Darling May Tax Bonuses, Raise Debt as Election Nears

By Gonzalo Vina and Robert Hutton

Dec. 9 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling today may boost the U.K. Treasury’s borrowing and raise taxes on bankers, part of the Labour government’s effort to revive voter support before next year’s election.

The BBC reported that banks awarding bonuses above a specific threshold will have to pay a levy of about 50 percent on them. It didn’t say where it got its information. Darling speaks at 12:30 p.m. in Parliament.

“Nobody wants to drive banks and bankers away from the City of London, they’re important for our economy,” Business Secretary Peter Mandelson told GMTV. “But we’re seeing in some respects a return to the short-term bonus culture that got us into trouble in the past, so it’s reasonable for the chancellor to deliver a message to the banks.”

Trailing in opinion polls before an election that he must hold by June, Prime Minister Gordon Brown is balancing the need to clamp down on a record budget deficit while extending support to voters struggling in the deepest recession since 1980.

Darling may add 30 billion pounds ($48 billion) to the government’s borrowing forecasts for the next four years, according to the median estimate of 37 economists surveyed by the Treasury last month.

The chancellor will maintain plans to trim government spending over the next two years, an official at the Treasury said, asking not to be named because details remain confidential. Total managed expenditure will be 671.4 billion pounds in the year through March and 701.7 billion pounds the following fiscal year, the official said.

‘Belt-Tightening’

“It’s not going to be painless what the chancellor announces this afternoon, but it’s not going to be reckless,” Mandelson said. “He’s going to introduce some belt-tightening measures, but he’s not going to act in a way that will slam on the brakes on the recovery that’s underway.

The report will contain a pledge to maintain current spending levels for schools, hospitals and police. That will mean cuts in other government programs beyond 2012, the official said.

The pound fell for a fifth day today, weakening 0.2 percent to $1.625 against the dollar. The currency will stay under “downward pressure” because the budget report today will fail to reassure investors Britain can shore up its finances, Citigroup Inc. economists said today.

Already, the chancellor has said he will claw back money from bankers after the industry benefited from the 117 billion pounds of support the Treasury granted financial institutions since the credit crisis started in 2007.

Taxpayer Bailout

“They need to realize that there would not be a bank standing today if taxpayers hadn’t put their hands in their pockets,” Darling said on Dec. 7. “The industry as a whole does need to show some degree of restraint.”

Brown’s Labour government and David Cameron’s Conservative both have promised measures to rein in the culture of bonus payments in the City, London’s financial district.

“There is a feeling out there that these guys are overpaid and the public wants retribution,” said Keith Pilbeam, a professor of financial economics at City University in London. “There is an idea that they need punishing because they haven’t really suffered at all during this crisis.”

Where the two parties diverge is on just how quickly the government should curb the deficit. In March, Darling forecast a shortfall of 175 billion pounds in the year through March 2009. At more than 12 percent of gross domestic product, it’s the most among the Group of 20 nations. Cameron says the deficit is the biggest threat to the economy and may weaken Britain’s top-notch credit rating.

Deficit Reduction

“We can’t solve the problem of the deficit straight away, but what there’s an absence of is a credible plan,” Cameron said yesterday. “I don’t think anyone’s going to be impressed with a plan that doesn’t at least have some early action in it.”

Darling said Dec. 7 that voters “don’t buy the argument that there should be a decade of austerity” and that “going further and faster” on curbing the deficit “would be ruinous.”

Five polls since the beginning of November have signaled the Conservative lead over Labour is narrow enough to deny the opposition an outright victory in the election. Those findings coincided with Brown and Darling stepping up attacks on bankers who they blame for causing the economic crisis.

A Populus Ltd. survey finished Dec. 6 showed the Conservatives with an eight-point lead over Labour, not enough to win a majority in the House of Commons.

Banker Concern

Barclays Plc President Robert Diamond yesterday said plans to impose a windfall tax on bankers’ bonuses are unwarranted, and that the U.K. risks putting the City at a competitive disadvantage.

The tax proposal “isn’t supported by the principles we adopted” in response to the financial crisis, said Diamond, who oversees the London-based lender’s investment-banking division.

Darling earlier this week said he will not be “held to ransom” by bankers who have cried foul about the levy. Bonuses for financial services employees may rise by 50 percent to 6 billion pounds this year, the Centre for Economics & Business Research Ltd. said in October.

Moody’s Investors Service yesterday said its top debt ratings on the U.S. and the U.K. may “test the Aaa boundaries” because their deficits are worsening. With the Institute for Fiscal Studies expecting tax increases to plug the hole in its public finances, Darling is looking for targets.

“Banks won’t be able in such a short timeframe be able to give everyone a big salary increase, so I think they will identify the bonuses fairly easily,” said City University’s Pilbeam.

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net or Robert Hutton in London at rhutton1@bloomberg.net