Financial Transaction Tax: European Union Report
Lord Harrison
That the Grand Committee takes note of the Report of the European Union Committee on Towards a Financial Transaction Tax? (29th Report, Session 2010-12, HL Paper 287).
Lord Harrison
My Lords, I am delighted to have the opportunity to introduce this debate on the report of the European Union Committee entitled Towards a Financial Transaction Tax? This report was based on work undertaken by the Sub-Committee on Economic and Financial Affairs, which I chair. The report was published in March and was based on evidence received from campaigners, representatives of the financial sector, academic experts, think tanks, MEPs, the Financial Secretary to the Treasury Mark Hoban MP and Algirdas Semeta, the EU Commissioner for Taxation and Customs Union, who appeared before the committee in February. I also thank all our witnesses who contributed to this inquiry and my clerk, Stuart Stoner, for mastering, as ever, a complex subject with consummate skill.
Since the global financial crisis erupted in 2008, there has been a continuing debate about the role of the financial sector within the economy. As recent events here in the UK have again brought into focus, many have criticised the perceived light-touch regulation of financial practices and of the markets. There is also a common perception that the financial sector does not pay its fair share, as well as widespread anger at the level of pay and bonuses in the sector at a time of economic austerity. In this context, there is an understandable desire to see the financial sector make amends for its perceived mistakes and shortcomings.
The proposal for some form of financial transaction tax is nothing new. Indeed, were the noble Lord, Lord Skidelsky, here, he would doubtless tell us the thoughts of John Maynard Keynes in that direction. In the early 1970s, the Nobel Prize-winning economist, James Tobin, brought forward an eponymous proposal to levy a tax on every amount exchanged from one currency to another to reduce short-term currency speculation. The idea was not adopted at the time, but it has returned to the agenda on a regular basis ever since. In the aftermath of the recent financial crisis, the European Commission has been actively considering the case for a financial transaction tax, or FTT. In September 2011, it published its proposals for a tax on the value of single transactions of a broad range of financial instruments, including equities, bonds, currencies and derivatives. EU leaders including Germany’s Chancellor Merkel and the former French President Nicolas Sarkozy advocated such a tax, while the Commission President Jose Manuel Barroso promoted it as a question of fairness. A wide-ranging campaign, spearheaded by the Robin Hood tax campaign here in the UK, has also called for a tax in order to tackle poverty and climate change.
Yet support for an FTT is far from universal. Leading economists have criticised the proposals, and several world economic heavyweight Governments, most notably the USA, remain implacably opposed to its introduction. The UK Government, while stating that they do not oppose a global tax, have remained consistently opposed to its introduction at EU level. The Prime Minister has called the tax madness, and the Chancellor of the Exchequer described it as,
“a bullet aimed at the heart of London”.
Even after we have published the report, we are still getting information, for instance from the City of London Corporation. It drew its own analysis of the tax, highlighting concerns and worries, and concluded that:
“This is not helpful to the European recovery and the jobs and growth agenda”.
It was in this febrile atmosphere that the committee’s inquiry into the Commission’s proposals took place. We were disappointed in what we discovered. We found the Commission’s proposed model wanting in many respects and unlikely to fulfil the objectives that the Commission had outlined. We found key elements of the Commission’s model to be fundamentally flawed, and advised the Government that they should refuse to agree to the proposal.
Why did we come to such a stern conclusion? We began by examining the Commission’s five stated objectives. The first was to avoid fragmentation in the internal market for financial services; secondly, to ensure that financial institutions make a fair contribution to covering the costs of the recent crisis and to ensure a level playing field with other sectors; thirdly, to create appropriate disincentives for transactions that do not enhance the efficiency of financial markets; fourthly, to create a new revenue stream for the EU budget; and, fifthly, to contribute to the continuing international debate on financial sector taxation and, in particular, the development of an FTT at global level.
We were not convinced that the Commission’s proposals would meet any of these objectives. Given the opposition to an FTT in the USA, the suggestion that the Commission’s proposal would pave the way for a global tax was, in our view, wholly unrealistic. We noted that the case for using an FTT as a new revenue stream for the EU budget was contentious even among its own supporters, many of whom favoured revenue being put to other uses, such as tackling global poverty and climate change. While we found there was a stronger case for asking the financial sector to make a contribution to the cost of the crisis or, indeed, for seeking to deter certain capricious transactions, in neither case did we find the Commission’s arguments persuasive. While we acknowledged the strength of public anger directed against the financial sector and the widespread view that those who contributed to the current financial crisis should contribute to its clean-up costs, we found that this FTT was the wrong way to meet such demands.
We next considered the detail of the Commission’s proposals. We concluded that the Commission’s model was impractical and unworkable. For instance, the proposed residence principle, defined as taxation in the member state of establishment of the financial institution regardless of where the transaction took place, was subject to widespread criticism, including from advocates of an FTT. There was, in our view, a significant likelihood that a tax so designed would lead to financial institutions relocating outside the European Union in order to avoid the tax. Only an FTT implemented on a global scale would prevent EU-resident institutions being placed at a significant competitive disadvantage in comparison with other leading global competitors. Yet, for the reasons I have outlined, the chances of a global tax being introduced are extremely thin.
We also concluded that it was uncertain who would shoulder the burden of the tax incidence. We pondered what the impact would be on consumers who might have the tax passed on to them. In addition, although the headline rate of the tax was relatively low, there was a danger of a potential cascade effect increasing the potential tax burden by the tax being levied at each stage of the financial instrument’s journey.
Much criticism focused on the Commission’s impact assessment, which indicated that the proposals seemed destined to have a substantial detrimental effect on the EU-wide GDP. In the context of the current financial crisis and the economic pressures being faced by many member states, we found this undesirable. We concluded that if a proposal of such importance as this is to be seriously contemplated, it is imperative that any such proposed tax is as well designed as possible. In our view, the Commission’s proposal failed this test.
The consequences of such a poorly designed tax, both on the United Kingdom financial sector and the EU financial sector as a whole, could be very serious indeed. Divergent views were put to us concerning the potential impact. We found such uncertainty about the outcomes alarming and so, I repeat, we were deeply concerned that an EU-wide FTT could have a serious detrimental impact on the United Kingdom, in particular by giving financial institutions an incentive to relocate away, principally from London. We heard evidence that over 70% of the revenues from an FTT could come from the United Kingdom, and we questioned the appropriateness of a proposal that would have such a disproportionate effect and impact on one member state above all others.
The United Kingdom Government have made it consistently clear that they would oppose an EU-wide tax. Given that EU-wide taxation proposals require unanimity among member states, we found the likelihood of such a tax being introduced extremely remote. Speculation has therefore grown that an FTT might be adopted by a smaller group of member states centred on the euro area from which the United Kingdom would almost certainly stand apart. However, the impact of such a tax on the United Kingdom cannot be ignored. If, as is likely, a directive covering a smaller number of member states equates the UK with third countries, there would still be a significant effect on the United Kingdom financial sector. UK financial institutions entering into a financial transaction with euro area financial institutions would still be liable for the FTT, which could be collected through EU mutual assistance for the recovery of tax or as a result of the regular provisions of joint and several liability. We urged the Government to work to ensure that UK financial institutions are not so damaged and that the United Kingdom tax authorities’ workload is not increased by an FTT introduced by an advance pioneer group of member states.
The Government’s response to the committee’s report has been received, for which we are grateful. However, we found the response to that point complacent. It merely states that the Government,
“will continue to contribute to discussions on the proposal with these issues in mind, and will continue to highlight that unless applied globally, FTTs risk relocation of business activity to countries not applying the tax”.
The deleterious impact of a euro area FTT on the UK could be very serious. I should be grateful if the noble Lord, Lord De Mauley, could provide us with a more considered response to those concerns. How are the Government seeking to address them? Who are the Government currently talking to and canvassing? Which MEPs and fellow Council members inside and outside the euro area are the Government talking to?
We were dissatisfied with the Government’s position on an FTT in one other respect. In his evidence to us, the Financial Secretary to the Treasury argued that the Government do not support an EU FTT but do not object in principle to a global FTT. The Government’s support for a global tax has been lukewarm at best. If the Government support the introduction of a global tax, they should make a sound case for it. If, however, their true position is that they oppose a financial transaction tax in principle and in practice, they should say so in thunder. The Government’s response argues that their position is clear, but we found it as clear as mud and acting to the gallery of those who seriously believe in the benefits of a Robin Hood tax.
Beyond all that, it is imperative that Her Majesty’s Government remain fully engaged in the debate. Discussion on whether and how the financial sector should be taxed cannot be ignored. In our report, the committee considers other models, including a financial activities tax or an EU-wide tax on the model of UK stamp duty, which appeared to be gaining traction when the report was published. We found that such models may bear further exploration. Since the report was published, the debate has moved on further still. The Compact for Growth and Jobs annexed to the conclusions of the European Council meeting on 28-29 June states at paragraph 3(j) that the,
“proposal for a Financial Transaction Tax will not be adopted by the Council within a reasonable period. Several Member States therefore will launch a request for an enhanced cooperation in this area, with a view to its adoption by December 2012”.
What update can the noble Lord, Lord De Mauley, give us on the current state of negotiations on the adoption of an FTT?
The leaders of Germany, France, Italy and Spain are reported as remaining in favour of an FTT. Which member states are expressing an interest in pursuing its adoption under enhanced co-operation? Given the implications for the United Kingdom, to which I have referred, what role are the Government playing in seeking to influence these discussions? I look forward to hearing the contributions on this important proposal, not only from the noble Lord, Lord De Mauley, but also from noble Lords on all sides of the Committee. I beg to move.
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?
Lord Hannay of Chiswick
My Lords, I pay tribute to the work of the noble Lord, Lord Harrison, and his colleagues. In recent months, their sub-committee has produced a string of reports on these financial issues that are so troubling the whole world but, in particular, Europe and the eurozone. We owe a debt of gratitude to them.
The Commission’s proposal for an EU financial transaction tax seems, alas, to have as many lives as Rasputin. No sooner is it pushed under the ice, as it was at a recent ECOFIN council, than it pops up again in the conclusions of the June Council, this time as a possible tax in the eurozone alone or perhaps, in the eurozone-plus if countries, such as Sweden, which burnt their fingers so badly on a single-state version of the tax in the 1990s are not more cautious on this occasion, so we certainly cannot afford to be complacent and assume that the problem has passed us by nor, as the Government seem to do—here I join the noble Lord, Lord Harrison, in his view—to assume that such a tax levied by the eurozone countries alone would have only positive consequences for us, no negative ones.
I should make it clear at the outset that, unlike noble Lords who have spoken before me, I am not a fan of even a genuinely worldwide FTT, such as the Tobin tax idea, to which the Government pay lip service without, it must be admitted, much sign of enthusiasm. Like the taxation of tobacco, its protagonists never seem able to decide whether they are really trying to to deter a nasty habit or to raise the maximum amount of money for good causes. In any case, a worldwide FTT remains a pipedream. Can anyone seriously foresee the US Congress, either the present one or one likely to be elected this November, voting in favour of an FTT? If that is the correct judgment, we need to face up, as the Commission lamentably failed to do, to the risk of displacement, of transactions simply moving off to New York, Geneva, Tokyo or Singapore, leaving Frankfurt, Paris and perhaps even London deprived not only of the proceeds of the tax but of the employment and corporate revenue tax benefits from the businesses carrying out the transactions.
Experience shows this to be no idle risk. Not only did Sweden, which I have mentioned already, suffer in this way in the 1990s, but the whole episode of the euro-dollar market which sprung up in London almost overnight when the Americans made an unwise fiscal decision is there as an awful warning. Europe needs a stronger, deeper capital market if its economy and single market are to prosper, not a shallower, feebler one, which it would be all too likely to end up with if any variant of an FTT on a Europe-only basis were to be introduced.
The Government are right to resist the Commission’s proposal for sound European reasons, not only British reasons. I wish that the Government would put the argument in those terms, not depict it simply as a heroic defence of the City of London. When the Minister replies to the debate, I hope that he will explain why the Government are so confident that there will be no negative consequences for the UK from a eurozone-only variant of the FTT. I am no banking expert but that proposition looks to me to be not entirely convincing.
As to whether there are alternative, less harmful ways of taxing at least some financial transactions—here I follow the course of the previous two speakers—of course there are. The stamp duty on share transactions such as we already levy in this country is one such. I do not see why the Government, in their reply to the excellent report of the noble Lord, Lord Harrison, felt the need to be so negative about such an approach at the EU level. I do not even see why we should jib at having an EU minimum rate for such taxes, as our rate is well above the level which any member state which currently does not have one is ever likely to impose. After all, that is what we have for value added tax.
The need to avoid a race to the bottom, or the creation of tax havens within the EU, deserves to be taken seriously. As long as the Commission’s even more unwise initial suggestion that the proceeds of an FTT should be earmarked as a resource for the EU budget—an idea which must, in any case, be dead in the context of a eurozone-only FTT—is not revived, would not the stamp duty on share transactions route be worth encouraging more?
The Government can rightly feel, from the trend of this debate and from the report we are discussing, encouraged by the support from the EU Committee of this House for their resistance to the Commission’s proposal for an FTT. That case would be all the more persuasive if it was not so often linked to references to Britain having a veto and being determined to use it. We would do much better to advance the case on the grounds of compelling logic and for the reasons that previous speakers have mentioned, such as the loss of GNI to the European Union at a time when it needs to gain it, and many other arguments of that nature.
Lord Giddens
My Lords, I also congratulate the noble Lord, Lord Harrison, and his colleagues on the report. However, I have some disagreements with it and therefore my position is different from that of previous speakers.
A tax on currency transactions, as was noted by the noble Lord, Lord Harrison, was mooted by James Tobin in 1972 in a now famous lecture at Princeton shortly after the US dollar was no longer tied to gold. Tobin’s proposal was a tax operating on a global basis that would dissuade speculators from trying to profit from very short-term rate fluctuations. In perhaps one of the most famous phrases in economics, he said that the point was to throw some “sand in the wheels” of currency markets—a quotation that has been repeated many times since.
It is important to recognise that the notion of a Tobin tax has gone through many different versions since then. We are discussing one such version now, which has surfaced in the form of a generalised financial transaction tax—the FTT. It is a big mistake—although I recognise the motives involved—to call it a Robin Hood tax, because it was produced by a Nobel prize-winning economist with a view to having an impact on world financial markets and we should keep that in view.
There are basically two reasons why an FTT has come back on the agenda. The first is obvious—the need to cope with systemic weaknesses in international financial markets. I know that I am not a substitute for the noble professor of economics who was referred to, the noble Lord, Lord Skidelsky, but JM Keynes made this point very well when he said:
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation”.
He was very good when writing about such issues.
The second contextual reason is obviously the one that we are here to discuss—the specific problems of the EU after 2008 when financial markets had homed in on real or perceived weaknesses of the euro. The report, as has been said, levels an array of criticisms at the proposals for a European FTT made by the Commission a while ago. The report was produced a while ago; it still refers to President Sarkozy, and so on, and a few things have happened since then. As such, it is a valuable contribution to the ensuing debate over those proposals and their subsequent elaboration within EU circles. However, I do not think that it is as conclusive in its critique as the noble Lords who are its authors seem to think.
It also worries me that, in the report, the views of individuals and groups who have clear special interests seem to be given the same weight as those who are likely to be more impartial. For example, in the summary near the beginning, it says that
“leading economists have criticised the concept—
of a European FTT—
“as fundamentally flawed”.
It then says that,
“the financial sector has been fervent in its opposition to the idea”.
Those two statements do not have the same status in my eyes. Moreover, many leading economists, such as Joseph Stilitz, have endorsed the idea of a European FTT, or have certainly stressed that it should be taken seriously.
I would therefore argue in contradistinction to the report that consideration of a European FTT will and should stay on the agenda. President Hollande and Chancellor Angela Merkel both endorse it, as do a number of other eurozone states’ leaders. It is right that the proposals should be further considered and developed and the risks and benefits scrutinised in detail before a decision is taken by the interested eurozone countries who might very well participate in such a tax. The issue of the FTT still needs to be scrutinised but it will stay on the agenda and it is still possible that it could be instituted.
I have one or two questions for the Minister in respect of these observations. First, near the beginning of the report, high frequency trading is discussed. What is the Government’s view on the desirability—which, after all prompted the original work of James Tobin—of throwing some sand in the wheels of high frequency trading? I found the discussion in the report rather inadequate. It does not offer evidence either way; it simply quotes one or two opinions. In my view, high frequency trading is, as the noble Lord, Lord Turner, says, largely socially useless and creates systemic risk in financial markets. I not think that the report discusses this adequately.
Secondly, there is the issue mentioned by the noble Baroness and stressed strongly in the report that if an FTT is introduced, businesses will move away from Europe. I spent some of my academic career studying this issue and I am not at all convinced that the evidence for it is strong. One has to look at it systematically, not just take specific examples. There are many reasons why it would be difficult for financial companies to move away from Europe and get a better financial position, wherever they went, because certain other taxes exist in other areas of the world to which they might move. In June, the Commission looked at this issue in detail and rejected the idea that there would simply be an outflow of companies from Europe. Speaking as a social scientist and an economist, I think that the issue is still much more moot than in the casual opinions which are mentioned in the report. I would like the Minister to comment on that. It is plainly part of the Government’s position but I do not see that there is systematic evidence either way, when one spends some time studying it.
Finally, I ask the Minister to respond to the same question that the noble Lord, Lord Harrison, raised. Do the Government support a global Tobin tax? That was where we started in 1972; Tobin said that it should be a global tax. There seems to be a certain contradiction, as the report says, between the Government’s view of this in regional and in global terms. It is obviously possible not to support a regional tax but to support a global tax but, as the noble Lord said, the Government should decide whether they are a strong advocate of a global tax of some kind. My view is that this debate still has a long way to go and that a lot of work is needed on it from academic economists. We have to look at the whole thing with more scrutiny before deciding on these issues, either regionally or internationally.
Lord Kerr of Kinlochard
My Lords, the national debate on the Commission’s proposal operated at a lower level of academic rigour than what we have just heard from the noble Lord, Lord Giddens. I thought that three myths infected the national debate. First, there was the myth that this was an EU tax, in the sense that it was a tax the proceeds of which would be used to help fund the EU budget. That was widely believed in this country and is completely untrue. There was a gleam in the Commission’s eye but it is clear from the preparatory text and the background that the proposal itself was for a series of national taxes collected by national tax authorities and going into national budgets. That myth produced a very adverse reaction in this country.
The second myth produced a strongly positive reaction. That was the Robin Hood myth: that it was to be a hypothecated tax, which was to be used for international development or to combat climate change. This was completely untrue and it was a bit implausible that at a time of concern about deficits, to put it mildly, Governments would be so altruistic. Anyway, no Government said that they would and the Commission did not propose that they should.
The third myth produced a strongly negative reaction in this country. It was the myth—fed a bit, I fear, by government—that the FTT proposal was a dagger aimed at the heart of London and that it was a malicious proposal from a malign commissioner and designed deliberately to damage the City. Usually, the Commissioner was said to be Barnier, although in fact he was not the commissioner involved at all. This was completely untrue but it was encouraged a bit—possibly because the more ferocious the dragon looks, the more valorous St George must be when he slays it. There was absolutely no doubt that we could slay this dragon whenever we chose, because unanimity is required for tax proposals.
I disagree slightly with the noble Lord, Lord Giddens, on his criticism: “Some FTTs could be quite good, so why were we so against an FTT?”. The members of the committee—I was lucky enough to serve under the noble Lord, Lord Harrison and we were unanimous in producing this report—were not attempting to argue that all FTTs are by definition bad; what we were unanimous about was that this proposal, this FTT, was unwise and unworkable, for reasons that are, to be fair, set out in some detail in the report.
The motivation of the proposal was none of those in our midst; it was, I think, a general wish to see the financial sector contribute in part to the cost of the crisis that it had caused and a particular wish to discourage high-frequency trading as inherently evil. I do not want to cross swords with the noble Lord, Lord Giddens, on high-frequency trading and whether it is indeed inherently evil. I do not think the committee reached a view on that. In fact, I do not think we attempted to reach a view on that issue in this report.
Lord Giddens
The report quotes someone from the Treasury who says that it is not harmful and it appears to endorse that. It is just an opinion from someone in the Treasury.
Lord Kerr of Kinlochard
I do not think we addressed the issue of whether high-frequency trading is or is not a good thing in this report, but there is no doubt that in the Commission’s mind it is a bad thing and that one of the purposes of this tax is to reduce it.
As the noble Baroness, Lady Randerson, said, the proposal was extremely oddly timed. I do not need to repeat the argument she made so eloquently. Setting out deliberately to reduce EU GDP by, it says, 0.5% seems an odd thing to do at a time of sharp recession. I think that 0.5% seriously underestimates the effect on GDP because the relocation effect was not taken into account in that part of the calculation.
Where are we now? First, I would like to consider whether St George fought well. I fear that I am in the school of the noble Lord, Lord Hannay, on this. I do not think we fought terribly well. I think the arguments we should have used were European Union arguments: arguments about the possibility of having one great financial market between the Asian market and the American market; arguments about London being the candidate; or arguments about damage to London being damage to the EU. I find such arguments play pretty well in many parts of Europe, although not in all. The best argument against a financial transaction tax that we should have used was the EU argument. Instead, we tended to wave the Union Jack, invoke Dunkirk, denounce Barnier and then, on 9 December, tried to make a UK opt-out from an FTT that the others could have if they wanted, a carve-out for us, a condition for our agreement to their move to the fiscal union to which we were urging them to move. It struck me as a really odd position to have got ourselves into.
However, that is all in the past. What do we do now? The dragon is not dead. I can reassure the noble Lord, Lord Giddens, on that. The dragon is alive and well. The noble Lord, Lord Hannay, has read out the European Council conclusions. Since the proposal would not be adopted EU-wide, several member states would instead seek to bring it in among themselves under the enhanced co-operation procedures—that is Article 20 of TEU and Article 329 of TFEU. So the Commission will produce a new proposal, presumably very similar to the one it produced for the Council as a whole. Those who wish to introduce such taxes will aim to agree a common scheme, and they have set themselves a target of the end of the year.
Should we mind? If they succeed, will they just damage themselves? Will the London market benefit at the expense of Paris and Frankfurt and anybody else who joins in? Should we, in the Prime Minister’s phrase, simply roll out the red carpet and cheer? I do not think so. Although our report was written some time ago, the Select Committee thought not. We noted that if the situation, which is now foreseen by the European Council, came about, UK financial institutions entering into transactions with institutions in FTT levying states would still be liable for the tax and if financial institutions from FTT levying states conducted transactions between themselves but in the City of London, they would be liable for the tax. In both cases, it would be for the UK authorities, HMRC, to collect the tax and forward it to the appropriate national fiscal authorities. We did not much like the sound of that. We would land the costs of collecting the tax but no revenue from it and, more seriously, the relocation effect would still be real. There would be a deterrent to transactions here and hence damage to the City. That is why, in our report, we said:
“We urge the Government to work to ensure that UK financial institutions are not damaged, and that UK tax authorities’ workload is not increased, by an FTT introduced by certain EU Member States”.
That seems to me to be the key message we should still be conveying to the Government. It was a point not really addressed, as the noble Lord, Lord Harrison, has noted in the reply we had from the Financial Secretary to the Treasury. In particular, he did not address our concern at the UK having to collect in London a tax from which we would not benefit. I hope the Minister will deal with that point more substantively tonight.
Is the die cast? Are we now out of the game? Is it all over? Can we go home? No. Under the enhanced co-operation procedures which they intend to use we have a seat in the room. Only those proposing to introduce the tax will have a vote but everybody will be entitled to speak and if we want to we can seek to influence what we do. In my view, provided we make EU arguments, not exclusively UK ones, they are likely to listen because the health of the City, as a lot of them recognise, matters to them too. We need to be there, sounding constructive, influencing the debate. I hope the Minister will assure us that is what the Government intend to do as this enhanced co-operation is pursued. I really hope we do not just climb onto our charger and ride off.
I have one additional point. Under Article 20 we do not have to leave the others to devise the tax without any advice from the representatives of the biggest financial market. As the others, possibly a slightly different group of others, go ahead with trying to work out some form of banking union, and they are proposing to do that under Article 127, precisely the same arguments apply. Article 127 is the Council as a whole. We would not be able to vote but we would be able to speak. We could be there. We cannot be the banking capital of Europe and let a negotiation about a banking union in Europe go on without our being there. You have to be in to win. We have got to be there.
The other day, Mats Persson of the Open Europe think tank—who is slightly more Eurosceptic than me and whom I would not normally cite—said of the risk of a eurozone banking union that it,
“is probably necessary in the long term, but is also a potential minefield for the UK. First, will it create barriers to UK financial firms doing business in the eurozone in turn fragmenting the single market? Secondly, will supervision spill over to regulation, with the eurozone effectively writing the rules for all 27 countries?”.
These are extremely good questions and the only way of making sure that the answers the European Union comes up with are the right ones is for us to be active participants. I was worried by the Prime Minister’s delight that he had he managed to strike out from the European Council conclusions all references to a common supervisory structure. They pop up in the eurozone annexe to the conclusions but they are to be discussed and negotiated in full Council with everybody there. I really hope we will occupy our seat and use it well.
Lord Monks
My Lords, I shall refrain from giving my usual congratulations to my noble friend Lord Harrison and his committee because this comprehensive demolition of the case for a European FTT is a demolition of the more general case for FTTs other than national ones. I am normally an admirer and fan of the work of the European Select Committee, but not quite so much of one this time.
After reading the report, with its relentless attacks on all the points made for a European FTT, I was reminded of a time in the Ministry of Labour during the Second World War when Ernest Bevin asked for a paper which set out the case for minimum wages in a number of key industries. He received a report from the Civil Service which gave 36 good reasons why it was totally impracticable. He said to the key civil servant, “You are a very clever person. Now give me 36 good reasons why this is a good thing”. He got his way in the end.
I do not know whether or not there are 36 good reasons for this proposal but the case is rather better than the one which is acknowledged by the committee. As others have said—I shall not repeat it—the FTT is not a new idea. After Tobin and as the century went on, the idea was put to one side. Things were going well—financial services were booming in the British and United States centres in particular—and “if it ain’t broke, don’t fix it” was very much the maxim.
However, the world changed in 2008 and that financial model has had a cardiac arrest. At the present time, much of the sector is kept on life support, courtesy of the taxpayer, with the cost of what has had to be done currently estimated at £20,000 per taxpayer and rising. It will cause problems for our children—and perhaps our grandchildren even—in years to come, and what were widely praised innovations and examples of Britain’s creative genius look rather more like seedy scams in the cold light of the experience of the past four years or so. A prized national asset is currently in danger of looking more like a liability.
I will not mention the scandals which seem to arise with some rapidity at the moment, but the sector must expect to come under close, intense, tough scrutiny and pressure. As Vince Cable recently acknowledged, we must recognise the strength of the lobbying that the City and other financial institutions are able to command, which is the subject of various newspaper reports at the moment. However, their trophy room is full of bright ideas that they have shot down which might have had an effect on the way in which the financial sector in London is regulated and works at the present time. I do not want the concept of a financial transaction tax to be put in that trophy room by the successful lobbying for which the City is noted.
Recent examples of successful lobbying include the weakening of the Vickers proposals, the cuts in UK corporation tax and taxes on banks’ overseas subsidiaries, and even the Financial Services Authority has been deployed to oppose the idea of a financial transaction tax.
I concede that the arguments are well set out in the report but perhaps I may address one or two of them briefly. There may be no chance of a global tax, but is there any chance of a global agreement on the environment? Are the United States Congress, the Australians and the Canadians likely to give in on that? I am not sure. They certainly were not at the start, but you have to keep on raising the issues and keep the pressure on. US supporters such as Warren Buffett, Bill Gates and so on continue to make the case for a global tax. I know it is very difficult, but do not give up, because things can change. It is important that we take a positive approach to the idea of a global tax, not a negative one.
The next point is: do not use the US Congress’s position as an excuse for European inaction. Europe still constitutes 30% of world GDP; it may be shrinking as other countries grow at a much greater rate than we do, but it is still the biggest single part of the world economy, if we can call it a single part. Giving a lead, as the EU can do, when it is well judged and well supported, is important. We in this House should not dismiss the argument with contempt but encourage its development in more practical ways.
There is already some development on the argument about how to spend the money raised, some agreements between President Hollande and President Barroso on global solidarity—it is a vague phrase, but we begin to see where it might go. Of the countries concerned, nine are committed, 10 are likely or possible and, as others have said, if we are not engaged they can go ahead without us. That poses all the problems which are the continuing story of the UK in the European Union: are we better inside trying to influence things or do we stand aside through opt-outs? I mention one area which is rather uncomfortable for the Labour side of the House, which is that when Britain was inside the social chapter, it was far more difficult from the union point of view to get anything through than when Britain was outside. I make that point with some discomfort about those years.
The next argument is about the role of London, which could lose a lot of prosperity and work through such a tax. That is a pretty powerful argument against any national tax or regulation. Those winning work are those with the least regulation and taxes. This week, my football club, Manchester United, located itself in the Cayman Islands. Thank you very much to the Glazers for that. They are the latest of many doing that. The search for the cheapest and least regulated jurisdiction is relentless. The concept of the Tobin tax or FTT is to stop that by having a world level playing field, at least to some extent. The quest needs to go on.
The final argument to which I shall labour some opposition is that such a tax will affect growth. That depends on its level. If it is a small tax, I agree that it may not be very effective in raising revenue, but if the levels are modest initially, I do not think that the effect on growth will be as lurid as painted in the report. The FTT is a good, simple idea—very complex to introduce, for sure. I hope that we will encourage work on that good idea rather than add to that list of moribund good ideas on display in some trophy room in the City. Where there is a will, there is a way, and we should not turn back in the search for a scheme that can work globally and that takes on the tax havens which are undercutting nearly all of us in the European Union. There may even be one or two in the European Union who are in the undercutting business.
I finish with a question which is similar to others which have been asked. In the Minister’s view, if there is an FTT in several big countries—Germany and France in particular—does he think that London will lose or gain?
Lord Flight
My Lords, I thank the noble Lord, Lord Harrison, for having chaired the committee so effectively and for having produced a clear report on a difficult and—dare I say it?—somewhat tedious subject. It is interesting that the membership of that committee has differing views on the whole Europe issue, but they were unanimous in their view on the FTT proposal. I think that most speakers, though not all, echoed that today, but I particularly appreciated the robust contributions of the noble Baroness, Lady Randerson, and the noble Lords, Lord Hannay and Lord Kerr.
In summary, it is economically flawed as a way of raising taxes, which John Chown, our tax expert, explained very clearly. It does not meet any of its five targets. We know what the residence issue is, and not all but many of the objections there are to a global version as well as to a particular country version. I think that it has now become part of what one finds in parts of Europe—blaming the Anglo-Saxon economic model for all the world’s horrors, such as the banking crisis and the collapse of the eurozone. This is an emotional stick with which to beat the UK. It is mistakenly seen as a form of moral cleansing when people know that the loss of GDP and tax revenue is greater than the FTT would raise, which is surely a foolish position.
It is ironic that the UK has stamp duty which, although it is not an FTT is a tax on securities that works. I happen to disapprove of it because it is simply a tax on everybody’s pension savings. Some time ago, in better days, the Government had a commitment of sorts to abolish it, and I wonder what the thinking is when better days return. There is the irony that the most efficient way of raising tax, at least from the banking sector, is bonuses, where income tax and employer and employee national insurance are a 62% tax charge and where banks are obviously paying little or no corporation tax, given their historic losses. I am not recommending that, but it is a great irony in the whole debate.
The noble Lord, Lord Kerr, made the most important point that this is unfinished business. The proposals for an EU-adjoined country-by-country tax seem to require that the UK, as a third country, collect and pay over the tax when an EU resident in a country that had this was the counterparty in London. That is absolutely not on. I understand that the USA would be treated as a third party in the same way and I think it would tell Europe where to go. I rather doubt that this will ever proceed because I do not think that individual member countries will want to sustain the loss of employment and GDP for very modest tax revenues. It is substantially a propaganda exercise, but the most important issue on which we have not had satisfactory responses from the Treasury is: how are the Government dealing with the potential proposal that there would be a burden, a liability, on the UK to collect the levy on qualifying EU parties?
Lord Dear
My Lords, I am grateful to noble Lords for allowing me to speak in the gap. I had intended to speak at greater length, but I knew that I would be detained in a committee elsewhere in your Lordships’ House, which was indeed the case. I shall keep my remarks very brief, as is the convention. I should also say that I am a Member of the European Union Committee which produced this report, and my thanks go to the noble Lord, Lord Harrison, for heading that inquiry and writing the report.
I will confine my remarks very much to headlines, bearing in mind the time constraint by speaking in the gap. First, I agree that the financial transaction tax design, as proposed by the Commission, is seriously flawed. It smacks of being hasty and not well thought through, and it is contradictory in places. It leaves us with doubts about its viability.
Despite the very strong case put forward by the noble Lord, Lord Giddens, I believe that there is a likelihood that financial institutions could migrate and relocate away from the EU to avoid paying the tax. Personally, I am especially concerned that the proposal might lead to a reduction in the GDP within the EU. In fact, the Commission forecast a negative impact of 1.76% of the total GDP in the EU, which it says equates to a loss of €200 billion or half a million jobs. That is not something that one should put aside lightly.
Moving from the general to the particular—and this is a point already made by noble Lords—the implications for the City of London are considerable. As we know, it is the largest financial sector in the whole of the EU and it is a core element in our own economy. In the Minister’s response, I believe that the Government should declare their position on this tax with greater clarity. There is already some ambiguity in this country and elsewhere in Europe; people have talked about “supporting the tax in principle”, and different variants of the FTT have been discussed which leads to confusion and doubt. I turn to the Minister to reassure the Committee that the Government will continue to play a constructive role in this debate. The implications for the EU in general and the UK in particular are too great to allow less than full attention to be paid to this issue. Here I echo the concluding remarks of the noble Lord, Lord Kerr of Kinlochard, in asking the Minister to reassure the Committee that that is the approach that the Government will pursue and that they will pursue it with greater clarity and vigour.
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.
Lord Flight
Does the noble Lord not agree that the problems of the eurozone are down to the faulty design of the euro, that the problems of public finances are largely about Governments having been spending too much and not taking a circular view of public spending, and that the problems of the banks are largely the result of money having been too easy for too long in the UK and elsewhere? History shows that banks always start doing foolish things if there is too much money.
Lord Davies of Oldham
If the noble Lord is suggesting that the banks carry no responsibility for the economic and financial crisis that we have suffered since 2008, I am surprised at the proposition. Is he really saying that we do not understand that the massive increase in short-term transactions that rendered the banks so very vulnerable when some of the debts began to be called in—those developments in which bank balances far outweighed the whole resources of the British GDP—did not create a situation of colossal instability? When the financial crisis broke, it is clear that Governments were caught out too and some had somewhat overreached themselves, but as for the British position the problem was the massive drop in tax receipts after the crisis rather than extra spending before it.
Lord Flight
The noble Lord seems to be accepting my point that mistaken monetary policy led to bank balance sheets and lending being excessive. These things can happen only when monetary policy is wrong.
Lord Davies of Oldham
Well, my Lords, then the noble Lord has to say that of each and every Government, because each and every society has suffered from this financial crisis and each and every Government were equally guilty of pursuing exactly the wrong framework of monetary policy. I have no doubt that it was the case that from deregulation onwards, Governments lost the capacity for some kind of control of the financial sector. I have no doubt at all that Governments rode the good years with light regulation, which was wished upon them by every area of political opinion in the countries involved. Certainly, that was the case in the United Kingdom. If it is suggested that Labour in government was too enthusiastic about light regulation, we have only to look at what the Opposition were saying to us at that time—that regulation was too tight.
Of course, I accept the strictures of the committee on the limitations of the proposals from the Commission. In particular, I am very grateful to the noble Lord, Lord Kerr, for demolishing some of the myths around that mistaken proposition by the Commission. A passing reference to the fact that the resources would go to the European budget was certainly not the core of the proposal; it was much fairer than that towards the Governments who would collect the taxation.
It has not been mentioned in the debate that the tax would produce vastly greater resources to the taxpayers of each country and the Governments representing them than the existing structures of taxation. Taxpayers think that the financial sector owes them a great deal in terms of the direction of resources. Given that we have had to rob money from our taxpayers in order to sustain banks that are too big to fail, it is obvious that taxpayers expect the Government to take the kind of action which will help to restore those resources to the taxpayer.
The financial transaction tax is at this stage a distant objective. We all know that it cannot be introduced in one country and that it is not likely to succeed within a limited framework of countries—certainly if it were within only the eurozone countries and certainly if it was based upon the principles that the committee has so effectively criticised. The likelihood of it being effective—and looking anything other than being directed at the City of London—would be fairly remote. However, that does not alter the fact that the arguments may change. The United States may change its perspective on this issue. If it were to do so, and if Europe reflected on the concepts of which the committee is critical, the United Kingdom would look very odd indeed if we said that, because of the significance of the City of London and our financial institutions to our economy, we were staying outside any framework for the development of such a tax.
I congratulate the committee because it has identified a rather forlorn initiative which I cannot see making successful progress in Europe because of the faults that have been accurately identified. However, I would be dismayed if the work of the committee led to a position where the whole concept of a financial transaction tax was regarded as completely outwith any government interest or action. I hope the noble Lord replying on behalf of the Government will at least give some hope in that respect.
Lord De Mauley
My Lords, I thank the noble Lord, Lord Harrison, and the Economic and Financial Affairs Sub-Committee for its work and its comprehensive report into a proposed financial transaction tax. I thank all noble Lords for their, in some cases unexpectedly passionate but in all cases interesting, contributions to the debate.
The United Kingdom remains firmly opposed to the European Commission’s proposals for an FTT. It would have significant negative economic impacts on the EU, damaging growth and employment at a time when it is critical for the EU to pursue policies which enhance the opportunities for that very growth and employment. The Commission’s own analysis suggests that relocation of the sector out of the UK, and therefore out of the EU, would, as the committee pointed out, be very significant. That is why we believe that broad-based financial transaction taxes could be contemplated only at a global level. As the noble Lord, Lord Harrison, said and the committee concluded, the proposal is flawed. It would damage our economy at a critical time and it would, as several noble Lords have said, damage the economy of the EU.
The Government agree with the EU that creating employment and delivering economic growth must be a priority during these difficult times. If an FTT were introduced, it would undermine the competitiveness of the EU. It would increase costs for manufacturers, savers and insurers. It would damage up to half a million jobs across the EU according to the Commission’s own analysis.
As several noble Lords have observed, the UK has the largest financial sector in Europe, so this EU-wide tax would disproportionately impact us. The UK would indeed face the most severe impacts, so we cannot support it. Supporters of the tax argue that it will stabilise financial markets and raise significant revenues, but both claims are flawed. As my noble friend Lady Randerson said, there is no evidence to back up the claim that an FTT would reduce market volatility or that it would effectively target the most speculative, risky activity. Like the committee, we are also doubtful of the revenue-raising potential of this tax. Its very significant negative growth impacts would lead to losses in other taxes. Income tax would raise less, as would corporation tax. The proposal requires the abolition of our stamp duty, so £3 billion would be lost to the Exchequer immediately. Overall it is possible that the tax might raise no money at all for the Exchequer. Not only that, it is inefficient. Based on the Commission’s own figures, every pound raised would cost 93p.
For these reasons the Chancellor said no to this proposal, and we will not accept it. Some member states wish to introduce an FTT through enhanced co-operation, as several noble Lords said. We will not join any such move, but before coming to a firm view about whether we should try to block it, we would need to see the detail of any proposal, what the scope of it will be and what would happen to the revenues.
The noble Lord, Lord Harrison, thinks we have been a bit mealy-mouthed in our response. The Government have been clear in our discussions with our EU partners. The UK does not and will not agree to the Commission’s proposal. There has been no ambiguity on the UK position. In answer to the question asked by my noble friend Lady Randerson, it is now accepted, as I think the noble Lord, Lord Harrison, said, that unanimity on this dossier will not be achieved, which is why there are moves by some member states to seek the introduction of an FTT through an enhanced co-operation procedure, to which I will return in a moment.
The Government fully believe—and perhaps in this, at least, I am in line with the noble Lords, Lord Monks and Lord Davies—that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and the wider economy. In his first Budget, the Chancellor introduced a bank levy with effect from 1 January 2012 that is designed to raise £2.5 billion each year. The UK has no objection to financial transaction taxes in principle. We have one in the shape of stamp duty, to which my noble friend Lady Randerson referred. We continue to be engaged with international partners on this issue. We would consider any proposal before forming a judgment. However, we think it is unwise to institute any FTT unless it is done globally due, as the noble Lords, Lord Hannay and Lord Davies, said, to the risk of activity relocating to jurisdictions not applying the tax, but it was clear from discussions at G20 meetings last year that the necessary international consensus does not currently exist.
The noble Lord, Lord Harrison, explored the impact on the UK of a euro area-only FTT. As I think I have said, no proposal for a euro area FTT has been tabled, but we are aware that France, Germany and Austria have outlined their support for using enhanced co-operation. Before taking a firm view, we would need to see the detail of any proposal, including its scope and what the revenues would be used for, so the Government continue to discuss this through the relevant EU fora. FTTs have been on the agenda at recent ECOFIN and European Council meetings. The UK has taken a full and proactive part in discussions, and yesterday the Financial Secretary affirmed the Government’s opposition at ECOFIN. Specifically to the noble Lord, Lord Kerr, I say, yes, we will continue to engage in a reasonable way. Nine or more member states can submit a proposal for enhanced co-operation to the Commission. We cannot assess how much the UK would be affected until we see what any proposals are. It is important, as ever, for us to be involved and to engage with the process to ensure that we are not disadvantaged.
The noble Lord, Lord Hannay, asked why the Government were so confident that there would be no negative impact on the UK and the noble Lord, Lord Monks, asked a similar question. The Government accept that a euro area FTT would impact the UK economy but, as I have said, no proposal has been tabled so we really cannot speculate yet on how it would impact on us.
I think it was the noble Lord, Lord Kerr, and it was certainly my noble friend Lord Flight, who asked whether we could be forced to collect a euro area FTT on behalf of other Governments. No, we could not be forced to administer a tax on behalf of another Government. As with any other tax, the UK tax authorities could be asked to assist other EU tax authorities in collecting known tax debts from specific taxpayers.
The noble Lord, Lord Giddens, asked whether such a tax would impact on market volatility or could be used to reduce it. There is no evidence that FTTs effectively reduce market volatility. In fact, a 2011 report from the Institute of Development Studies, reviewing academic studies on FTTs, concludes that they may in fact contribute to market volatility. He also asked about high-frequency trading, which is a very important and complicated area. In general, the evidence is mixed about the impact of algorithmic trading on financial markets; in fact, research identifies both risks and benefits. Early conclusions from the Foresight programme’s project on computer trading suggest that liquidity has improved, transaction costs are lower and market efficiency has not been harmed by computerised trading in regular market conditions. The project has so far found no direct evidence that high-frequency trading has increased volatility. However, the early work identifies various risks to market stability posed by potential positive feedback loops, as they are called. The Foresight programme’s final report is expected in the autumn of this year.
Lord Kerr of Kinlochard
I want to be clear that I have understood the answer that the Minister has just given to the point in paragraph 128 of the report. I drew attention to that and I was supported by the noble Lord, Lord Flight. In paragraph 128, the report says:
“UK financial institutions entering into financial transactions with euro area financial institutions”—
those that were applying the FTT—
“would still be liable for the FTT, which could be collected through EU mutual assistance for the recovery of tax or as a result of the provisions of joint and several liability”.
I recall that the committee took legal advice. That was not simply our view but our view on the best legal advice of the House. Is the Minister saying that that statement is untrue?
Lord De Mauley
No, my Lords, I do not think I was addressing that point but rather than delaying the Committee this evening, I will look into it and write to the noble Lord. It is a complicated area.
Lord Giddens
I would like to disagree, quickly, on high-frequency trading and what the Minister seemed to say about it. There is simply an ongoing debate among economists about how you best model it. I do not think it is at all the case that, as he said, the issue is resolved. It is still a matter of ongoing modelling and economists are reaching different conclusions about it.
Lord De Mauley
I hope that when the noble Lord reads my words, he will not see that I said that anything was resolved. In fact, I said that we are expecting a report this autumn, which is not quite the same thing.
Lord Flight
Could I mention that the noble Lord, Lord Boswell, the chairman of the committee, in fact wrote to the Financial Secretary on 20 June, posing precisely the question that the noble Lord, Lord Kerr, proposed and which I echoed? However, we have had no reply yet.
Lord De Mauley
I think I am aware of that. I apologise; the letter is still working its way through the system and a response will be sent.
I move on to the issue of relocation, on which the noble Lord, Lord Giddens, specifically challenged the concept that a tax, unless applied globally, would force relocation. The noble Lord, Lord Monks, gave a rather graphic example of how such things can happen—but I am being slightly frivolous. The committee’s report, at paragraph 64, itself refers to the experience of Sweden as an illustration of the risk of relocation. Sweden introduced a 0.5% tax on the purchase or sale of shares in 1984. By 1990, 30% of all Swedish equity trading had moved offshore—more than 50% of it had moved to London—and the volume of bond trading had declined by 85%. That is an interesting answer.
The noble Lord, Lord Kerr, asked about our approach to banking union. That is wide of these evening’s debate, but I will ensure that his comments are heard at the Treasury. I think that my noble friend Lord Flight asked whether we would do away with stamp duty.
Lord Flight
There was a commitment at the time of the Conservative Party’s policy considerations a few years ago which proposed to abolish stamp duty—not on property but on transactions—as a tax on savings and pensions.
Lord De Mauley
My Lords, we keep all forms of taxation under review, but compared to the proposed EU FTT, stamp duty is easy and cheap to collect and raises £3 billion a year.
We firmly believe that the financial sector should pay its fair share. That is why we have introduced a permanent bank levy. Our bank levy raises more than the bank levies in France and Germany combined and, as discussed, we already have stamp duty on shares. During these difficult times, the focus should be to deliver growth and jobs. The Commission’s proposal is inconsistent with that objective. It would damage growth and jobs in the UK and the EU; it would risk business relocating outside the UK and Europe; and we therefore continue to be clear in discussions.
I add my sincere thanks to the noble Lord, Lord Harrison, the committee and all noble Lords who have spoken this evening. I am very grateful for the points raised in the debate.
Lord Harrison
My Lords, I am most grateful to the Minister for answering all colleagues who joined the debate this evening. I am particularly grateful to two of my colleagues from Sub-Committee A, the noble Lords, Lord Dear and Lord Flight, for speaking in the gap. It is one of the joys of the House of Lords that no sooner is one professor of economics unavailable then another springs to his place and offers an adumbration of the points I was making about John Maynard Keynes and James Tobin. Therein lies the reason why this interesting examination of the FTT proposed by the Commission fell at the first hurdle, because in each case—that of Keynes and Tobin—a single objective was being attempted, not the suite of five ideas we were offered by the Commission.
Let me bring joy to the heart of my noble friend Lord Giddens and tell him that in our most recent report, published on Monday, Markets in Financial Instruments Directive II, on which I am sure that the Minister is looking forward to answering later, we analyse the question of high-frequency trading and algorithmic trading and make a distinction between the two. I am pleased that the Minister gave us some prior information about the Foresight group, from which we will hear later. The noble Lord, Lord Kerr, made the point that the committee rejected the proposition for FTT. Others may come to the fore which we will examine.
Finally, if noble Lords are interested in this area, they should read the Commission’s impact assessment, which was dreadful in the way that it castigated and condemned the proposals before us. In the mean time, I am particularly grateful to all those who have contributed to a debate to which we will need to return.