Financial Transaction Tax: European Union Report

Baroness Randerson Excerpts

Wednesday 11th July 2012 Grand Committee

[Baroness Randerson]

My Lords, I speak in this debate not as someone who participated in the production of this report and the discussions which took place among the committee, but simply as an interested and keen observer of the problem that the committee examined and as someone who has, of course, read the report and considered the matter in great detail. My noble friend Lady Maddock, who was a member of the committee, is unfortunately unable to be here this afternoon.

This is a very impressive report. I have rarely read a report where the committee appears so united and strong in its condemnation of the topic it was asked to examine. The report makes a compelling case for the Government to do all in their power to resist this tax, even if it were to be applied only to the euro area. It is understandable at a time of deep financial crisis—a world crisis where emotions are running high against the bankers, particularly in this country—that there are proposals to tax the financial services industry. The FTT or Tobin tax, or the Robin Hood tax—that last name giving you a flavour of how this tax is viewed—is that rare kind of tax, one which easily wins the hearts and minds of the public. Very few taxes are popular with the public but in the public mind, for many people, the Robin Hood tax will solve the problem they see. In my view, and I am very persuaded by the report, it is the wrong tax at the wrong time and in the wrong place.

It is the wrong tax because its design is so flawed. For example, the residence principle is, as the committee says, impractical and unworkable. We all know how difficult it is to stop companies moving out of this country and relocating to the country they see as being of most tax advantage to them. One company which has recently made the press in this respect is Amazon, locating its headquarters in Luxembourg and paying very little tax in this country despite doing billions of pounds of business here. That same principle applies to the financial services sector, especially where the companies concerned will have everything to gain and nothing to lose by locating outside the EU.

I felt that there were some extraordinary aspects to the details of this tax: the double incidence, for example, if both parties in the transaction are in the EU. It is an unusual tax if you pay it twice simply by accident of location. It is important to remember that FTT is not the only option. As the noble Lord, Lord Harrison, has stated, there are realistic alternatives, including the UK stamp duty option and the financial activities tax, so the urge to tax the financial sector can be achieved in other ways.

I stated that this is a tax at the wrong time. The Commission’s own impact assessment states that there would be a long-term total decrease of EU GDP of between 0.5% and 1.76%. I note that the Government’s letter in response to the committee’s report points out that, at the top end of that range, that would equate to a reduction of more than €200 billion in EU GDP and would mean the loss of nearly half a million jobs. Possibly the Government’s estimate of jobs is quite light—it could be more than that. Therefore, it is pretty extraordinary that the Commission is proposing what is, effectively, a tax on growth at a time when the EU is uniformly suffering from very low growth and, in some cases, negative growth. If you could identify the problems of the EU, at the very top of the list would be its problems with growth at this moment. It is a fairly extraordinary proposal to come forward with in this situation. Imposed suddenly—and by its nature it must be imposed suddenly—it could reduce liquidity and have the adverse effect of increasing market volatility. The Commission is talking about using it to reduce the high-velocity trading, but it could increase market volatility. The noble Lord has already referred to the cascade effect, which could intensify these problems.

One point of concern is that the FTT is being seen as all things to all men. Different groups are clutching at it to fund their own, individual pet priorities, mostly things that we would agree are very worthy and worthwhile, and which need funding. However, out of one tax you cannot fund the EU’s main revenue stream at the same time as funding international development, assisting with international poverty or counteracting global warming. It is unrealistic and ill thought out not to have a clear process for deciding where this funding would go. Clearly, it cannot do all those things, but the danger would also be that the relocation of businesses out of the EU as a result of the tax would mean that the yield is much lower than expected. In any event, the government response argues that the incidence will be passed on to manufacturers and therefore, ultimately, to consumers.

Finally, I stated that this is a tax in the wrong place. I am an enthusiastic pro-European and sometimes get irritated that we in Britain always say that it is all right for the rest of Europe but we are different. However, in this case I am firmly convinced that this is a tax that will have particularly adverse consequences. The committee points out, absolutely rightly, that the impact on the City of London and the UK financial services sector in general is so disproportionate that it must be revisited. There is a great deal of concern in the coalition Government, and rightly so, at the unbalanced state of the economy and that we as a nation rely far too much on financial services. Yet one has to accept that that is where we are in our economy and that turning it into a different shape will take decades.

We want to grow the rest of the economy. We do not want to destroy the financial services that are so important to us. Therefore, the threat from this tax to the pre-eminence of our financial services sector is considerable. I remind noble Lords of the Commission’s own figures. If you derive the proportions from them, the revenue raised in the UK would be 4.6 times higher than the revenue raised in Germany and 10.9 times higher than that raised in France. That is how we get to the figure of 71.3% of all revenue from this tax coming from the UK, to which the noble Lord referred. This effectively means that it is a UK tax masquerading in EU clothes. Eighteen per cent of the revenue that would be raised from this tax within the UK would be transferred to other EU states if it were to be divided up in the process that the Commission suggests. That would not be fair, effective or wise.

I hope that this excellent report assists the Government in their efforts to resist this tax, whether it is proposed for the whole of the EU or simply for the euro area. Can the Minister assist us by giving us an updated assessment of whether the Government consider that the financial transaction tax is likely to go ahead in the way envisaged when this report was written?

--- Later in debate ---

[Lord Davies of Oldham]

My Lords, I begin by thanking the noble Lord, Lord Harrison, for his chairmanship of the committee, which has produced such an incisive report, and for his opening speech today, which covered accurately the committee’s conclusions on the issue of the tax proposed in Europe. As has been said, some aspects of the presentation by the Commission on the tax have been clumsy in the extreme, giving the committee a fairly straightforward and easy target. But I side with those noble Lords who have spoken today who have indicated that we ought not to drown the concept of this form of taxation, usually termed the Tobin tax, because this particular proposal has relatively few merits.

The noble Baroness, Lady Randerson, mentioned the emotion in Britain about the financial and economic situation in which we find ourselves. She even indicated that it was more intense in Britain than elsewhere. Are we really saying that we are not aware of the emotional responses of the Greeks, the Spaniards and the Italians, just to cite three countries where enormous popular concern has been shown—in Italy leading to the imposition of a Government on a democratic country? Is it surprising that from Europe comes an attempt at a condign punishment on bankers and a challenge to the financial system that has produced these circumstances?

[Baroness Randerson]

The noble Lord is really taking my words out of context. My very first sentence of significance related to my understanding that there was an emotional attachment to this tax. At no point in my speech did I say that I was opposed to it on a worldwide basis. I explained very clearly that I understood that there was a public popularity for this tax.

[Lord Davies of Oldham]

I accept that entirely from the noble Baroness. I am grateful for her intervention—but let me respond, if I may. I am merely indicating that this is not just a British reaction but is Europe-wide, which is why we have to put these proposals into some kind of context. People are responding to the crisis that was visited on us four years ago, for which all our fellow citizens, both here and elsewhere in Europe, are paying the price today.