LONDON The government slapped a one-off levy on bank bonuses on Wednesday and said it would hike income tax for all but the poorest in 2011, delaying action to tackle a record deficit until after an election it is expected to lose.
Despite warnings by ratings agencies that debt has to be reined in, Chancellor Alistair Darling revised up his borrowing forecast for this year to a record 177.6 billion pounds or 12.6 percent of GDP, from 175 billion.
Next year's borrowing forecast was also revised up by 3 billion pounds in a pre-budget report that would normally be full of populist giveaways given an election is due within six months and Labour is far behind in opinion polls.
Darling set out Labour's electoral pitch, promising to protect schools, hospitals and the police from the sharp spending cuts that will have to be felt almost everywhere else.
He also talked about getting the wealthy to pay their share, trying to draw a distinction between Labour as the party of hard-working families against a Conservative Party it says is more interested in protecting the interests of the rich.
"The biggest burden will fall on those with the broadest shoulders," Darling told parliament.
Markets are pricing in the Conservatives being in power by June and know that many of Labour's policies may never come to pass. But almost everyone agrees that big spending cuts and more tax rises will be inevitable whoever wins the election.
Darling made that much clear. National Insurance, a payrolls tax paid by employers and employees, would rise by a further 0.5 percent for anyone earning over 20,000 pounds in 2011. It was already slated to rise by the same amount then.
Public sector wage rises would be capped at 1 percent, more generous than freezes planned by the Conservatives but a real-terms pay cut nonetheless for many on low incomes.
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With his overall package fiscally neutral -- neither pumping in money nor taking it out of the economy -- analysts said the harshest measures to cut debt would be taken after the election.
Ratings agencies said the pre-budget measures did little to change their view on Britain which still has a triple-A rating but are looking to the next government for more concrete steps.
"The rating is based on the assumption that fiscal retrenchment will take place in the not too distant future," Arnaud Mares, Moody's lead analyst for the UK, told Reuters.
The government bonds rose after the PBR as markets had anticipated an even higher total for gilt issuance but analysts said the government could have done more.
"Today's PBR does not do the economy excessive harm. But nor does it come to terms with the challenge of setting a course towards a sustainable fiscal position," said Philip Shaw, chief economist at Investec.
George Osborne, expected to be chancellor if the Conservatives win power, said the budget was a savage indictment of 12 years of Labour rule and now showed them indulging in old-style class war politics by targeting the wealthy.
"Instead of telling the country that we are all in this together, Labour now pretend they can solve our problems by setting one part of the country against another," he said.
But the Conservatives indicated they would support the tax on bank bonuses.
They have said they want to cut the deficit faster but have so far done little to spell out their strategy beyond public sector pay freezes and, like the government, finding billions in efficiency savings, measures usually derided by analysts.
Darling stuck to his economic growth forecast for next year of 1 to 1.5 percent but was forced to admit he expected the economy to shrink 4.75 percent in 2009, instead of the 3.25 to 3.75 percent decline originally predicted.
He said the economy would then start roaring ahead by 3.5 percent in 2011 and 2012 which would help the deficit come down to 5.5 percent of GDP by 2013/14.
Perhaps the biggest reaction in London dealing rooms was saved for the new supertax on bankers' bonuses. Banks will be charged a 50 percent tax rate on bonuses they pay their staff above 25,000 pounds starting today until April, a powerful disincentive for big payouts this Christmas.
The City of London was not happy.
"Viewed from abroad, those foreign banks which reward their UK staff with contractually-agreed bonuses are likely to be the hardest hit," said Angela Knight, Chief Executive of the British Bankers' Association. "London may well look to them now like a significantly less attractive place to build a business."