Alistair Darling was yesterday considering imposing a last-ditch windfall tax on bank bonuses in an attempt to quell public anger at their excesses, and bring in billions to help reduce Britain's deficit.
After a week in which fury at the banks' role in the economic crisis was reignited by claims that many City staff were in line for bonuses worth millions of pounds, the Chancellor is pushing for a new levy that would force them to help fund the recovery, Treasury sources confirmed.
A one-off tax, which could feature in Mr Darling's pre-Budget report on Wednesday, has been seen as a justifiable contribution to the public finances, which have pumped some £850bn into rescuing British banks since the start of the credit crisis.
Mr Darling will also hold out the threat of an annual tax on banks in the form of an insurance fee to protect the Government against future bail-outs and raise billions to pay off Britain's record national deficit.
But the dramatic plan has sparked furious rows within the Treasury and with 10 Downing Street, as some members of the Government believe it could damage any resurgence of British banks and antagonise a sector that is seen as critically important to economic recovery.
Plans for a windfall levy have been drawn up by Treasury officials as Mr Darling seeks new sources of income to fill the gaping hole in the public finances and limit swingeing spending cuts as Britain's damaged economy struggles into recovery.
The spending programme is the most politically charged of his tenure as Chancellor, since it will set the scene for the tax-and-spend debate with the Tories and underpin Labour's manifesto for an election that is due within six months.
Mr Darling is under increasing pressure to "soak the rich", in line with his party's latest class-based campaign strategy, with a series of tax rises designed to recoup billions without hurting the middle class or the traditional Labour vote.
He is expected to move away decisively from last year's commitment to reducing the inheritance tax burden, announcing that plans to raise the threshold from £325,000 to £350,000 have been frozen at the very least. Party strategists had been urging him to scrap the increase to give Labour a solid platform from which to attack the Tories on the issue in the coming months.
However, one senior government source distanced himself from claims that Mr Darling would "punish" the very rich to help kick-start recovery. He suggested that the burden of extra taxes – although not an increase in income tax – would fall on a wider pool of people.
"It is debatable whether soaking the rich is desirable if you want to be fair and maintain support across the board," the source said. "But, frankly, it is not necessarily the best way to do it, as the pool of people you are taking from is not incredibly large."
Downing Street has also placed great emphasis on making huge savings in the administration of government departments, with the streamlining of "back-office" functions such as advertising, and increasing use of the internet earmarked to save up to £400m.
Mr Darling will also be under pressure from the markets to present concrete plans to halve the UK deficit in four years. He is expected to publish a long-trailed "fiscal responsibility Bill", setting out detailed measures to cut the deficit to 5.5 per cent by 2014.
The proposals to govern within tight fiscal restraints up to 2014 will inevitably point to severe spending cuts for most departments, although front-line services such as hospitals, schools and policing will be protected.
Funds from tax rises will be channelled into growth initiatives, including "green" technology and a £1bn "jobs guarantee" for young people.
There are expected to be "green" tax breaks for people who install environmentally friendly technology in their homes.
Experts predict that the Chancellor's £175bn deficit projection for this year will be increased slightly, although the Treasury maintains that it will be comfortably below £200bn. Mr Darling will stick to growth forecasts of between 1 per cent and 1.5 per cent for 2010, but will predict above-average growth after that.
The Conservatives have called for a moratorium on existing and upcoming computer projects across central government ahead of the pre-Budget report.
The shadow Cabinet Office minister, Francis Maude, said: "Labour's IT procurement process has been marked by a catalogue of failures, late deliveries and cost overruns. We need a freeze on signing up to yet more failed projects. We have a once-in-a-generation chance to ensure greater value for money, rein in Labour's database state and use modern technology to transform government and society for the better."Reuse content