Labour declares war on fat City bonuses

Harriet Harman said the payouts, totalling £7billion already this year, were increasing the gulf between rich and poor.

Ms Harman won strong applause when she called for action "to stop these excessive, ridiculous bonuses".

The constitutional affairs minister, who is close to Gordon Brown, said: "Inequality matters. The big gap between those at the top and those at the bottom makes for a sick society. I do take the view that we are in the Labour Party because we don't like to see some people struggling while others are hugely rich."

Her remarks, to a fringe meeting at Labour's conference in Manchester, echoed a pledge from Denis Healey who said he wanted to tax the rich "until the pips squeak" in the Seventies. The TUC has condemned bonus levels as "obscene" and with unions making up a third of the electoral college for the deputy leadership, Ms Harman has an eye on their votes as she seeks to replace John Prescott.

One recent survey showed that 52 per cent of City staff expect a big bonus this Christmas. Most of the bonuses are used to pay off mortgages or buy second homes and are a powerful driver of the housing market.

Former home secretary Charles Clarke said that the bonuses were inevitable if the economy was doing well, but he expressed his distaste at the way in which the cash was spent. Expensive cars and plastic surgery are among the favoured items for bonus spending. "I share some of the concern at the conspicuous consumption of some of the people who get these bonuses. I think it is deplorable and dreadful," he told the meeting of the Fabian Society.

But a senior Cabinet minister was scathing about Ms Harman's remarks, dismissing them as old fashioned. One study by the Centre for Economics and Business Research found that bonuses are now at a level higher than just before the dot.com boom. Nearly 10,000 extra jobs have been created, taking the total employed in financial services to 325,000. The average salary in the City is £88,000.

Among the big winners this winter are expected to be investment bank Goldman Sachs bosses Michael Sherwood and Richard Gnodde, the firm's European investment heads. Both are set for bonuses of £10 million each.

Last year, Barclays plc president Bob Diamond won the highest bonus, worth £14.8 million. Speaking at the same meeting, City minister Ed Balls made a strong defence of the pay-outs, pointing out that they were good for tax revenues and for job creation.

He added: "If the City is doing well, the country is doing well. When it prospers, we all prosper."