Financial Transaction Tax: European Union Report

Lord Flight Excerpts

Wednesday 11th July 2012 Grand Committee

[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?

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[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.

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[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.