Chancellor will resist call for tax on banks in Budget

Alistair Darling will press case for global deal, while David Cameron says he would impose a levy if international talks fail

Alistair Darling has little more than 48 hours to decide if he will announce new tax on the UK's banks in Wednesday's Budget, after a weekend when the other political parties have tried to outflank the Chancellor by disclosing measures to keep the financial services industry in check.

By the time Mr Darling stands up to deliver his third Budget statement, which he knows is one of Labour's last set-piece opportunities to persuade a wavering public to hand the party a fourth term in office, his opponents will have already outlined plans to tax the banking sector.

The Government has so far ruled out a specific tax on banks in the UK, preferring instead to work towards an international framework. However, this position was challenged on Saturday when David Cameron said, in a shift of policy, that the Tories would introduce a levy on the industry in the UK, if an international consensus showed no sign of materialising.

Wednesday's Budget speech is undergoing several rewrites. One Government source yesterday said that the Budget would be altered right up until the start of the speech, but that the introduction of a specific domestic bank tax was unlikely.

Mr Darling is thought to be considering the creation of an insurance charge for banks, which will be paid for by a so-called "pollution tax". If introduced, the charge would be levied only on banks' riskiest activities.

Since the start of the financial crisis, Government ministers have consistently favoured reaching an international settlement, rather than risk denting the UK's competitiveness which they say would result from a unilateral charge. Groups such as the G20 are debating a number of proposal including a large-scale insurance fund and a transaction tax on financial institutions. "The Chancellor is concerned about the competition impact of a unilateral banking tax," said a Government source. "The view in Government is that to act independently is not the best way forward and while there is certainly appetite for action on bank taxes, I would be very surprised if the approach deviates too far from the one pressing for a global settlement."

The pressure on the Government is growing, however. Mr Darling has few fiscal or monetary tools to attract voters, and any international deal is almost certain to come after the election. In broadcast interviews at the weekend, Mr Darling said there would be no "giveaways" this week.

The Tories' plans have added to the pressure on Government to act, however. A spokesman for the Conservatives yesterday insisted that the Opposition is confident a global agreement would be reached, but refused to say how much the party expected to raise from a unilateral levy.

Lord Myners, the City minister, attacked the speech by Mr Cameron on Saturday: "This ill thought-out Tory briefing has all the hallmarks of a plan made up on the hoof. This kind of tax on bankers needs to be international."

The British Bankers' Association also criticised the Tory proposals: "We are ready and willing to work for change, but we believe any further reforms need to be timely, considered and internationally co-ordinated so they do not restrict credit to individuals and businesses as the recovery picks up speed."

The Liberal Democrats favour a 10 per cent tax on banks' profits, on top of ordinary corporation tax. The International Monetary Fund is expected to announce next month how it proposes to control systemic risk in the banking industry.

Bank taxes: Where the parties stand

*Labour

Since the start of the financial crisis, the Government has stressed the need for a global solution. The Government is unlikely to meet calls to introduce a domestic bank tax when the Chancellor delivers his Budget speech on Wednesday. Mr Darling and the Prime Minister are worried that imposing any unilateral tax could drive the banks' operations out the City, despite calls from some quarters that the pace of talks among the G20 is too slow. The Government will hope that proposals to control systemic risk, to be published by the IMF next month, will provide a framework to build on.

* Conservatives

Like the Government, the Tory party favours an international agreement, fearing that a domestic levy would dent UK competitiveness. However, in a speech on Saturday, the Conservative leader David Cameron said he would introduce a tax if international talks fail. The Conservatives favour consensus over a so-called stability fee, a tax that the Opposition claims is similar to plans outlined by the Obama administration in the US and by the Swedish government. The Conservatives said yesterday that the amount raised would depend on any global deal, but was likely to be "billions of pounds".

*Liberal Democrats

Of the three main parties, the Liberal Democrats is the only party that would not wait for international agreement before taxing the banks. They would immediately impose a 10 per cent levy on bank profits, on top of corporation tax, which the party reckons would raise about £2bn a year. The measure, the party says, is a temporary and would be reassessed when the party's other banking policy– to split banks' investment and retail operations – was completed. The banking industry is so big in the UK, they say, that future instability in the sector would undermine the whole economy.