UK slaps tax on bank bonuses, to spread pain later
By Sumeet Desai
LONDON, Dec 9 (Reuters) – Britain’s Labour government slapped a one-off levy on bank bonuses on Wednesday and said it would hike income tax for all but the poorest in 2011, delaying action to tackle a record deficit until after an election it is expected to lose.
Despite warnings by ratings agencies that debt has to be reined in, finance minister Alistair Darling revised up his borrowing forecast for this year to a record 177.6 billion pounds ($290 billion) or 12.6 percent of GDP, from 175 billion.
Next year’s borrowing forecast was also revised up by 3 billion pounds in a pre-budget report that would normally be full of populist giveaways given an election is due in less than six months and Labour is well behind in opinion polls.
Darling tried to set out Labour’s electoral pitch, promising to protect schools, hospitals and the police from the sharp spending cuts that will have to be felt almost everywhere else.
He also talked about getting the wealthy to pay their share, trying to draw a distinction between Labour as the party of hard-working families against a Conservative Party it says is more interested in protecting the interests of the rich.
“The biggest burden will fall on those with the broadest shoulders,” Darling told parliament.
Markets are pricing in the Conservatives being in power by June and know that many of Labour’s policies may never come to pass. But almost everyone agrees that big spending cuts and more tax rises will be inevitable whoever wins the election.
Darling made that much clear. National Insurance, a payrolls tax, would rise by a further 0.5 percent for anyone earning over 20,000 pounds in 2011.
Public sector wage rises would be capped at 1 percent, more generous than freezes planned by the Conservatives but a real-terms pay cut nonetheless for many on low incomes.
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With his overall package fiscally neutral — neither pumping in money nor taking it out of the economy — analysts said the harshest measures to cut debt would be taken after the election.
“He has … missed the opportunity to increase the UK’s credibility by reducing the public deficit earlier,” said Richard Lambert of employers lobby the Confederation of British Industry. “We are no clearer today as to how the government plans to reduce public expenditure.”
Darling’s opposite number, George Osborne, expected to be finance minister if the Conservatives win power, said the budget was a savage indictment of 12 years of Labour rule.
“The biggest debt we have ever known, spending cut on almost everything, taxes up on anyone who earns more than 20,000 pounds a year,” he told parliament.
Osborne accused Labour of indulging in old-style class war politics by targeting the wealthy.
“Instead of telling the country that we are all in this together, Labour now pretend they can solve our problems by setting one part of the country against another,” he said.
So far, Osborne has done little to spell out how they would tackle the huge budget deficit beyond imposing pay freezes in the public sector and, like the government, finding billions in savings from efficiencies, measures usually derided by analysts.
Darling stuck to his economic growth forecast for next year of 1 to 1.5 percent but was forced to admit he expected the economy to shrink 4.75 percent in 2009, instead of the 3.25 to 3.75 percent decline originally predicted.
He said the economy would then start roaring ahead by 3.5 percent in 2011 and 2012 which would help the deficit come down to 5.5 percent of GDP by 2013/14.
Perhaps the biggest reaction in London dealing rooms was saved for the new supertax on bankers’ bonuses. Banks will be charged a 50 percent tax rate on bonuses they pay their staff above 25,000 pounds starting today until April, a powerful disincentive for big payouts this Christmas.
“Viewed from abroad, those foreign banks which reward their UK staff with contractually-agreed bonuses are likely to be the hardest hit,” said Angela knight, Chief Executive of the British Bankers’ Association. “London may well look to them now like a significantly less attractive place to build a business.”
European Central Bank Governing Council member Axel Weber said late on Tuesday that a windfall tax on bankers’ bonuses would not be effective in encouraging less risky behaviour among banks in the long term.
(Additional reporting by Christina Fincher, Matt Falloon, Keith Weir, David Milliken, Fiona Shaikh, Avril Ormsby, editing by Mike Peacock)