LONDON (Reuters) - British finance minister Alistair Darling slapped a one-off levy on bank bonuses and raised other taxes on the wealthy on Wednesday, setting the stage for the coming election by playing on class divides.
“The biggest burden will fall on those with the broadest shoulders,” Darling told parliament.
Over half of the additional revenue raised by measures announced over the last year would be paid by the top 2 percent of earners, he said.
Britain has been put on warning by markets and ratings agencies that it must rein in its soaring debt but a deeper than expected recession meant 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.
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.”
Labour is on course to lose an election due within 6 months and desperately needs to close the opposition Conservative Party’s huge opinion poll lead.
Alongside higher taxes on the wealthy, there were sops for poorer families like promises of free school meals.
Next year’s borrowing total was also revised up by 3 billion pounds to 176 billion pounds but gilts rose after Darling’s speech as financial markets had predicted an even bigger total.
For graphic on borrowing figures, click on: here
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 admitted as much, announcing pain for almost everyone once the election was out of the way. National Insurance, a payrolls tax, would rise by 0.5 percent for anyone earning over 20,000 pounds in 2011.
The public sector would also have wage rises capped at 1 percent, more generous than the freezes suggested by the Conservatives but a real-terms pay cut nonetheless.
His opposition number, George Osborne, said the huge debt total was a savage indictment of Labour’s rule since 1997.
“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.
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.
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 will lead to a talent exodus.
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.
Additional reporting by Christina Fincher, Matt Falloon, Keith Weir, David Milliken, Fiona Shaikh, Avril Ormsby, editing by Mike Peacock