Great government policy rarely enjoys an easy ride. Challenging the status quo will always ruffle the feathers of vested interests. So 11 European countries should be congratulated for taking on the titans of finance and agreeing to implement a financial transaction tax (popularly known in the UK as a Robin Hood tax).
Today, their proposal for a micro tax of 0.1-0.01% on stocks, bonds and derivatives received the thumbs-up from EU member states at the Economic and Financial Affairs Council meeting in Brussels, meaning they can plough on to implementation, possibly as early as next year. Europe’s largest economies – Germany, France, Italy and Spain – are signed up. IMF chief Christine Lagarde recently gave her blessing. It will help ensure the financial sector plays its part for the damage caused to our economies. Yet there is one notable refusenik: the UK. Our government opted out, choosing instead to dance to the City of London’s tune.
The social justice arguments for an FTT are incontrovertible: the City’s financial elite may have sparked the financial crisis, but it is the rest of society, especially the poor, who are paying the price with the harshest programme of austerity since world war two. Yet amid the 2.5 million unemployed and the threat of a triple dip recession, the financial sector has over the past year enjoyed one of the strongest performances of any sector on the FTSE 100. But it is the economic common sense, the potential to raise billions in additional revenue, that has led the centre-right in Angela Merkel’s Germany, Mariano Rajoy’s Spain and Mario Monti’s Italy to back this tax. It will collectively raise the 11 countries involved £30bn a year – no small beer.
The size of the UK’s financial sector means we have even more to gain. Can the government really afford to turn down an additional estimated £8bn of annual revenue? Imagine what could be achieved: we could fund job creation programmes, spreading investment across our regions, giving the million young unemployed the skills to enter (or re-enter) the workplace. We could fund the British Investment Bank (BIB) that Ed Balls and Chuka Umunna have rightly put much emphasis on. In Wales we already have such an institution, Finance Wales, which was set up by the Labour-led Welsh government in 2000 and manages £300m worth of capital to SMEs. Rolled out across the country, it could bypass the bottleneck of banks refusing to lend to cash-starved SMEs, helping them to be the drivers of growth.
This is not about punishing the banks, but about getting Britain back on a stabler footing. The rate is set so low precisely to avoid hitting either the City or longer-term investments such as people’s savings and pensions. Undoubtedly an FTT would reduce certain areas of City trading – high-frequency computer trading that was memorably referred to by Adair Turner as “socially useless” – and this should be seen as a distinct advantage. The process would help rebalance the economy away from an over-obsession with the City’s short-term rewards towards other, less volatile, less geographically concentrated sectors such as manufacturing.
President Obama may support an FTT in his second term and we should actively encourage him to do so, but even without US support, Europe is right to forge ahead. The UK already has an FTT on share transactions. This doesn’t drive business away – on the contrary, London’s stock exchange is one of the most successful in the world. The exchequer benefits by some £3bn a year from this FTT, something George Osborne often seems to forget. Other financial centres also have unilateral FTTs – Hong Kong’s raises £1.7bn a year, South Korea’s £3.8bn and Brazil’s more than £10bn (pdf).
As the Bank of England’s executive director of financial stability, Andy Haldane, said recently, there is no “ideological chasm” that needs to be bridged in order to roll this tax out to other areas of the financial markets such as bonds and derivatives. As Labour continues to articulate its vision of a responsible capitalism, it is time to put the FTT centre stage. Between Europe and our own stamp duty, we have the blueprint to make this happen. In times of fiscal difficulty, tax needn’t be a dirty word – the financial transaction tax could be one of the most popular taxes this country has ever seen.