This saga will soon end with an outcome. It may very well be the government loses the fight. If it does it will be shot at from all sides.
This will be entirely its own fault for two reasons. The first is that it constantly raised the hopes of an angry people that it would put an end to the bonus gluttony. Second it delayed the re-structuring of the banks with the political expedient of Banking commission, which has yet to report.
The Treasury has dug the government into a corner, from which escape will be difficult. 20% of all government tax revenue comes from financial services, which include banking. 50% of every large bonus paid comes back in higher rate income tax, giving the taxpayer half the spoils to spend on public services or cutting the deficit. This makes the bankers’ case strong and the economic argument against, weak. This is why Osborne is floundering ( and Clegg and Cable are fuming). Where it not for the fact that Alan Johnson is utterly clueless on economic matters, political times for the government would be a good deal tougher.
The argument and the anger is not, however, economic. It is about example, responsibility, restraint and sympathy. They are emotional not economic issues. The Confederate South argued that slavery was an essential pillar of its economy upon which it was dependent. This was true, but the revulsion against slavery had nothing to do with economics. The South could have freed its slaves in an orderly manner, restructured its economy to operate with free labour which was paid, rather than paid for labour which worked for free. If it had done that it would have gained its independence.
All that has to be done to resolve this is to make it clear to the banks with investment arms, which take 90% of the bonus pool, that they are on their own financially and there will be no bail outs in another meltdown. In advance of re-structuring with the regular part of the banks ring fenced and secure, this element would be seized in a crisis by the State without compensation, allowing the investment banking departments to implode with losses many times our GDP and collectively if the contagion spread, many times the GDP of the world. Within that climate of risk, the banks could pay whatever bonuses they liked.
I doubt they would pay much. Finally the fact that 20% of all tax revenue comes from financial services is not a measure of their strength, but of the weakness of the industrial section of the economy, upon which both recovery and stabilty ultimately depend.