Financial Transaction Tax: European Union Report

Lord Kerr of Kinlochard Excerpts

Wednesday 11th July 2012 Grand Committee

[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.

--- Later in debate ---

[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.