A minor irritation?

Are the Government feeling the pressure? I only ask because it seems as if they are already playing to the galleries. Less than a year into their first term and the Tories have followed up their rabble rousing speech attacking Muslims with an attack on another oppressed minority. Yes, Little George Osborne from the Lower House has made his voice heard above the cries for a 'Plan B' and asserted himself with an attack on the only people less popular than Muslim 'extremists' and, of course, the dear old Liberal Democrats. Who? Bankers, of course.

The Chancellor has announced that he is increasing the levy on banks to £2.5 billion. It means an extra £800 million for the Treasury than had originally been announced. In December, Osborne said that the levy would be introduced at a reduced rate of 0.05% this year would rise to 0.075% for future years. However, in the last two months it appears the Chancellor has changed his mind over the state of the bank finances and now believes they are healthy enough to carry the full levy from this year. The change of heart will mean that the Treasury will have to play catch up and charge a higher rate until April.

If it seems like George is making it up as he goes along you may be right. Only last week, the Chancellor  was asked to visit the 'headmaster's study' for a chat in the shape of the Institute for Fiscal Studies' 'Green Budget'. While the IFS conclusions supported the Tory's fiscal strategy, the body of the report raised an alarming number of concerns which they underlined publicly by suggesting that it would be useful if Osborne has a 'Plan B'. It was as if the Head had given George an encouraging pat on the back for his ambitious application to Oxford University but then asked what he thought of Derby?

City analysts were arguing that a 'Plan B' would be reassuring rather than unsettling to the markets. The papers concluded that the refusal to countenance a 'Plan B' was because the Chancellor did not want to be seen to change direction so soon. Most agreed that to do so would weaken his personal authority within the government. It has been interesting to hear him barracking Ed Balls as Miliband's 'second choice' because young George was originally Michael Howard's third choice, behind Hague and Cameron. His appointment astonished Conservative MPs. Could his personal ambition and insecurity be driving economic policy?

After all, it is extremely rare for a Chancellor to make such announcement anywhere but in a budget. Ed Balls, called the change 'panicky' and a 'damp squib'. Balls claimed that even after the rise, the Government would be raising less from the banks than they did last year. A 'damp squib' - yes. The BBC's Robert Peston, called it a 'rounding error' as the total raised will amount to 0.1% of the fiscal deficit. Next week the banks are expected to announce bonus payments of £6 million. Peston concluded, 'the tax rise is probably of more importance from a symbolic point of view - perhaps indicating a touch more iciness in ministers' attitudes to the banks.'


The Banks, themselves, have been less poetic and attacked the rise as 'purely political'. Osborne has been in negotiation with the banks to reach a settlement on a range of issues, including a pledge to make £190 billion of credit available to small and medium size businesses this year. The agreement under the ludicrous name 'Project Merlin' (wasn't Merlin the name for the false source of information in the John Le Carre novel Tinker, Taylor, Soldier Spy? Someone has got a sense of humour) is due to be announced some time next week. However, as banks work under regulations that mean they must operate for the benefit of their shareholders, the Government simply doesn't have the authority to force the banks to lend. On one hand they are being asked to lend responsibly and on the other the Government are asking them to take extra risks. Like Labour before them the Tories are discovering that they are fighting with their hands tied behind their backs.

George might be flexing his muscles but no one is really watching. Although a few senior bankers were described as 'livid', the announcement had no effect on the share price, the true test. This suggests that something like this was expected. 'Panicky'? Well, inflation is rising, the IFS have suggested that he needs a 'Plan B' and we have the image of a Tory Chancellor making political capital from the City of London. As Louise Armistead explained in the  The Telegraph, 'the initial bank reaction has been irritation'. The fact is that the success of 'Project Merlin' ultimately rests on the 'goodwill' of the big clearing banks.

Perhaps, he has good reason to panic.