The pre-Budget report 'to include 50% bank bonus tax'

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Title The pre-Budget report 'to include 50% bank bonus tax'
Summary A tax on bankers' bonuses is expected to form the centrepiece of Alistair Darling's pre-Budget report - the last before the general election.
Body Banks may face a one-off 50% levy on bonuses above a level which could be as low as £10,000, the BBC's business editor Robert Peston understands.

It is intended to deter big bonuses rather than raise revenue, he said.

The Tories accused Labour of "chasing headlines" by "bashing the bankers" to divert attention from the economy.

Economists expect Mr Darling to revise upwards his forecast for borrowing this year from the £175bn predicted in April's Budget.

That would make it even more difficult for him to fulfil his pledge to halve the budget deficit - the gap between the amount of money the government gets from things like tax and the amount it spends - by 2013.

The Conservatives say borrowing levels need to be reduced much more quickly, as the spiralling deficit is sapping economic confidence.

Shadow business secretary Ken Clarke said Mr Darling's speech would contain "a fair amount of political candy floss", such as the tax on bankers' bonuses, to divert attention from the state of the economy.

"What he should do is start talking seriously about freezing budgets of non-essential public spending, deciding where to make the savings so that we don't have to keep printing the money we are at the moment, so we can borrow it from people without interest rates going up," he told the BBC News Channel.

Without such measures there would only be "flickering" recovery next year said Mr Clarke, rather than the firm return to growth likely to be predicted by Mr Darling in his speech.

The chancellor is expected to say the economy will shrink 4.75% this year - a more severe contraction than the 3.5% drop predicted in April - but stand by forecasts for growth in 2010 of between 1% and 1.5%.

Business secretary Lord Mandelson denied the government just wanted to "teach the banks a lesson" with its new one-off bonus tax.

He told BBC Breakfast: "We want the banks to build up the capital on their balance sheets, we want them to become profitable again, we want them to function normally because the rest of the economy depends on that.

"But, equally, they do have to understand that people will be very disconcerted, and disapproving, to see a return to the excesses, the bonus culture that we have seen in the past."

Youth unemployment

Explaining how the bank bonus tax would work, Robert Peston said: "The chancellor will say that if banks pay bonuses to individual bankers over a specified fairly low level - perhaps £10,000 - that will trigger a special one-year-only tax for those banks.

"The tax payable will be calculated by adding together all those big bonuses and then levying a charge on the aggregated sum of those big bonuses.

"The tax rate for the bank on that pool of bonuses would be more than 50%."

He said the effect of the new tax, which is expected to apply to all banks operating in the UK including branches of foreign banks, would be to make it "very expensive" for banks to pay bonuses.

Many banks intend to pay out millions of pounds in bonuses despite it being just a year since the huge taxpayer-funded bail-out of the banking system.

Some have warned of bankers moving abroad to dodge the tax but Mr Darling has said he would not be "held to ransom" by the banks.

Mr Darling is not expected to set out detailed spending plans for the years after 2010-11 but he may single out areas in England, such as schools, hospitals and police to be "ring-fenced" from future cuts as the battlelines are drawn for next year's general election.

A number of new green initiatives are expected in the report, with tax rebates for electric cars and wind turbines and possible help with the cost of replacing old household boilers.

Support for youth unemployment and environmental measures are also likely. There is also speculation about possible increases in National Insurance.

The chancellor's statement at 1230 GMT will set the tone for the economic debate in the run-up to the election - which must be held by next June.

The Lib Dems argue neither of the main parties are being honest about the spending challenges facing the next government and the extent of cuts that will be needed.

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