Comment: Taxing the City will make the crisis worse
A tax on financial transactions will drive even more business east.
By Janice Small
The financial transaction tax (FTT) is a tax on jobs and a way of raising money for pet projects, circumventing sovereign governments' ability to veto higher spending. France and Germany's FTT ruse would raise 80.9 billion euros (£70.3 billion) of which 58.3 billion euros (£50.6 billion) would come from UK-based businesses.
If implemented, the EU budget for 2014-20 would raise spending by 11%. Make no mistake, the EU sees this as a budget raising exercise and, as it only really affects the UK, they do not care about the jobs that will be lost in the UK. They have already stated that part of this money would be used to combat climate change and other pet projects. This is an ingenious way of raising new taxes without having to argue for increased budget spending when all nations are arguing for a net reduction in contributions.
The coalition play lip-service to Brussels with the Treasury saying it is a good idea while at the same time batting their eyelashes at their City donors, saying that it can only work if it is implemented globally.
When Sweden introduced a FTT levy of 0.5 per cent, 60% of the 11 most actively traded Swedish shares and over 50% of Swedish equities had moved to London by 1990. Naturally, this affected revenues. The tax raised only one thirtieth of the promised proceeds in Sweden. The UK Robin Hood Tax Campaign assumes that £20 billion can be removed from the UK financial sector without causing major disruption, highlighting the campaign's economic illiteracy.
Its colossal failure in Sweden should act as a warning to us. London is currently the leading centre for foreign exchange and stands to lose more than any other European nation.
The City employs over half a million people and respected economists like Tim Congdon estimate that around 25% of these jobs will be lost if these proposals go ahead. And remember that most of the high tax-paying bankers with bonuses will go off-shore taking their spending power with them. The City contributes £52 billion pounds in tax, that's 100,000 nurses or ten Olympic stadiums.
Britain's export of financial services grew by 15% a year for over 15 years and contributes five per cent to our GDP – no small amount.
But if you think it's good riddance to the ill-gotten gains of that tax, think about the back office staff, the IT workers, the secretaries, the sandwich makers, the retailers and the facility management employees – they will all lose their jobs and will not be replaced.
Michael Spencer, Icap boss, and Conservative party donor, said: "This tax would destroy the City and cost the exchequer billions, but it would benefit Brussels. Companies like Icap will simply move elsewhere outside the EU if Nicolas Sarkozy and Angela Merkel push ahead with this silly tax."
The City is the powerhouse of the UK economy (and that is the fault of successive governments who have failed to support our manufacturing industries which have also gone east). We cannot delude ourselves that they are not and that our leading industry can solve the world's perceived problems like Brendan Barber, general secretary of the TUC would like, such as climate change. We have other methods of dealing with these issues – the G20 and learning to live within our means.
Even were it imposed globally, a Tobin tax would still slash transaction volumes, make markets less liquid, increase the cost of raising finance and punish companies that operate in more than one currency.
MEPs have argued in the past that the tax would collect £20 billion from UK trades alone, an equivalent to almost half of all corporation tax receipts. That is of a similar order of magnitude as the entire global profits of UK-based universal banks – though it would be paid for by thousands of financial firms that operate here and their investors, including pension funds and insurance firms, whose returns from investments would be decimated. It is absurd to believe that what would probably be the biggest ever tax hike (much of it sent to Brussels) could quietly be imposed on the City without any consequences in terms of jobs.
Others believe the real cost would be even larger. The World Federation of Exchanges puts the total value of financial transactions in the UK at £600 trillion a year. Given that Tobin supporters believe taxed transactions would remain at identical levels (a silly suggestion, of course, but the crucial assumption that explains why pro-Tobin folk believe their tax will raise so much) this means that the tax could yield £40 billion to £300 billion. There is of course no way that such sums would ever be raised. Transactions would simply cease to happen. Tens of thousands of jobs would be lost overnight and the City of London would be destroyed. The tax would raise a couple of billion at most, while increasing volatility by forcing traders to concentrate on larger, less frequent trades.
If the government refuses to make the intellectual and economic case against a Tobin tax, it will actually make its long-term implementation more likely. Just like the implementation of the agency workers' directive which will be implemented on October 1st. Again, this directive has hit the UK more than any other European country. David Cameron said he had looked at legal ways of preventing its implementation. Vince Cable's department said it would go ahead. It is estimated that 500,000 jobs could be lost by Christmas.
Those deluded souls like Barber who say that this tax is a good thing who believe they have discovered a new way of solving the world's problems by taxing financial transactions. They will achieve nothing other than crippling the economy.
We have to get wise to what is happening in the far east. HSBC – employing 10,000 in Canary Wharf – are in negotiations with Hong Kong to go 'home'. It is a tempting offer. The far east beckons. Beware the west. Not only do we face fierce competition from them but also Brazil, South America, India and Indonesia. While Brussels and left-wing pressure groups woo the coalition, these emerging economies are wooing our financial industries.
Janice Small is a former Conservative party candidate and a member of the City Campaign Group for Ukip.
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