Financial Transaction Tax: European Union Report

Lord Davies of Oldham Excerpts

Wednesday 11th July 2012 Grand Committee

[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.