City Matters: The EU financial transaction tax will hurt the prudent – not the reckless

Mark Boleat
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THE IMPORTANT debate between the City and 11 EU governments on whether or not to introduce a tax on derivatives and shares continued last week. Both sides have scored victories, but now a more conciliatory tone is emerging, and this should be welcomed. With the European Court of Justice rejecting a pre-emptive challenge to this financial transaction tax (FTT) by the UK government two weeks ago, now is the time to look at the proposal away from the spectre of the financial crisis – and to recognise its underlying flaws.

The City of London Corporation published a report in February that showed the key failing of an FTT: it would cost UK households €4.4bn (£3.6bn) – equivalent to 0.2 per cent of our GDP – by reducing the value of their saving. Previous research also found that the cost of UK government borrowing would rise by almost £4bn. All this is despite the fact that the UK will not be participating in the tax. The extraterritorial nature of the FTT is one of its key flaws.

The tax is also two years behind schedule, as even the 11 countries that have signed up to it in principle can’t agree about more specific details on the tax’s application. The details that have been worked out have been negotiated largely in secret, despite the extraterritorial nature of the FTT, and they don’t include key issues such as whether the tax should be based on where instruments are issued (a stamp duty) or on the country of origin of those trading the instrument. Despite these difficulties, 10 countries have committed to introducing an FTT by 2016.

It is understandable, given the palpable anger at the financial crisis, that a tax of this nature was sought in 2011. But now that the economy is recovering, it is time to take a more rational look at what can be done to prevent these events from ever happening again. 

Sensible steps like increased capital requirements for banks and insurers, more joined-up regulatory structures, and better board governance have all been implemented to ensure that Europe’s taxpayers will not suffer the consequences of risk-taking behaviour by individuals. But the FTT will not tackle the individuals taking the risks, it will not tax the causes of that recklessness; it will only add an extra burden to individuals who have struggled to save through the worst recession in living memory.

The governments pushing for this tax have already admitted that it is imperfect. It is my hope that this more realistic tone – including the latest remarks from European Commission president Jose Manuel Barroso – will set the table for the UK government to work with EU authorities to solve some of the problems experienced by City institutions, to build trust with the community, and to help the City work together to protect itself from excessive risk-taking.

Choosing instead to focus on the FTT risks punishing the many savers in Britain (and Europe). This has been a hard fought recovery. We shouldn’t give away our gains to this tax on savings.

Mark Boleat is policy chairman of the City of London Corporation.