Facing budget deficit, Britain taxes some bankers' bonuses

LONDON -- Britain's ruling Labor Party on Wednesday slapped a one-time levy on bankers' bonuses and vowed future spending cuts and tax hikes to tackle the government's biggest budget shortfall since World War II.

The measures underscored the extreme pressure faced by nations including Britain and the United States to confront the massive budget deficits created during the financial crisis. With tax revenue plunging and spending to bail out banks and prop up the economy soaring, the British government is now borrowing 12.6 percent of national income to cover shortfalls.

On Tuesday, Moody's credit agency warned of an "inexorable deterioration" in Britain's long-term ability to pay its debt if the government does not deal with its budget deficit. The warning fanned market fears of a credit rating downgrade. Any move to lower Britain's rating would roil world markets at a time when concern is already growing over a possible debt default in Greece after Dubai World's announcement of a suspension of payments last month.

Britain's government vowed to halve the $300 billion deficit within four years. Yet the ruling Labor Party, whose support in opinion polls has tanked, put off its toughest reforms until at least 2011, after elections expected next spring.

In Britain as in many other nations, officials fear that tax hikes or spending cuts made too soon could derail attempts to mend the economy, which is still mired in recession, even as the United States, Japan and other major nations in Europe have returned to growth.

Alistair Darling, the chancellor of the exchequer -- Britain's equivalent of Treasury secretary -- warned Britons that their contribution to national insurance programs would need to increase in 2011. He also told public servants to expect new limits on pay raises and broadly outlined $8.4 billion in cuts from low-priority programs. With election season in full swing, however, Darling was more specific about what he would not cut -- vowing that budgets for hospitals, schools and police would be protected.

With public anger growing here, as in the United States, over plans by financial institutions to dole out billions in executive bonuses so soon after the crisis, Darling also unveiled a much-anticipated one-time tax on bank bonuses over $42,000 -- generating a pool of $924 million to be spent on job creation.

"There are some banks who still believe their priority is to pay substantial bonuses to their already high-paid staff," Darling told Parliament.

"So I am giving them a choice. They can use their profits to build up their capital base. But if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer."

The opposition Conservative Party -- well ahead in opinion polls here despite calling for deeper, faster cuts in government spending -- railed against Darling's measures, saying they would not do enough to right the nation's ailing finances.

Darling had a choice when preparing the measures, presented in what is known as a "pre-budget report," George Osborne, the Conservative Party's leader on economic issues, told Parliament on Wednesday.

"Would he take the tough spending decisions before the general election, or would he completely duck them?" Osborne asked.

"We were promised a pre-budget report, and what we got was a pre-election report. They have lost all the moral authority to govern today."