David Prosser: Bankers' bonuses: the great government climbdown begins

Outlook: The claim of the BBC yesterday to have discovered that our biggest banks plan to ignore publicoutrage and pay yet more large bonuses will not be winning too many prizes as a journalistic scoop.

Anyone who thought the banks were running scared ofministers' warnings of dire consequences for big bonus payers was always likely to be disappointed. These were empty threats from a government aware both that the bonus round will once again spark fury and that it feels powerless to stop it, even at those banks in which the taxpayer continues to own large stakes.

Indeed, even leaving aside the rights and wrongs of bonus payments, George Osborne and Vince Cable ought to be embarrassed by their failure to secure restraint from the banks. Aware of the strength of feeling about City pay, both have sought to sound tough on the issue while knowing all along that they would not be able to deliver much of substance.

In the end, the City deployed what it regards as its most devastating weapon in order to fight off further attacks on its remuneration policies. You might describe it as the £53.4bn tank. This is the total amount of tax that the financial services industry paid during the 2009-10 financial year. Thefigure is the equivalent of 11.2 per cent of the country's entire tax receipts, making the City by some margin the largest contributing industry.

The thought of killing the goose that lays the golden egg (or, even worse, seeing it take flight to more welcoming countries) terrifies the Treasury. Now, there is an argument that it should not be so cowed. Investment banks, the biggest bonus payers, account for only a chunk of that tax revenue, and the City hardly feels deserted just now, despite new measures such as the 50p top rate of income tax and the banking levy. Are we really at breaking point, with any further curbs on remuneration, through new taxes say, certain to trigger a mass exodus?

However, it has been clear for some time that the Chancellor would blink first in this staring contest. The limited scale of the levy sent the City a clear signal that Mr Osborne did not have much time for the bash-the-bankers lobby, whatever he and his senior colleagues might have to say on the subject.

In the end, the initiative lead by John Varley, the former Barclays Bank chief executive, to broker a peace deal with the Government over City pay has proved appropriately named. Project Merlin, the bankers dubbed it, well aware that the Chancellor fell under their spell long ago.