(Pic)-Britain's Chancellor of the Exchequer Alistair Darling (C) smiles after having his collar adjusted by U.S. Treasury Secretary Timothy Geithner (L) as France's Finance Minister Christine Lagarde looks on during the family photo at the G20 Finance Ministers meeting at a hotel in St. Andrews, Scotland, November 7, 2009. REUTERS/Andrew Winning
LONDON (Reuters) - British finance minister Alistair Darling set the stage for the coming election, announcing on Wednesday a one-off super tax on bank bonuses and other higher taxes on the rich.
His Labour Party is on course to lose an election that must take place in less than six months and desperately needs this pre-budget report to help close the opposition Conservative Party's commanding lead in opinion polls.
But the recession has turned out to be much deeper than forecast in April and Darling had to revise up his borrowing forecast for this fiscal year to a record 177.6 billion pounds ($290 billion) or 12.6 percent of GDP, from 175 billion.
Borrowing for 2010/11 was also revised up by 3 billion pounds to 176 billion pounds.
Though Darling stuck to his economic growth forecast for next year of 1 to 1.5 percent he 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.
"Because of the underlying strength of our economy, the pick-up in world demand, and the substantial spare capacity opened up by the recession, my Budget forecast ... of growth of 3.5 percent in 2011 and 2012 remains unchanged," Darling said.
With little money to spend on giveaways when markets are very keen to see more measures to get the record budget deficit down Labour turned up the heat on bankers who many blame for Britain's worst recession since World War Two.
BANK BONUS HIT
Darling said banks would be charged a 50 percent tax rate on bonuses they pay to their staff above 25,000 pounds starting today until April 5, 2010, a powerful disincentive for big payouts in this year's Christmas bonus round.
The new tax would apply to all banks, building societies and branches of foreign banks operating in Britain.
The government hopes the move will encourage banks to use additional cash to shore up their capital bases, rather than pay high salaries. But banking groups have warned that penalizing high earners in the financial sector will lead to an exodus of talent overseas.
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 behavior among banks in the long term.
Britain has been put on warning by markets and ratings agencies that it must rein in its spiraling debt.
On Tuesday, Moody's said AAA-rated governments with "stretched balance sheets" such as Britain will come under increasing pressure to announce credible fiscal adjustment plans and start implementing them.
Earlier this year, rival ratings agency Standard & Poor's downgraded the outlook for Britain's rating to "negative" and said it could cut the rating after the election if Britain's next government did not produce a watertight plan to cut debt.
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Wed Dec 9, 2009 8:59am EST
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