If polls for the by-election in Oldham East and Saddleworth are to be believed, they don’t make much political sense either – especially for the Liberal Democrats.

What is it then about the government’s economic policy that Summers and other economists find so wrong? There are three key things. First, when two and a half million people are unemployed, and economies around the world are still on the cusp of recovery, huge cuts to public spending are likely to make the economic situation worse rather than better. Second, even if you believe that the deficit needs to be brought down at breakneck speed, then you could still think that those at the top should contribute a little bit more than those who are already struggling to make ends meet. And third, given the scale of the global crisis there are some fundamental questions about the sustainability and desirability of an economic model so dependent on financial services above other industries for both economic growth and tax revenues.

I have written about the first of these points on many occasions. On the second and third it is becoming increasingly clear that the government is pursuing a highly regressive strategy for deficit reduction and is unwilling to acknowledge the structural problems in the economy that we must address to ensure a sustainable and fair recovery.

The Institute for Fiscal Studies has demonstrated that the measures coming into effect in 2012-14 will mean that the poorest tenth will pay five times more than the richest to bring down the budget deficit, and its acting director Carl Emmerson has confirmed that ‘the tax and benefit components of the fiscal consolidation are, overall, being implemented in a regressive way’.

Between 2001 to 2008, the share of financial services in the economy increased from 5.3 per cent to 9.0 per cent, as the sector grew by 40 per cent. In 2007-8 the financial sector was responsible for 27 per cent of all corporation tax receipts. And in 2009, financial services’ 10 per cent share of UK GDP was higher than in other major economies (including the US, Japan, France and Germany).

It is clear that UK plc had become too dependent on financial services. As the prime minister put it, we need more engineering, less financial engineering.

It goes without saying that things need to be done differently – the budget deficits and debt accumulated during the recession need to be unwound as the economy recovers. But most important, the over-reliance on financial services, the risk-taking and bonus-obsessed culture in the banks and hedge funds needs to be reformed and we need a strategy for jobs and growth that is both regionally balanced and based in industries across the whole economy – including in manufacturing.

But what we see from this government is a one-sided economic strategy. A strategy to reduce public spending, although not necessarily the deficit. A strategy that far from reining in the banks allows them to carry on with business as usual as if the credit crunch and recession had never happened.

Let’s take the issue of bank bonuses. In the 2009 budget, the then Chancellor Alistair Darling introduced a tax on bank bonuses of 50 per cent. The Treasury forecast that it would bring in £550 million. In the end it raised £3.5 billion – several times more than predicted – part of the reason for the budget deficit for 2009-10 coming in £10 billion lower than Darling forecast back in March (yes, in spite of Osborne and Cable claiming that the financial position they inherited from Labour was worse than they thought the deficit was actually substantially less than envisaged just before the election).

The new government scrapped the tax on bank bonuses and set out instead in their June budget a new bank levy. Much heralded by the government, it will bring in £1.2 billion this year – that is around a third of the revenue the bonus tax generated. Moreover, analysis by HSBC shows that the bank levy is more than cancelled out by the reduction in corporation tax for UK domestic banks – including Lloyds Banking Group and RBS. So, banks will be taxed less, not more, by this government.

So much for the reality, what about the rhetoric? Cameron said on Sunday that ‘what I want to see is socially responsible banks behaving responsibly, lower bonus pools than last year’s. Responsible levels of remuneration and proper agreements on lending to businesses’. Well I agree with the prime minister. But he is no longer a hopeful onlooker, he’s in charge. If he wants to see lower bonus pools he could tax them. If he doesn’t think Stephen Hester should get a £2.5 million bonus he should both say so and act – the government and taxpayers are, after all, the majority shareholder in RBS. Instead Cameron says he understands the public anger but doesn’t want to ‘micromanage’ the banks on a daily basis. But, if he really understands public anger and incomprehension at how those responsible for causing the financial crisis – institutions still reliant on taxpayer bailouts, guarantees and liquidity – he would act.

Instead, the budget and comprehensive spending review cost children and families more than twice as much as it cost the banks. Why is it that constituents of mine in Leeds West, who earn an average of £18,000 a year, are being asked to contribute more towards deficit reduction than the banks? And why are small businesses, with bright futures, having their ambitions crushed by banks who are happy to pay multimillion pound bonuses but will not extend finance to the entrepreneurs and firms who are the true life-blood of our economy?

Unlike the government, Labour is willing to take action to both curb excessive bonuses and to ensure that those with the broadest shoulders bear more of the burden of deficit reduction. That’s why Ed Miliband proposed yesterday that the tax on bankers’ bonuses should be extended for an additional year for banks that offer bonuses of more than £25,000. The revenues would be used to support jobs and growth and represent a fairer and more responsible way to reduce the deficit and rebalance the economy. So far the government has set out to cut the welfare bill for families and pensioners by £18 billion, increase VAT by £13 billion but asked little from the banks. Labour’s plans would more than double the revenue raised by the bank levy – reducing the deficit and supporting jobs, particularly for young people with youth unemployment now running at 20 per cent.

There is a consensus about the need to bring down the deficit, but not on the speed of cuts, and who should bear the greatest burden of deficit reduction. Labour is rightly sticking to Darling’s plans to halve the deficit over this parliament but Ed has sent out an important message this week that it should not fall solely on families and pensioners to plug the deficit. It is right and fair that we ask a bit more from the banks too.

If we want to build a fairer, more sustainable and responsible economy in the wake of the financial crisis we must challenge the bonus and risk taking culture at the root of the financial crisis.

Photo: Dystopos