British finance minister Alistair Darling set the stage for the coming election, announcing today a one-off super tax on bank bonuses and other higher taxes on the rich.
His Labour Party is on course to lose an election that must take place in less than six months and desperately needs this pre-budget report to help close the opposition Conservative Party's commanding lead in opinion polls.
But the recession has turned out to be much deeper than forecast in April and Mr Darling had to revise up his borrowing forecast for this fiscal year to a record £177.6 billion or 12.6 per cent of GDP, from £175 billion.
Borrowing for 2010/11 was also revised up by £3 billion to £176 billion.
Though Mr Darling stuck to his economic growth forecast for next year of 1 to 1.5 per cent he was forced to admit he expected the economy to shrink 4.75 per cent in 2009, instead of the 3.25 to 3.75 per cent decline originally predicted.
"Because of the underlying strength of our economy, the pick-up in world demand, and the substantial spare capacity opened up by the recession, my Budget forecast ... of growth of 3.5 per cent in 2011 and 2012 remains unchanged," Mr Darling said.
He announced a tax rise in the pipeline for anyone in work with a further 0.5 per cent increase national insurance rates from April 2011 for all employers, employees and the self-employed.
The Chancellor angered unions by announcing plans to cap public sector pay rises to 1 per cent for two years from 2011.
He said that contributions from the state to the pensions of teachers, local government and health workers and civil servants would be also capped, saving £1 billion a year.
The Government said the senior civil service pay bill would be cut by up to £100 million over three years and any new government appointment over £150,000 and all bonuses over £50,000 would require Treasury approval.
Mr Darling gave a boost to pensioners announcing a 2.5 per cent increase in the state pension next year.
And there was laughter from MPs when he announced a cut in bingo duty.
He confirmed that VAT will return to 17.5 per cent on January 1 but added: "I have no other changes in VAT to announce."
With little money to spend on giveaways when markets are very keen to see more measures to get the record budget deficit down Labour turned up the heat on bankers who many blame for Britain's worst recession since World War Two.
Mr Darling said banks would be charged a 50 per cent tax rate on bonuses they pay to their staff above £25,000 starting today until April 5th, 2010, a powerful disincentive for big payouts in this year's Christmas bonus round.
The new tax would apply to all banks, building societies and branches of foreign banks operating in Britain.
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 penalising high earners in the financial sector will lead to an exodus of talent overseas.
European Central Bank Governing Council member Axel Weber said late yesterday that a windfall tax on bankers' bonuses would not be effective in encouraging less risky behaviour among banks in the long term.
Britain has been put on warning by markets and ratings agencies that it must rein in its spiralling debt.
Yesterday, Moody's said AAA-rated governments with "stretched balance sheets" such as Britain will come under increasing pressure to announce credible fiscal adjustment plans and start implementing them.
Earlier this year, rival ratings agency Standard & Poor's downgraded the outlook for Britain's rating to "negative" and said it could cut the rating after the election if Britain's next government did not produce a watertight plan to cut debt.
Agencies