**A one-off tax on bankers’ bonuses is expected to form the centrepiece of Alistair Darling’s pre-Budget report - the last before the general election.**The chancellor is under pressure to explain how he will meet his pledge to halve the deficit over four years by cutting spending or raising taxes.
The Conservatives say borrowing levels, which could exceed £175bn this year, need to be reduced much more quickly.
Support for youth unemployment and environmental measures are also likely.
The chancellor’s statement, which he will deliver on Wednesday, will set the tone for the economic debate in the run-up to the election - which must be held by next June.
The Lib Dems argue that neither of the main parties are being honest about the spending challenges facing the next government and the extent of cuts that will be needed.
‘Held to ransom’
It has been widely reported Mr Darling will announce a one-off tax of 50% or more on “excessive” bonuses paid to some investment bankers in the UK although details of the plan remain unclear.
It is believed the proceeds could be spent on helping youth unemployed and small businesses starved of credit.
Many banks intend to pay out millions of pounds in bonuses at the end of the year, just over a year since the banking system was close to collapse and had to be propped up by the government.
After the board of Royal Bank of Scotland, in which the taxpayer has an 80% stake, threatened to resign if blocked from paying bonuses, Mr Darling said he would not be “held to ransom” over the issue.
Industry groups have warned such a tax would force some bankers abroad, damaging the UK economy further, while tax experts have questioned how viable such a move would be.
Speaking on Tuesday, Conservative leader David Cameron said he would have to consider any proposal if it was announced but a one-off tax on a particular sector of the economy was not necessarily harmful.
Economic forecasts
Mr Darling will use the statement update MPs on his latest forecasts for the economy, which has been in recession for more than a year.
He is expected to say the economy will shrink 4.75% this year - a much more severe contraction than the 3.5% drop predicted in April - but to stand by his forecasts for growth in 2010 of between 1% and 1.5%.
Many economists also expect him to revise upwards his forecast for borrowing this year from the £175bn predicted in April’s Budget, which would be equivalent to 12.4% of total economic output.
The banking crisis and the recession have had a severe impact on the public finances but Labour says the UK is the only major country to set out a plan for how it would deal with the mounting deficit.
Ministers are committed to halving the budget deficit - the gap between what revenue its bring in and what it spends - over four years and to eliminate it entirely by 2018.
The Conservatives say this must be done much faster to maintain market confidence but ministers say this risks stopping the recovery in its tracks.
Tax measures
No detailed spending plans for the period after 2010-11 are expected from the chancellor but he may single out areas to be “ring-fenced” from future cuts as the battle lines are drawn before next year’s poll.
The three main parties have all identified billions in cost savings but experts say these are not nearly enough to rebalance the public finances.
While Mr Darling is expected to confirm that VAT will revert to 17.5% in January - after it was cut to 15% a year ago - attention will focus on any other tax rises he has planned.
It has been reported the chancellor could target the better-off by reducing tax relief on pension contributions for high earners and increasing national insurance contributions for the wealthy.
A number of new green initiatives are also expected, with tax rebates for electric cars and wind turbines and energy efficiency incentives.