THE call from President Jose Manuel Barroso and the European Commission to set up a European Financial Transaction Tax (FTT) is misguided, not only because it is unlikely to work, but because if it does, it would have a chilling effect on growth and would damage the UK’s competitiveness.
It is clear that Europe needs a relentless focus on growth but, by the Commission’s own official impact analysis, this tax could dent long-run EU gross domestic product by more than €100bn.
The arguments that are used to support an FTT are not compelling. Although it is right to have a domestic debate about whether the financial services sector and indeed other industries are taxed proportionately, few tax experts believe that an FTT is the right solution.
EASY TO BEAT
A transactions tax would be easily circumvented by firms simply moving their trades out of the EU. This would, of course, hit the UK hardest because London is by far the largest financial market in the EU. Transactions would be pushed out to competitor jurisdictions, like New York, Singapore and Hong Kong, damaging the UK’s long-term competitiveness as a leading centre for financial services companies.
This is no idle threat – when an FTT was implemented in Sweden in the 1980s, share prices fell quickly and substantially, and half of all Swedish equity trading moved to London. The volume of bond trades fell by 85 per cent and futures trades by 98 per cent. As a result, the Swedish government eliminated the tax, trading volumes resumed, and Sweden is now one of the most vociferous opponents of the tax.
The argument that the cost of the introduction of an FTT would somehow rest with banks is not convincing – it would ultimately be borne by businesses and investors. The onus is on the private sector to drive economic recovery, but businesses that are trying to grow and create jobs by raising money from the markets would feel the impact of an FTT because of the subsequent increase in the cost of capital. This would hold back their growth potential.
These costs would also fall heavily on investors, including consumers saving for their future, and those parts of the industry which were less involved in the financial crisis, for example insurance firms, which do not pose a systemic risk.
As the potential costs for businesses and the economy would be so high, particularly in the UK, the European Commission needs to explain what it hopes to achieve through the tax, particularly at a time when all efforts should be focused on growth.
The Commission cannot argue that the financial services sector does not make a fair tax contribution. The UK’s financial services industry accounts for around 10 per cent of total economic output, 11 per cent of the UK’s total income tax, and 15 per cent of corporation tax. Additional tax is also collected from more than 1m people who work in the industry through employer national insurance.
Nor would the tax correct risky behaviour and financial instability in the sector. Robust regulation and supervision is a much more effective means of achieving this and, in any case, there is little evidence that points to a link between transaction volumes and financial instability.
Maybe then, this is just a revenue raising exercise, aiming to tap the London markets. In which case they are likely to be disappointed, as history suggests that transactions would move elsewhere.
The proposals for a Financial Transaction Tax do not stand up. At a time when we should be focused on promoting growth, the introduction of such a tax would damage businesses and stifle economic recovery.
Neil Bentley is deputy director-general of the CBI.
HEAD OF RESEARCH,INTERNATIONAL CENTRE FOR FINANCIAL REGULATION (ICFR)
AT THE end of June, no less an authority than the president of the ECB Jean-Claude Trichet expressed his concerns over any European financial transactions tax, saying: “I call for great, great prudence in introducing something which is not done at a global level... Let’s be sure we don’t do something we might regret one day… If certain transactions are considerably more costly in Europe than in other parts of the world, they will be done overseas... I understand it appeals to some observers. But if we are not satisfied with the overall functioning of our financial system, is the right thing to do to put sand in the machine?”
It may have some popular appeal to politicians seeking to justify policy initiatives in other areas, but the likelihood of any international agreement on financial transactions taxes is very remote. Emerging countries in particular are not keen. To go-it-alone in Europe or the euro area would only put greater pressure on the region’s global competitiveness and may even increase the costs of financial intermediation to consumers and businesses. Is that really the desired outcome?