Cut in City bonuses unlikely to be as severe as Brown forecast

The forecast collapse in City bonuses that the Government used to justify raising public borrowing requirements in Tuesday's Pre-Budget Report is unlikely to be as severe as the Chancellor predicted, economists said yesterday.

The forecast collapse in City bonuses that the Government used to justify raising public borrowing requirements in Tuesday's Pre-Budget Report is unlikely to be as severe as the Chancellor predicted, economists said yesterday.

Radical revisions to assumptions about tax revenues from the financial services industry, in the form of corporation tax and income tax on employees' annual bonuses, were the principal drives behind Gordon Brown's warning that the Government was anticipating a sharp drop in tax revenue next year. The impact of lower City bonuses alone was estimated at as much as £1bn, while the weakness in equity markets was expected to have a negative effect into 2003.

However, economists said the Treasury's estimates appeared excessively cautious, and there was little reason to believe that the recession under way in the Square Mile would have such a hefty impact on tax receipts.

David Hillier, the chief economist at Barclays Capital, said the Government appeared to be taking a pessimistic view of the City to provide headroom for future Budget giveaways. "The revisions look a little too extreme. Could the Chancellor be building us up for another better-than-expected borrowing number, which can then be used to finance further spending?"

Richard Iley, UK economist at ABN Amro, said: "The financial services slowdown is not a catastrophe for the Government. There is plenty of scope for upside [to tax receipts] if the City downturn is not as bad as expected."