WHEN George Osborne starts offering more money to poor people, it's a sure sign the Tories are getting worried.

The Chancellor tried to upstage Ed Miliband's speech on banking reform on Friday by announcing, in advance, that he planned to restore the real-terms value of the national minimum wage by raising it to £7 an hour. And about time too. Those four million souls on this miserable remuneration should never have been made to pay the cost of the bank bail-outs of 2008.

However, the announcement was more about politics than fairness. The Coalition realised that Ed Miliband's call to reject Royal Bank of Scotland's latest excessive bonuses, and to break up the monopoly banks, was going down rather well with the voters. Even 80% of Tory voters, according to YouGov, oppose the RBS bonuses.

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Under EU rules, major shareholders must agree employee bonuses which are more than 100% of basic salary. The Government is the major shareholder in RBS, owning 81%. Yet, David Cameron last week refused to block bank boss Ross McEwan's bonuses of 200% for Royal Bank executives. Cameron put a cap on the RBS bonus pool of £607 million - the same as last year - but didn't say how it should be distributed.

This was a revealing insight into the psychology of a government dominated by ex-public schoolboys who really don't understand the fuss over high pay. These payments are offensive not just to the left, not just to the poor, but to the 85% of the population who earn less than £40,000 and have been struggling to cope with rising prices and falling wages. This is not just a reward for failure; it is a reward for wrongdoing.

The state-owned behemoth was caught last year conniving with other banks to fix the Libor interest rate, and is paying hundreds of millions in compensation for mis-selling payment protection insurance (PPI).

RBS has not only failed to lend to small businesses; it stands accused by the Government's own enterprise adviser, Lawrence Tomlinson, of trying to drive many of them out of business altogether. Finally, RBS posted losses of £5 billion last year, owes £45bn to the taxpayer and is still sitting on £38bn in bad loans. So much for performance-related pay.

After a performance like this you might think the executives of RBS should be handing their salary back, not trebling it. Next time you see one of those toe- curling RBS adverts about being "here for you", remember that it's taxpayer-funded propaganda for a bank that's here for the enrichment of its own executives.

And while we're at it, why has the Scottish Government been so silent on bonuses and competition? Where is the social democrat Alex Salmond, he of the Common Weal? Both of Britain's part-nationalised banks have Scottish origins and are headquarters in Scotland. Yet if the Scottish Government has said anything about bank competition or bonuses, they have said it so quietly as to be scarcely audible.

The SNP leadership got far too close to the Scottish banks before 2008. The fear must be that, in an independent Scotland, the banks could exert even greater influence over the Scottish Government than they do over the UK.

The banks don't do anything so crude as bribe politicians: they intimidate them with expensive lobbying campaigns and then dangle the prospect of lucrative jobs for senior politicians when they retire from public life. Tony Blair walked out of Downing Street and into JP Morgan bank with a reported sinecure of over £1m. We can only speculate where George Osborne and David Cameron will choose to devote their energies when they leave office.

A million a year seems to be a kind of benchmark for City remuneration. We are told high pay is essential in a capitalist economy. But is it? More people earn in excess of €1m in the City of London - 2700 - than in all the other EU countries combined. In Germany, only 212 bankers earn this much. Yet the German economy is in vastly better shape than our own, which suggests bonuses aren't quite the incentive bankers say they are.

APOLOGISTS for the banks say capping bonuses wouldn't make much difference because they'd just increase basic salaries to make up the difference. Perhaps - though the Government would surely have a say on this in state-owned RBS. However, it's true that banking seems to be one occupation where people can pay themselves anything they want. But there is a reason for that: there is too little competition.

British banking is rather like the energy sector - dominated by a handful of giant banks which tend to work closely together. The Libor rate-fixing scandal revealed the extent to which banks jointly manage the money markets in their own interest - just as the great Scottish economist, Adam Smith, said they would if not exposed to competition. Lloyds/HBoS has a market share of over 30% - something that would be illegal in America. Four UK banks account for 70% of retail banking and 80% of business lending.

These behemoths are vertically integrated, just like the energy monopolies, and can engage in subtle accounting transactions to obscure their true earnings. Their size also makes them "too big to fail" because if one of them goes down, the entire financial system could crash. As the former Governor of the Bank of England, Mervyn King, put it: "Banks that are too big to fail, are simply too big."

Under EU competition law, Lloyds and RBS should be broken up to prevent them dominating the market.

The Labour leader Ed Miliband has called for a Monopolies Commission inquiry into banking competition - a pretty modest proposal - and for no bank to have more than a 25% market share. The governor of the Bank of England, Mark Carney, says this in itself would not improve competition. But it is a necessary, if not a sufficient, condition for creating a competitive banking sector.

What we have now is what has been described as "socialism for the banks". These institutions have almost unlimited access to public money, through measures like quantitative easing, yet cannot go bust like any other business. It is to David Cameron's discredit that the party of Margaret Thatcher should be so willing to protect this lucrative sector from the disciplines of market competition. The Government has tried to block EU legislation on banker bonuses, and on the financial transactions tax to pay for future bank bail-outs.

Banks are not part of the productive economy. As the former head of the Financial Services Authority, Adair Turner, put it, they are "socially useless". They divert capital from productive activities and into bonuses - some £13bn a year, twice the revenues from North Sea oil. What we need is capitalism for the banks.

Labour hardly have clean hands here. Indeed, it was a Labour chancellor, Gordon Brown, who let the City of London become a casino. He also created the ultimate behemoth bank in 2008 when he arranged the shotgun marriage of Lloyds and HBoS. But better a sinner repenteth. Ed Miliband should stick to his guns. He has the nation behind him.