Think-tanks: UK’s reply to Tobin is weak

Tim Wallace
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A EUROPE-WIDE financial transactions tax (FTT) could cost the UK’s economy tens of billions of pounds, the Adam Smith Institute (ASI) warned yesterday – and yet the government is failing to act to stop such a tax being introduced, said the Centre for Policy Studies (CPS).

The ASI calculated that the UK will be hit disproportionately hard by the tax, costing the economy £25.5bn, as London accounts for 74.4 per cent of interest rate derivatives turnover within the EU.

The report cites the European Commission’s (EC) own impact report, which projected that the FTT would lead to a decline in derivatives trading activity by up to 90 per cent.

The institute also claimed the tax would lead to greater volatility and higher transaction costs.

Yet the EC has proposed the tax, arguing that “the financial sector has played a major role in causing the economic crisis whilst governments and European citizens at large have borne the cost.”

As a result, the EC said, “the financial sector should contribute more fairly given the costs of dealing with the crisis and the current under-taxation of the sector.”

However, it is ordinary companies and mortgage-holders who would suffer because of the tax, the ASI said.

The report argues that “derivatives markets allow the discovery of the appropriate interest rate for fixed rate mortgages” and that “without them, there would be less precision and more difficulty for mortgage providers wanting to offer fixed rate contracts.”

Meanwhile the CPS’s Tim Knox has criticised David Cameron for failing to “take the opportunity to dismiss outright the chance of it ever being introduced.”

He also worries that the Financial Reporting Council and Financial Services Authority are “completely unaware of moves in Brussels to introduce the tax through the back door.”

“The fear is that this complacency is based on ignorance,” he claimed.

An FSA spokesman rejected the accusations, telling City A.M. “We play an active role on a wide range of discussions at a European level and are fully engaged in financial services issues debated.

“However, tax matters are for national governments not regulators.”