George Osborne should not sign off mega-bonuses at RBS

With 81 per cent still taxpayer-owned, there is a strong argument for retaining the top talent needed to turn the ailing institution around

Of all the unenviable positions in which the Chancellor may find himself, the contortions over bonuses at Royal Bank of Scotland are as challenging as any. Although a formal approach is yet to be made, executives are primed to approach George Osborne (as their main shareholder) for permission – needed under new European laws – to hand senior staff a windfall worth twice their salaries.

There are good reasons for the Chancellor to concur, not least his own fight against Brussels’ bonus cap (largely on the grounds that it will not be effective). With RBS still 81 per cent taxpayer-owned, there is also a strong argument for retaining – and encouraging – the top talent needed to turn the ailing institution around. Finally, if the bank’s case as to why such generosity is earned is compelling, then the Chancellor must surely act accordingly.

The problem here is the politics. It did not need Labour’s demand that the expected bonus request be blocked to galvanise public opinion. With swathes of Britain still feeling the pinch after five years of stagnation – much of the blame for which must fall to the banks – the spectacle of “business as usual” come bonus season would never have passed unremarked. For a Chancellor who is already, rightly or wrongly, caricatured as a “posh boy”, out of touch with normal people, the situation is trickier still.

David Cameron did his best to lance the boil yesterday, using Prime Minister’s Questions to stress that the bank’s remuneration bill will not be allowed to rise (a less meaningful pledge than it might seem, given recent sharp cuts in staff numbers) and to promise that cash bonuses will be limited to £2,000 next year (although there was no mention of share awards).

All of which only underlines the need for the state to sell its bank stakes as swiftly as possible: business should not be complicated by politics. In the meantime, however, Mr Osborne’s problematic choice remains. The politics must, in this instance, take precedence. With RBS facing yet more “substantial” losses, and still being widely criticised for its failure to support small businesses, mega-bonuses are simply not defensible, whatever RBS’s internal logic might be.