Only days before the City of London's top bankers expected to walk home with Christmas rewards in the millions of British pounds, Gordon Brown's government slapped banks with a punitive one-time, 50-per-cent "super tax" on bank bonuses.
For Mr. Brown's Chancellor of the Exchequer, Alistair Darling, the tax was an exclamation point on a pre-election mini-budget that mixed modest tax increases with small spending increases. Larger cuts will be deferred until after May, when it is highly likely that another party will be in power.
The tax was almost inevitable. London's banks were preparing to pay £7-billion ($12-billion Canadian) in bonuses at the end of what had been a good year - thanks in no small part to public sector bailout funds. Meanwhile, voters are feeling the pains of rising unemployment and slashed services as a result of the crisis and the cost of the bailouts.
"We think that the public would be pretty outraged if those same bankers we had bailed out then turned around and rewarded themselves with bonuses," Peter Mandelson, the secretary of state for business and Mr. Brown's deputy, told an interviewer.
"If we hadn't done anything, then the public would have been pretty aghast. "
British banks have received an estimated £850-billion in taxpayer bailout funds during the past year, putting many of them, including Royal Bank of Scotland Group and Lloyds TSB Bank PLC, largely in public hands.
This has led to public outrage at the sight of hundreds of bankers preparing to receive bonuses in the tens of millions and thousands more receiving hundreds of thousands each.
It marks the first time a government has successfully stepped in to regulate the remuneration practices of banks. Under the new one-time tax, banks must pay a tax of 50 per cent on all bonuses of more than £25,000 paid between now and April 5. Banks attempting "avoidance schemes" by postponing bonuses would face further, unspecified punishments.
After that tax has been paid by the bank, the bankers themselves will be subject to a top rate of income tax, paid by those earning more than £150,000 a year, rising to 50 per cent from 40 per cent beginning in April.
About 20,000 London bankers - employees of both British banks and of most London branches of foreign banks - would see their bonuses taxed. An estimated 5,000 of them this year are expected to take home bonuses in excess of £l-million each.
There were howls of outrage from senior bankers Wednesday, and grave warnings from their lobbyists that the industry would move out of London to jurisdictions where the business is less heavily regulated.
Bank officials argued that the tax risks driving away the financial services business, by far Britain's largest industry, which generates about 12 per cent of U.K. tax revenue, or £61-billion annually, according to estimates made for the City of London.
"Viewed from abroad, London may well look now like a significantly less attractive place to build a business," Angela Knight of the British Bankers Association told reporters.
It marks a sharp reversal of a trend that began in 2002 when Washington, in the wake of the scandals around the collapse of Enron and the accounting industry, imposed the Sarbanes-Oxley Act requiring greater transparency and disclosure in financial services.
This caused a flood of business to cross the Atlantic, with financial sector companies setting up their main operations in London and moving thousands of workers to the city to avoid the U.S. regulations.
In the wake of Wednesday's budget, there was some speculation that the U.S. may soon introduce a similar tax. In March, the House of Representatives passed a bill imposing a 90 per cent tax on bonuses paid by banks that had received more than $5-billion (U.S.) in government aid. It was dropped by the Senate.
Some bankers predicted that their employers would find ways to evade the tax. One major Asian bank is reported to have paid two years of bonuses in advance last week in order to beat the bonus. Others suggested that their banks might promise the bonuses to be paid after a Conservative government comes to power, a likely possibility next year.
The tax is meant to be used to pay for a new scheme to tackle youth unemployment, a serious problem in Britain.
But analysts said that the tax is unlikely to raise the £500-million Mr. Darling's budget anticipated. This would itself be a minuscule sum next to the enormous public spending and borrowing requirements provoked by the crisis.
Mr. Darling ignored calls from the opposition Conservatives to make immediate sharp cuts in spending, arguing that the economy still has not recovered enough to withstand a large withdrawal of public funds.
Next year, Britain expects to borrow £176-billion, only £2-billion less than in 2009. Public spending will increase by £14.6-billion, including a variety of green initiatives, although spending increases have been reduced to 0.8 per cent per year through to 2014, down from an average of 3.6 per cent annually during Mr. Brown's tenure as Prime Minister.