David Prosser: Chancellor's Christmas comes late

Outlook: Darling feels able to say that the UK won't go for a version of the US insurance levy
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The Independent Online

They make rather unlikely bedfellows but on one topic, at least, Compass, the left-of-centre think-tank, is singing from the same songsheet as the hedge fund Tosca. Both organisations are pretty dismissive of warnings that bankers are set to flee London as the supertax on bonuses and higher rates of income tax begins to bite.

Their arguments differ. Compass thinks the wider interests of Londoners are more important than those of the banking community, while Tosca reckons the capital will attract at least 100,000 new financial services professionals, many of them from banks in Brazil, Russia, India and China, over the next decade. But their point is the same: the hysteria over perceived threats to London's pre-eminence as a financial centre increasingly looks misplaced.

Indeed, Gordon Brown and Alistair Darling appear now to be considering taking the raid on the City further, with talks continuing among the G7 nations about how to make banks contribute to an insurance fund that could be called upon in future crises. Now that President Obama has proposed just such a levy in the US, the prospects of an international agreement to introduce similar taxes elsewhere are much enhanced. And don't expect a Conservative government to change tack. The shadow Chancellor, George Osborne, has been pushing for an insurance levy, assuming other countries agree, for several months. For Mr Darling, Christmas is arriving in January. A concerted worldwide movement to tax the banking sector more punitively (whatever form those taxes might take) is now in play, and this fact will undermine the argument that Britain has been over-aggressive. If banks face higher taxes in every country to which they might consider relocating, leaving London becomes rather less attractive.

Even better for the Chancellor, his own windfall tax on bonuses is being overlooked because there is so much focus now on the US plan to tax the banks. That's fortunate since the tax, proposed by the Treasury as a deterrent against banks paying bumper bonuses for 2009, is proving to be an abject failure. We saw JP Morgan announce payouts exceeding £1bn in the UK alone, last week, and its rivals – among both US and European investment banks – are set to unveil even larger bonuses.

Still, there is some consolation in this failure for Mr Darling. Unveiling the supertax, the Treasury forecast it would raise around £550m in extra tax this year. If other banks follow JP Morgan's example, as everyone expects they will, the figure is more likely to be somewhere in the region of £3bn to £6bn. If your policy is going to go wrong, taking more than 10 times as much income tax as expected ought to cushion the blow.

The happy news for the Chancellor does not end there. Not only is he now enjoying seeing other countries taking their own attacks on the banks much further than Britain – and making a tidy sum from the supertax in a meantime – but the icing on the cake will be the uncomfortable position in which Boris Johnson, the Mayor of London, now finds himself.

Last week, Mr Johnson was falling over himself to defend the interests of the City, warning that higher taxes and more regulation would drive 9,000 bankers out of London. But yesterday, having spotted that his defence of the bankers wasn't going down too well with many Londoners (and also that it lacked intellectual rigour) the Mayor was backtracking, expressing "shock" at the size of "excessive" bonuses.

For Mr Darling, meanwhile, the best of both worlds now looks to be in reach. With plenty of money coming in from the banks this year, the Chancellor feels able to say publicly that the UK won't go for a retrospective version of the US insurance levy (we're hoping to get our money back from selling off the stakes the taxpayer holds in various British banks). He will, of course, be happy to sign up to a levy in the future, assuming every other major economy does too.

Just one cloud is left on the horizon for Mr Darling, then. Will he be around long enough to enjoy all of these unexpected dividends?

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