Pre-Budget Report: Darling's last stand?

Wednesday, 09 December 2009 11:19

The chancellor is due to give his Pre-Budget Report (PBR) later today with analysts predicting a windfall tax on banker's bonuses and the scrapping of planned inheritance tax reforms.

Many believe Alistair Darling will propose a 50% tax on bonuses over £20,000 for those working in the financial services. Critics have, however, already pointed out that the banks themselves will simply find ways around the levy including simply increasing bankers' salaries.

The tax would not be applied to individual bankers themselves but banks would have to pay 50% on the total bonus pool they intended to give their staff. In the case of Royal Bank of Scotland (RBS) this would amount to 50% of the £1.5 billion pool it had set aside for its investment staff this year.

Last week the board of RBS threatened to resign in a spat with the government over the size of the bonus pool. The board claimed it would suffer from a "flight of talent" if it were not able to provide a generous bonus structure to its staff.

But business secretary Peter Mandelson insisted the tax would not lead to an exodus from the City.

"I know some people think that the banks have brought this on themselves and that we just ought to teach them a lesson," Mr Mandelson told the BBC this morning.

"That's not the frame of mind that we are in.

"We want them to become profitable again. But also people do have to understand that people will be very disconcerted, very disappointed to see the return of excessive bonuses we have seen in the past."

The chancellor will also have to admit that the economy shrank by more than expected this year but he is expected to stick to the Treasury's forecasts for growth in 2010 of between one and 1.5 per cent.

The bonus tax is just part of a series of measures which will see the financial services industry targeted in an effort to ease public anger and as a way of suggesting the UK economy must never become over reliant on the City again.

Tomorrow, a 60-page report will make the case for a transaction tax on City trading. An insurance scheme will act to prevent any repeat of the events which led to the credit crunch, with the public protected against propping up the banking industry in the event of another collapse.

The chancellor will also be expected to explain how he intends to halve the budget deficit in the next four years. This is largely expected to come in the form of drastic cuts or freezes in public spending.

Front line services such as the police, health service and education will be ring-fenced. But other government departments have been told to expect budget cuts of up to 15% from 2011 onwards in order to support those front line services.

Meanwhile, the government's upcoming reforms to inheritance tax (IHT), which would see the nil-rate band rise from £325,000 to £350,000, could also be cancelled. This would set a dividing line between Labour and the Conservatives who want to increase the IHT threshold substantially.

It is also possible national insurance contributions will go up beyond the planned rise of 0.5 per cent to one per cent.

Meanwhile, the Tories will find it hard to oppose action against the banks, which would allow the government to argue they do not have the inclination to tackle the sector.

Yesterday, David Cameron launched a pre-emptive attack on the PBR while speaking at a business conference.

"A credible plan is not only about tomorrow but it's also about what you start to do today," he said.

"I don't think anyone is going to be impressed with a plan that doesn't have at least some early action in it."

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