putting £38bn of its most troublesome loans into an internal bad bank after a review commissioned by George Osborne ruled out a full-blown standalone bad bank.

Budenberg admitted he had accelerated Stephen Hester's departure from RBS in September. The MPs were told that UKFI had not seen opportunities for a sale of the 81% government stake in RBS in the last two years – which appeared to contradict remarks by the bank a year ago when it raised the possibility of sale in 2014.

Budenberg's successor, James Leigh-Pemberton, indicated that the average price at which the taxpayer bought its stake in RBS – 502p – would not be the only consideration when deciding whether to sell anyshares. "It is difficult not to take it into account but it can't be the only consideration, because when we make our recommendations we also provide it in the context of whether there is an opportunity to realise fair value or more than fair value ," he said.

Leigh-Pemberton said it was "very, very difficult to say with any precision" when a sale of RBS could begin, and it would not be before the £1.5bn dividend access share, which allows the government to receive dividends before other shareholders, is removed.

To demonstrate UKFI's independence from Osborne, Budenberg said he had resisted deep cuts to bonuses suggested by the chancellor on the grounds the reductions were not "commercially acceptable". Budenberg also cited UKFI's influence in convincing Osborne not to force RBS to sell off its US arm, Citizens, too quickly. Citizens is to be spun off next year, probably through a stock market flotation.

"Our view has always been that we need to give Citizens time to recover in terms of its financial performance, and now is a time to begin that process," said Budenberg.

He is to leave at the end of the year after overseeing the sale of the first part of the stake in Lloyds – 4.2bn shares worth £3.2bn – in September at a price of 75p a share. Budenberg said the government could raise another 0.5p per share, or £21m, if more short-term investors, such as hedge funds, had been allowed to participate in the sale.

Budenberg said that UKFI wanted to show it was a responsible seller and that it does not "just sell to the highest bidder".

Further details would be released by the National Audit Office, Budenberg said.

Article Source : http://www.guardian.co.uk
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London's economic boom leaves rest of Britain behind

Exclusive: Guardian analysis highlighting regional imbalance raises troubling questions about who is enjoying UK's recovery

London's economy is doing even better after the banking crash than during the bubble – while nearly every other part of the UK has seen its economy shrink by comparison. Exclusive findings published by the Guardian show that London and the south-east are racing away from the rest of the UK at a pace that would have seemed almost incredible at the height of the financial panic.

During the boom from 1997 to 2006, London and the south-east was responsible for 37% of the UK's growth in output. Since the crash of 2007, however, their share has rocketed to 48%. Every other nation and region – with the exception of Scotland – has suffered relative decline over the same period. The upshot is about a quarter of the population is responsible for half of the UK's growth, leaving the remaining three-quarters of Britons to share the rest.

The research also shows that the UK's highest-earners have become relatively more prosperous after the crash, while many on middle incomes are being squeezed hard. In austerity Britain, the top 20% of earning households are enjoying 37.5% of all Britain's income growth, even after accounting for taxes and benefits.

These findings will embarrass the government, especially as they come shortly before the release of the latest GDP figures on Friday. Ministers are poised to celebrate news that the economy is at last enjoying strong growth, and may even have racked up its best quarter in 13 years. But the Guardian's analysis raises questions about who is enjoying Britain's growth and how sustainable it is, and will fuel the debate over who should bear the burden for an economic crisis that began in the Square Mile.

The Guardian's analysis is based on official measures of gross value added, often used to assess regional and industrial performance, and was conducted by the Centre for Research on Socio-Cultural Change at Manchester University.

The findings suggests that David Cameron has failed to meet some of his most important promises: on making Britain's economy less lopsided; on ensuring that the pain from its cuts would be fairly shared out; and that banks would lend more to small businesses.

In his first major speech as prime minister, Cameron described Britain as "more and more unbalanced, with our fortunes hitched to a few industries in one corner of the country". Analysis of the statistics shows that regional imbalance has grown sharply since the crash.

The chancellor, George Osborne, has repeatedly claimed that "we're all in this together". But while the highest-earning 20% of households have done well, and the fortunes of the bottom 20% have been boosted by the minimum wage, most of the rest – the so-called squeezed middle – have seen their incomes stretched.

Article Source : http://www.guardian.co.uk

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Let's not pretend there's a housing boom, George Osborne tells audience

Chancellor's speech to Institute of Directors backed by some who say exceptional London prices are skewing national picture

George Osborne on Wednesday insisted he was not inflating a housing bubble, despite official data showing property prices in England have broken through their pre-crisis peak.

The chancellor told an audience at the Institute of Directors annual conference that there was no housing boom under way even though the ONS data showed the average price of a UK house has now surpassed its peak of five years ago with the average price reaching £245,000.

Osborne said he was "alert to the risks but let's not pretend there's a housing boom".

He insisted that his Help to Buy scheme, which has been widely criticised for pumping up demand and prices, was not a "weapon of mass destruction".

He was speaking as the Bank of England body charged with deflating bubbles was holding its scheduled quarterly meeting.

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But the members of the Bank's financial policy committee, who may have to decide whether the chancellor's Help to Buy scheme is overly inflating the market, face a plethora of divergent information about house prices.

An analysis of 10 house price surveys shows that estimates of average prices on a national level vary from £154,300 to £252,881. They put the average price of a London home between £300,800 and nearly £500,000.

The discrepancies can be explained by differences in the way that information is gathered and measured. Some cover only homes bought with mortgages and exclude those which are bought to let out to tenants, while others are based on estate agencies expectations or asking prices posted on websites. Some exclude Northern Ireland and Scotland, or houses which have not changed ownership for more than 20 years.

This week's ONS index, which has sparked the latest debate, is skewed towards higher valued properties and developments in London. Matthew Pointon, property economist at Capital Economics, said that it has "almost certainly overstated the rise in price of a typical home".

He argued that, excluding parts of London, house prices are way off their previous peaks.

"In any event, this is a useful reminder of the challenge the financial policy committee will face when deciding whether action needs to be taken to choke off an unwarranted rise in house prices.

"Not only are regional house prices behaving very differently, but alternative house price indices can give very different signals about the strength of the market as a whole."

Many economists stress the relationship between incomes and prices – which will vary widely depending on which house price survey is used.

The FPC uses a range of price indicators including a house price to rent index based on an average of the Halifax and Nationwide indices and the rent levelscontained in the retail price index.

According to Steve Pateman, head of UK banking at Santander, there is a house price bubble in London, but it is not evident in other parts of the country.

As the Spanish-owned bank prepares to embark on a new push into the home loans market, Pateman said: "That is borne out by the statistics you can see.

"You can't argue with the fact that the London price point is at higher level than in 2008, so people will talk about whether that is sustainable and the south east is caught in that glow.

"But you are not seeing the same trends in other (regional) markets, where there is a closer correlation between local GDP and house prices".

Lucian Cook, head of research at upmarket estate agents Savills, said Land Registry had the widest sample data and unlike some measures also included cash buyers. These buyers are responsible for 35% of purchases.

Richard Donnell, director research at Hometrack, said another 6% of the market was buy-to-let, excluded from some of the indices.

Land Registry has not yet published data for August but specialist residential property investor London Central Portfolio (LCP) has bought data from the body to make it possible to calculate average house prices for last month.

LCP's calculations show UK house prices up 2.4% to £252,881 over the last year. In London there was an average August sale price of £482,141 – a 6.5% rise in the last 12 months.

Naomi Heaton, chief executive of LCP, said that the average national price figure could have policy implications for Osborne as it is above the £250,000 threshold at which stamp duty jumps from 1% to 3%.

"It will a deal a huge blow current homeowners wishing to trade up. The chancellor should urgently restructure these thresholds in his autumn statement to avoid a bunching occurring at the £250,000 mark."

Article Source : http://www.guardian.co.uk

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