Page last updated at 11:35 GMT, Sunday, 6 December 2009

Chancellor Alistair Darling warns banks over bonuses

Alistair Darling: "I don't want to end up with a situation where you damage an industry which we need"

Chancellor Alistair Darling has warned banks that the government will not be "held to ransom" over bonuses.

He played down reports he will hit bankers with a windfall tax on bonuses in Wednesday's pre-Budget report.

But he told BBC One's Andrew Marr show the better-off would have to shoulder more of the "burden" of recovery.

Shadow chancellor George Osborne would not rule out a windfall tax on bonuses, likely to hit £6bn this year, but said he would prefer a future profits tax.

RBS reportedly wants to pay a total of £1.5bn in bonuses to investment banking staff, and the board has threatened to quit if the government blocks the move.

Mr Darling said the government had a "veto" over bonuses at the state-owned bank but said it had "not come to us with any proposals at all at the moment because they don't yet know what the end of year position will be".

But he stressed: "These bonuses have to be reasonable and they have to be responsible and I think everyone has to accept that."

Spending cuts

He refused to speculate on whether there would be a windfall tax on bonuses in Wednesday's pre-Budget report, but added: "We are not going to be held to ransom by people who believe you can pay extraordinarily high bonuses without regard to what's going on."

But he acknowledged also that there had to be "sufficient incentives" to ensure RBS got back onto a "proper footing" and off the government's books.

You would expect the broadest shoulders to bear the greatest burden
Alistair Darling, chancellor

Mr Darling is expected to confirm on Wednesday that Britain's annual budget deficit will now top £175bn, largely because of plummeting tax receipts due to the recession.

He said his top priority is to halve the deficit within four years - and he said he would detail some areas of public spending that are likely to be cut, but stressed that the pre-Budget Report was not a full spending review.

Asked about speculation he will further increase tax rates for the rich in the pre-Budget report, he said the top rate of income tax was fixed at 50%.

But he added: "You would expect the broadest shoulders to bear the greatest burden."

Mr Darling's speech on Wednesday is likely to include several revenue raising measures, with capital gains tax and inheritance tax thought likely to be targeted.

Tax rises

It is thought that Mr Darling may increase the capital gains tax rate to 25% or even 30%, while some commentators think he could go further and raise it to 40%, in line with the 40% income tax band.

Accountants KPMG predict Mr Darling will hit wealthy families with the introduction of a new 50% rate on estates worth more than £1m.

Mr Darling has been heavily critical of Conservative plans to cut inheritance tax, telling Andrew Marr: "It wouldn't be right to be giving further tax breaks to people at the very top."

George Osborne told Andrew Marr he "wouldn't rule out" a windfall tax on bonuses, but would prefer reforms to ensure banks pay tax on future profits.

George Osborne: "Wouldn't rule out" bank windfall taxes

"My message is clear - when the banks start making profits again they should start paying taxes again," he said

The shadow chancellor also argued that no "significant" bonuses should be paid in cash or existing shares to bankers.

Any rewards should be paid in new share capital, he argued, which would help support lending and help tackle the "scandal" that cash flows had not been restored to consumers and small businesses.

He also defended his party's inheritance tax proposals and insisted he would seek to introduce them over time "when we can afford it".

'More effective solution'

On the wider economy, Mr Osborne said he could not rule out tax rises but called for measures to restrain government spending.

Liberal Democrat Treasury spokesman Vince Cable said a tax on bank profits would be more effective than a levy on bonuses.

"There is a complete lack of clarity at the heart of the Labour and Tory approaches to the banks," he said.

"The simple and correct approach, since many banks are returning to high levels of profitability, is for banks to pay for the taxpayer guarantee that they currently enjoy.

"A 10% levy on bank profits would raise around £2bn in current conditions and would go to paying down the deficit.

"This is a much more effective solution than a one-off levy and recognises the debt that the banks owe to the taxpayer."

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