Events | 2009.12.08
Labour opens new front in battle with the City
Gordon Brown threatens transactions levy on top of Alistair Darling\'s pre-budget report super-tax on bonuses
Gordon Brown is planning to escalate Labour\'s growing war with the City by threatening two more levies on banks in addition to the tax on bonuses due to be announced tomorrow by the chancellor.
Alistair Darling will use tomorrow\'s pre-budget report to impose a one-off tax on this year\'s bonus round, but No 10 will further step up the squeeze on the Square Mile on Thursday with a 60-page report making the case for a so-called transactions tax on all City trading, and an insurance scheme to stop taxpayers being forced to foot the bill for any future banking crises.
Leaked plans for the bonus tax have already attracted fierce criticism in the City, where traders will be scrutinising the pre-budget report for signs of weakness in Britain\'s public finances after renewed jitters in the market today.
In tomorrow\'s speech, the chancellor will signal "real cuts" across Whitehall if Labour is re-elected, promising that only the budgets for schools, hospitals and police will be protected from his determination to meet a commitment to halve a £180bn deficit by 2014.
He will not spell out tomorrow precisely how much each department will have to cut in the year after the election, arguing the economic outlook is too unpredictable to set out detailed figures now, but the promise to increase spending in the three protected areas implies that some departments will face cuts as deep as 15% from 2011.
In what is seen as one of the last big political landmarks before the election, Darling is locked in a balancing act trying to show he can protect cherished frontline services, and yet cut the deficit and assuage the markets.
He hopes to inject credibility into his promise to cut the deficit by publishing a bill binding him to halving the deficit within four years.
He will also spell out for the first time the degree to which the schools, hospitals and police budgets will be protected when he reveals how extra spending in these areas will be funded by measures including higher taxes and efficiency savings.
Nevertheless, Darling will face Tory allegations of dangerously deferring the necessary tough medicine when he reveals he will not start to cut spending next year, instead sticking to published plans for 2010-2011 to boost spending by £30bn to £700bn.
David Cameron mounted a pre-emptive strike by claiming the deficit represented a dark cloud hanging over Britain, adding that the government did not have a credible deficit reduction plan.
Speaking at a business conference, the Conservative leader said: "A credible plan is not only about tomorrow but it\'s also about what you start to do today. I don\'t think anyone is going to be impressed with a plan that doesn\'t have at least some early action in it."
Darling\'s tax on bankers\' bonuses to be announced tomorrow may not in itself raise significant sums. But the government\'s new-found appetite for challenging the City is winning enthusiastic support from Labour MPs, and the decision to follow this up immediately with the threat of two further taxes is hugely symbolic.
The prime minister and the chancellor are determined to keep up their populist attack on high-rolling bankers, who have infuriated the government by rapidly returning to business-as-usual.
The Treasury-backed report due to be published on Thursday will suggest international financiers are making excessive profits, and should be forced to contribute more to society.
It will say: "Where there are elements of the financial services industry that are generating super-normal returns for either executives or shareholders because of the existence of market failures, then there may be a case for increasing taxation on those returns." It will argue the transaction tax must be set at a low rate to avoid distorting the markets, but should cover all transactions, including trading in the complex derivatives that were at the heart of the US subprime crisis, as well as shares and currencies.
The report will also flesh out ideas for ensuring banks meet the costs of future crises. Brown believes the rescues of the past 18 months show that any government would be forced to bail out sprawling financial institutions such as Royal Bank of Scotland, or face complete economic collapse. Therefore, such banks should pay up front for the insurance they in effect receive from the state, or devise plans that will ensure their shareholders foot the bill.
Whitehall sources suggested the government was keen to pursue both ideas – an insurance scheme and a transaction tax, making a hefty double-whammy for the financial sector.
With Darling due to give more details tomorrow of how he will meet his promise of halving the public deficit over the next four years, the Treasury believes an international transaction tax could bring in much-needed revenues.
"Clearly a very low rate would have much less distortionary impact, while potentially raising a significant amount of finance," it will say.
As Darling prepares to reveal the details of his new tax on bonuses, the City regulator, the Financial Services Authority, also gave banks a clear message today that they should not pay out bonuses without its prior consent.
Plans for the bonus tax have prompted a furious reaction in the City. Jon Wood, a hedge fund manager, described the proposal as disgusting, adding: "It wasn\'t all the bankers\' fault."
When asked if the tax would drive financiers away from the City, Wood, founder of SRM Global fund which lost out when Northern Rock was nationalised, said "absolutely". But he also reckoned bankers would find ways around whatever tax was introduced. "The City will be ahead of the Treasury," he said.
Bob Diamond, one of the highest profile investment bankers in the City, who has himself been paid bonuses of up to £20m, also launched a defence of the bonus culture today. Diamond, president of Barclays and the head of its investment banking arm Barclays Capital, said that a tax on bonuses went against the principles agreed by the G20 to spread out payments over three years and pay larger portions in shares.
"We don\'t feel that is supported by the principles that were adopted," Diamond said, adding a threat that bankers could flee the City if the plans go ahead. "Both financial capital and human capital are extremely mobile," he said.
Brown has said he will not press ahead with plans for a transaction tax without approval from the world\'s other major financial centres. But No 10 claims there has been growing international momentum behind the radical plan since the prime minister threw his weight behind it in a speech last month.
The French finance minister, Christine Lagarde, and the foreign minister, Bernard Kouchner, wrote an editorial in Le Monde backing a transaction tax earlier this week, while in the US, Democratic majority leader Nancy Pelosi has said it has "a great deal of merit".
Max Lawson, head of development at Oxfam, said: "A tax on financial transactions is the only option that will raise serious money to prevent cuts and fight poverty.
"The prime minister should go it alone and put a small tax on sterling trading to raise billions of pounds, without waiting for the rest of the G20."
With the International Monetary Fund due to complete an analysis of plans for stabilising the financial sector in April, the government\'s study will lay out options for ensuring that the financial sector pays its way, including imposing an up-front insurance-style scheme for banks that are "too big to fail".The prime minister will use the evidence set out in the paper to push the idea of a transaction tax with his fellow leaders at a European council meeting on Thursday. No 10 also plans to hold a series of seminars with economists and bankers to discuss the idea over the coming months.
For more information, please visit
http://www.guardian.co.uk/politics/2009/dec/08/pre-budget-report-tax-banks
