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Forex: Darling Sees UK Recovery In 2010; Introduces 50% Bank Bonus Tax

8:21 AM

(RTTNews) - Wednesday, the UK Chancellor Alistair Darling said the economy is likely to return to growth in the fourth quarter of this year and announced the much imminent tax on bank bonuses.

"The choice facing the country is between securing recovery or wrecking it," the Chancellor said in his third pre-budget presentation before the parliament since he took charge as the Chancellor in 2007. "To cut support now could wreck the recovery - that's a risk I am not prepared to take."

Effective from today, the Chancellor introduced a special one-off levy of 50% on any individual discretionary bonus above GBP 25,000. Darling noted that if banks use their profits for paying bonuses, instead of using it to build up their capital base, they will have to pay a large amount back to the taxpayer. The Chancellor also announced that he decided against imposing a windfall tax on profits.

"This will be paid by the bank not the bank employee. Anti-avoidance measures will be introduced with immediate effect," Darling said. "High-paid bank staff will of course also have to pay, as usual, income tax at their top rate on any bonus they receive. On a cautious assumption, which includes our expectation that some banks will rein back bonuses, this one-off levy is expected to yield GBP 550 mln."

Regarding the economy, Darling said the government expects the British economy to return to growth in the fourth quarter, though it is forecast to contract by 4.75% this year. Gross domestic product is likely to grow by between 1% and 1.5% during 2010. He expects growth of 3.5% in 2011 and 2012.

The Chancellor noted that it would be dangerous to reduce spending too soon. "As long as extraordinary uncertainties remain in the world economy, this is not a time for a spending review. So, to continue to support jobs and the economy, we have decided to stick to our spending plans for next year," Darling said.

Huge public spending puts burden on the government in the form of public debt. Darling said, net debt will reach 56% of GDP this year. It will then increase to 65% next year and to 78% by the end of the forecast period in 2014-15. He added that net debt will begin to fall the year after that. Even at its peak, debt will be in line with the average for the other G7 economies, Darling asserted.

Due to the severity of recession in the UK, the Chancellor revised his forecast for public sector net borrowing to GBP 178 billion from GBP 175 billion revealed in the Budget in April. He forecasts GBP 176 billion net borrowing next year.

As the economy recovers and the deficit reduction plan starts to take effect, net borrowing would decline to GBP 96 billion in 2013-14, before falling to GBP 82 billion in 2014-15, he said. As a share of GDP, borrowing is forecast to be 12.6% this year and 12% next year, eventually falling to 4.4% by 2014-15.

The budget deficit is expected to drop to 1.9% by the end of the forecast period. The provision for any potential impact on the public finances from government's interventions in the financial sector was revised down to around GBP 10 billion from GBP 50 billion.

The policy initiatives are fiscally neutral, ING economist James Knightley said. "Given the proximity to the upcoming election Chancellor Darling has clearly taken the view that he has little to gain in taking aggressive action now," he noted. "Today's details will do little to dissuade ratings agencies from paying even closer attention to the state of the UK's finances." Further, Darling said unemployment will continue to rise for some time and hence, it would not be right to withdraw all support now for homeowners. The Chancellor added that unemployment in the UK remains lower than in France, Canada, the United States and the euro area.

Moreover, Darling confirmed that VAT will return to 17.5% on January 1 as planned. Hence, consumer inflation will rise from 1.5% to around 3% early next year, before falling back, he noted, citing that the Bank of England expects inflation to then fall below target and reach 1.5% by the end of next year.

Among the new initiatives, Darling decided to increase all employer, employee and self-employed rates of National Insurance by a further 0.5% from April 2011. To protect those on modest incomes in the front line jobs, Darling said no-one earning under GBP 20,000 is not required to pay any more national insurance contributions.

Announcing changes to the climate change levy, Darling said, from April, people with a home wind turbine or solar panels who plug their excess power into the national grid, will receive a tax free amount of an average GBP 900 a year.

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