Cameron forced on to the defensive over RBS bonus

Mr Cameron defended the market and free enterprise as 'the best imaginable force for improving human wealth and happiness' (AP)

David Cameron pledged yesterday to tackle "the crisis of capitalism" but was immediately forced on to the defensive over the level of bonus payments at state-funded banks. The Prime Minister promised to keep a lid on bonuses at Royal Bank of Scotland and Lloyds Banking Group. But despite his tough language, Stephen Hester, the RBS chief executive, could still be in line for a bonus of about £1m on top of his £1.2m salary.

The RBS board wants to reward Mr Hester for his part in turning the bank round by handing him a bonus of between £1.3m, and £1.5m for 2011. But ministers are nervous about the public reaction because RBS was bailed out with £45bn of taxpayers' money.

The bank's remuneration committee is due to meet next week and a bout of arm-wrestling with the Government looks inevitable. RBS said it was "premature" to speculate and a final decision is expected next month.

Mr Cameron said: "If there is a bonus, it will be a lot less than it was last year." Mr Hester received a £2.4m top-up then. A £1m bonus would be controversial because the bank's share price has fallen by 43 per cent in the past year.

Mr Cameron set out his vision for a new "popular capitalism" in which he accepted a role for state intervention but mounted a strong defence of the free market. He said: "I believe that open markets and free enterprise are the best imaginable force for improving human wealth and happiness.

"They are the engine of progress, generating the enterprise and innovation that lifts people out of poverty and gives people opportunity. And I would go further: where they work properly, open markets and free enterprise can actually promote morality."

Mr Cameron admitted the link between risk, reward and effort had been broken but insisted: "We won't build a better economy by turning our back on the free market. We'll do it by making sure that the market is fair as well as free."