THE CALL from the German chancellor Angela Merkel and French president Nicolas Sarkozy to revive proposals for a European Financial Transactions Tax (FTT) is misguided, not only because it is unlikely to work, but because if it does it would have a chilling effect on UK growth and would damage competitiveness.
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.
A transactions tax would be easily circumvented by companies 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% and futures trades by 98%. 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 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, Sarkozy and Merkel need to explain what they hope to achieve through the tax.
They cannot argue that the financial services sector does not make a fair tax contribution. The UK’s financial services industry accounts for around 10% of total economic output, 11% of the UK’s total income tax, and 15% of corporation tax. Additional tax is also collected from more than one million 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 an FTT simply do not stand up. At a time when we should be totally focused on promoting growth, the introduction of such a tax would damage businesses and stifle economic recovery.
Neil Bentley is CBI deputy director-general