Bail-outs: Banks told to curb bonuses or face higher tax bills

David Cameron has threatened the banks with higher taxes if they failed to rein in lavish bonuses.

The Prime Minister signalled a new focus on banking sector tax revenues, saying that unpopular decisions on bonuses would make it difficult to keep a regime "that they might favour".

His comments backed Deputy Prime Minister Nick Clegg's warning that the Government would not stand on the sidelines if banks refused to restrain their pay levels.

Mr Cameron insisted the banks had to understand the "political context" of bonuses as the banks had been bailed out by tax- payers who are now feeling the pinch.

The UK public found it "very galling" to see bankers paying themselves "unjustified bonuses", he said.

"We have had to bail out the banks and use taxpayers' money in a difficult economic situation and I do believe in social responsibility, that people have to think of their responsibilities when they make these decisions.

"And of course every decision like that the banks make makes it more difficult to keep a tax regime that they might favour.

Mr Clegg used an interview with the Financial Times to issue a call for "visible restraint" in the forthcoming bonus round.

"It is wholly untenable to have millions of people making sacrifices in their living standards, only to see the banks getting away scot-free," he said.

Shadow Chancellor and Hull West MP Alan Johnson accused Mr Clegg of using the issue of bankers' bonuses to appeal to Liberal Democrats and to try to put the row over tuition fees behind him.

"Nick Clegg's hot air on bankers' bonuses is designed to rehabilitate a tarnished reputation," he said.

"But he is Deputy Prime Minister in an administration that will not even apply regulations that Labour introduced requiring banks to notify the public about individual bonuses in excess of 1m."

The comments came as it became apparent that strict European rules to curb bankers' bonuses will not apply to most UK financial institutions.