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Goldman Sachs is removing a cap on bonuses for London-based staff, paving the way for it to resume making multimillion pound payouts to its best-performing traders and dealmakers.

Sky News can exclusively reveal that the Wall Street banking giant notified its UK employees on Thursday that it had decided to abolish the existing pay ratio imposed under European Union rules and which the government recently decided to scrap.

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In a video message to staff, Richard Gnodde, chief executive of Goldman Sachs International, which comprises its operations outside the US, said it had decided to bring its remuneration policy in Britain in line with its operations elsewhere in the world.

“We are a global firm and to the extent possible we adopt a consistent global approach across everything we do,” Mr Gnodde said in the message, which has been relayed to Sky News.

“The bonus cap rules were an important factor preventing us from being consistent in the area of compensation.”

He added that the shift would “mean lower fixed pay, but a higher proportion of discretionary compensation”, adding that it “also reflects the prudential objective of our regulators”.

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The removal of the cap means several hundred UK-based Goldman staff will now be eligible for variable pay worth up to 25 times their base salaries, according to insiders.

As a consequence, allowances which were introduced to help those employees deal with the cap will begin to be reduced from 1 July, Mr Gnodde told employees.

People close to the bank insisted, however, that the revised approach would not necessarily mean senior employees being paid more, but that they could now be appropriately rewarded for exceptional performance and that the move would allow Goldman more flexibility to manage its fixed cost base.

Goldman is among the first major investment banks to signal its intention to pursue a revised approach to remuneration in the wake of the cap’s abolition by UK regulators last October.

Under it, firms were prohibited from paying their material risk-takers – or most senior staff – more than twice their fixed pay in bonuses.

Some banks used the mechanism of a fixed-pay allowance in addition to employees’ base salaries to give them more flexibility to pay larger bonuses.

While Goldman’s move may draw controversy, the EU bonus cap drew criticism from many influential figures in finance over many years, including from Andrew Bailey, the Bank of England governor, who said in 2014 that it was “the wrong policy [and] the debate around it is misguided”.

During his ill-fated stint as chancellor, Kwasi Kwarteng moved to scrap the EU bonus cap, saying it would boost the international competitiveness of Britain’s financial services sector.

UK regulators agreed that scrapping the cap would aid financial stability by enabling firms to reduce pay faster during downturns or in scenarios where they needed to conserve capital.

Mr Gnodde has publicly endorsed the removal of the cap, saying in 2020 that doing so would “put the UK on the same footing, aside from the EU, with every other major financial centre”.

“Removing that ratio makes London a more attractive place for sure,” he said at the time.

“If I move a senior person between New York and London I am driving up the fixed cost of our operations. If that rule doesn’t exist, I don’t have to think about that.”

While Goldman is among the first to notify its employees about its amended stance on bonuses for UK staff, many of its peers, including bosses at lenders such as Deutsche Bank and Santander have also criticised the cap.

At its annual meeting on Friday, HSBC is expected to win shareholder approval to remove the two-to-one pay ratio.

Other firms are also understood to be reviewing their UK compensation practices in light of the cap’s abolition.

Many industry executives have argued that the cap actually encouraged greater risk-taking because it put smaller sums of money at risk for senior bankers.

Insiders also pointed out that because the bonus cap does not impose a limit on overall remuneration, it had placed upward pressure on salaries and allowances not linked to longer-term performance, and which could not be reduced or clawed back if failure or previous misconduct had subsequently emerged.

Responding to an enquiry from Sky News, a spokesman for Goldman said: “This approach gives us greater flexibility to manage fixed costs through the cycle and pay for performance.

“It brings the UK closer to the practice in other global financial centres, to support the UK as an attractive venue for talent.”

Goldman has often been in the vanguard of responding to changing public policy in relation to bankers’ pay.

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In 2010, it imposed a £1m pay ceiling on its UK staff after the then Labour government introduced a one-off tax on bank bonuses in response to the public outcry over the financial crisis.

Goldman’s decision to remove the two-to-one ratio comes as UK regulators also consult on the length of deferral periods for variable pay for senior bankers.

Mr Gnodde told staff on Thursday that Goldman would continue to lobby for closer global alignment on deferral periods, which would mean reducing the current UK duration from seven years.

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Chancellor admits tax rises and spending cuts considered for budget

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Chancellor admits tax rises and spending cuts considered for budget

Rachel Reeves has told Sky News she is looking at both tax rises and spending cuts in the budget, in her first interview since being briefed on the scale of the fiscal black hole she faces.

“Of course, we’re looking at tax and spending as well,” the chancellor said when asked how she would deal with the country’s economic challenges in her 26 November statement.

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Ms Reeves was shown the first draft of the Office for Budget Responsibility’s (OBR) report, revealing the size of the black hole she must fill next month, on Friday 3 October.

She has never previously publicly confirmed tax rises are on the cards in the budget, going out of her way to avoid mentioning tax in interviews two weeks ago.

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Chancellor pledges not to raise VAT

Cabinet ministers had previously indicated they did not expect future spending cuts would be used to ensure the chancellor met her fiscal rules.

Ms Reeves also responded to questions about whether the economy was in a “doom loop” of annual tax rises to fill annual black holes. She appeared to concede she is trapped in such a loop.

Asked if she could promise she won’t allow the economy to get stuck in a doom loop cycle, Ms Reeves replied: “Nobody wants that cycle to end more than I do.”

She said that is why she is trying to grow the economy, and only when pushed a third time did she suggest she “would not use those (doom loop) words” because the UK had the strongest growing economy in the G7 in the first half of this year.

What’s facing Reeves?

Ms Reeves is expected to have to find up to £30bn at the budget to balance the books, after a U-turn on winter fuel and welfare reforms and a big productivity downgrade by the OBR, which means Britain is expected to earn less in future than previously predicted.

Yesterday, the IMF upgraded UK growth projections by 0.1 percentage points to 1.3% of GDP this year – but also trimmed its forecast by 0.1% next year, also putting it at 1.3%.

The UK growth prospects are 0.4 percentage points worse off than the IMF’s projects last autumn. The 1.3% GDP growth would be the second-fastest in the G7, behind the US.

Last night, the chancellor arrived in Washington for the annual IMF and World Bank conference.

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‘I won’t duck challenges’

In her Sky News interview, Ms Reeves said multiple challenges meant there was a fresh need to balance the books.

“I was really clear during the general election campaign – and we discussed this many times – that I would always make sure the numbers add up,” she said.

“Challenges are being thrown our way – whether that is the geopolitical uncertainties, the conflicts around the world, the increased tariffs and barriers to trade. And now this (OBR) review is looking at how productive our economy has been in the past and then projecting that forward.”

She was clear that relaxing the fiscal rules (the main one being that from 2029-30, the government’s day-to-day spending needs to rely on taxation alone, not borrowing) was not an option, making tax rises all but inevitable.

“I won’t duck those challenges,” she said.

“Of course, we’re looking at tax and spending as well, but the numbers will always add up with me as chancellor because we saw just three years ago what happens when a government, where the Conservatives, lost control of the public finances: inflation and interest rates went through the roof.”

Pic: PA
Image:
Pic: PA

Blame it on the B word?

Ms Reeves also lay responsibility for the scale of the black hole she’s facing at Brexit, along with austerity and the mini-budget.

This could risk a confrontation with the party’s own voters – one in five (19%) Leave voters backed Labour at the last election, playing a big role in assuring the party’s landslide victory.

The chancellor said: “Austerity, Brexit, and the ongoing impact of Liz Truss’s mini-budget, all of those things have weighed heavily on the UK economy.

“Already, people thought that the UK economy would be 4% smaller because of Brexit.

“Now, of course, we are undoing some of that damage by the deal that we did with the EU earlier this year on food and farming, goods moving between us and the continent, on energy and electricity trading, on an ambitious youth mobility scheme, but there is no doubting that the impact of Brexit is severe and long-lasting.”

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Four big themes as IMF takes aim at UK growth and inflation

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Four big themes as IMF takes aim at UK growth and inflation

Six months ago the International Monetary Fund (IMF) warned that the world economy was heading for a serious slowdown, in the face of Donald Trump’s tariffs.

It slashed its forecasts for economic growth both in the US and predicted that global economic growth would slow to 2.8% this year.

Today the Fund has resurfaced with a markedly different message. It upgraded growth in both the US and elsewhere. Global economic growth this year will actually be 3.2%, it added. So, has the Fund conceded victory to Donald Trump? Is it no longer fretting about the economic impact of tariffs?

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Either way, the World Economic Outlook (WEO), the IMF’s six-monthly analysis of economic trends, is well worth a look. This document is perhaps the ultimate synthesis of what economists are feeling about the state of the world, so there’s plenty of insights in there, both about the US, about far-reaching trends like artificial intelligence, about smaller economies like the UK and plenty else besides. Here, then, are four things you need to know from today’s WEO.

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The key bit there is the final two words. The Fund upgraded US and global growth, saying: “The global economy has shown resilience to the trade policy shocks”, but added: “The unexpected resilience in activity and muted inflation response reflect – in addition to the fact that the tariff shock has turned out to be smaller than originally announced – a range of factors that provide temporary relief, rather than underlying strength in economic fundamentals.”

In short, the Fund still thinks those things it was worried about six months ago – higher inflation, lower trade flows and weaker income growth – will still kick in. It just now thinks it might take longer than expected.

The UK faces the highest inflation in the industrialised world

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One of the standard exercises each time one of these reports come out is for the Treasury to pick out a flattering statistic they can then go back home and talk about for the following months. This time around the thing they will most likely focus on is that Britain is forecast to have one of the strongest economic growth rates in the G7 (second only to the US) this year, and the third strongest next year.

But there are a couple of less flattering prisms through which one can look at the UK economy. First, if you look not at gross domestic product but (as you really ought to) at GDP per head (which adjusts for the growing population), in fact UK growth next year is poised to be the weakest in the G7 (at just 0.5 per cent).

Second, and perhaps more worryingly, UK inflation remains stubbornly high in comparison to most other economies, the highest in the G7 both this year and next. Why is Britain such an outlier? This is a question both Chancellor Rachel Reeves and Bank of England governor Andrew Bailey will have to explain while in Washington this week for the Fund’s annual meeting.

What happens if the Artificial Intelligence bubble bursts?

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Few, even inside the world of AI, doubt that the extraordinary ramp up in tech share prices in recent months has some of the traits of a financial bubble. But what happens if that bubble goes pop? The Fund has the following, somewhat scary, passage:

“Excessively optimistic growth expectations about AI could be revised in light of incoming data from early adopters and could trigger a market correction. Elevated valuations in tech and AI-linked sectors have been fuelled by expectations of transformative productivity gains. If these gains fail to materialize, the resulting earnings disappointment could lead to a reassessment of the sustainability of AI-driven valuations and a drop in tech stock prices, with systemic implications.

“A potential bust of the AI boom could rival the dot-com crash of 2000 in severity, especially considering the dominance of a few tech firms in market indices and involvement of less-regulated private credit loans funding much of the industry’s expansion. Such a correction could erode household wealth and dampen consumption.”

Pay attention to what’s happening in less developed countries

For many years, one of the main focuses at each IMF meeting was about the state of finances in many of the world’s poorest nations.

Rich countries lined up in Washington with generous policies to provide donations and trim developing world debt. But since the financial crisis, rich world attention has turned inwards – for understandable reasons. One of the upshots of this is that the amount of aid going to poor countries has fallen, year by year. At the same time, the amount these countries are having to pay in their annual debt interest has been creeping up (as have global interest rates). The upshot is something rather disturbing. For the first time in a generation, poor countries’ debt interest payments are now higher than their aid receipts.

I’m not sure what this spells. But what we do know is that when poor countries in the Middle East and Sub-Saharan Africa face financial problems, they often face instability. And when they face instability, that often has knock on consequences for everyone else. All of which is to say, this is something to watch, with concern.

The IMF’s report is strictly speaking the starting gun for a week of meetings in Washington. So there’ll be more to come in the next few days, as finance ministers from around the world meet to discuss the state of the global economy.

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UK to have highest inflation in G7, IMF says

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UK to have highest inflation in G7, IMF says

Price rises in the UK are to be the highest among the G7 club of industrialised nations, according to the International Monetary Fund (IMF).

Inflation will be the highest among the club both this year and next, the world’s lender of last resort has said in its World Economic Outlook.

It is an unexpected increase from the IMF’s July forecast.

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There was mixed news elsewhere in the outlook, as the UK’s economic growth forecast, as measured by GDP, was revised up for this year but revised down for next.

Latest data showed inflation stood at 3.8% and is forecast by the Bank of England to reach 4% by the end of the year.

The IMF, however, said it expected inflation to average at 3.4% in 2025, up from its previously predicted 3.2%.

That is forecast to slow to 2.5% this year, higher than the 2.3% anticipated just three months ago.

Food and services inflation had been particularly high in recent months due to rising wage bills and poor harvests.

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Economic growth will be a higher 1.3% this year, up from the 1.2% forecast in July, thanks to a strong first few months of the year.

Next year, however, GDP will be 1.4% rather than 1.3% as economies across the world feel trade pressures.

Political reaction

Chancellor Rachel Reeves said: “This is the second consecutive upgrade to this year’s growth forecast from the IMF.

“But know this is just the start. For too many people, our economy feels stuck. Working people feel it every day, experts talk about it, and I am going to deal with it.”

Shadow chancellor Sir Mel Stride said the IMF assessment made for “grim reading”.

“Since taking office, Labour have allowed the cost of living to rise, debt to balloon, and business confidence to collapse to record lows,” he said.

“Working people are feeling the impact every time they shop, fill up the car, or pay their mortgage.”

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