Taxing financial transactions

This article appeared in the Yorkshire Post


16 November 2009

It was Winston Churchill who summed it up when he said he wished that "finance was less proud and industry more confident".

Then, he was Chancellor of the Exchequer 80 years ago, but the endless and usually unequal contest between the men of finance and the real thing-producing and service-providing economy is now reaching a crisis point.

Tomorrow's Queen's Speech will see the biggest shake-up in the Government's approach to how the modern economy is handled since Margaret Thatcher launched the privatisation of state-owned enterprises in the 1980s.
The global recession has exposed all economies.
Naturally, opponents of Gordon Brown, including those on the Left, like to blame him for the present woes.
But unemployment is higher in America, France, Germany and Spain and Britain's deficit and national budget problems, while serious, are no worse than the problems faced by other OECD economies.
The French newspaper, Figaro, had to use two of its pages to be able to draw a steeply rising red line to show the deficit President Sarkozy is now running. The re-elected German Chancellor, Angela Merkel, has made clear Germany will continue to borrow and not raise taxes rather than see Germany tip back into recession.
And when it comes to beating up on bankers or nationalising banks, the language of George Osborne and Vince Cable owes more to Trotskyist ranting against capitalism as both opposition economic spokesmen search for headlines and soundbites to castigate Brown.
That's politics. But no-one should underestimate the changes now coming fast down the track which will bring to an end the deregulated financial practices that have brought about the disaster.
Public opinion in the form of hard-working business leaders who suddenly face a credit famine, even if they have high productivity and good business plans, is now very angry. Workers laid off or facing wage freezes are furious. This globalised crisis of modern economic management has seen a sharp rise in populist, xenophobic and racist politics across the world. Anti-semitic comments blaming the crisis on "Jewish capitalism" are now common on the web and anti-Jewish remarks can again be heard from mainstream politicians in east Europe.
And yet we need banks. They are the petrol stations of the modern economy, providing fuel around the clock to allow businesses to start and to grow.
We need good financial services to invest our savings and to move from a culture of hoarding money under the bed or buying gold to a practice in which the money-power of individual citizens can be harnessed to the general economic good.
American citizens do not want Goldman Sachs to go under. They need it and other investment banks to go up in value, thus securing a future return on their retirement investment plans.
So the argument is not for or against capitalism, or for or against banking, but rather what kind of capitalism and what kind of management of banking?
In 1996, as an MP on the Finance Committee of the House of Commons which deals line by line with the Budget, I put forward an amendment which called for a tiny modest tax on global financial transactions. Sometimes called the Tobin tax, after the Nobel laureate, James Tobin, who said such a tax would help make transparent and slow down uncontrolled global trades – the casino capitalism that everyone now deplores – my proposal met with instant rejection by Gordon Brown.
His lieutenant on the committee, Alistair Darling, took my carefully worded amendment and got out his red felt tip pen. "No New Taxes," he scrawled across it and that was the end of my attempt to change economic history. At the time, Alistair was right and I was wrong. The de-regulation fervour and the view that the market is never wrong combined into a totemic belief that nothing bankers and finance traders could do should be challenged.
Today there is no stronger proponent of a financial trading tax – a kind of 0.05 per cent VAT – on the sale of financial instruments than Gordon Brown. After all, we pay VAT on all sorts of other goods and services. If money as a product is to be traded in different financial instruments or products, why should there not be a modest transaction tax? The tax could become a modern equivalent of the North Oil tax revenues of the 1980s.
The Prime Minister defended my idea last week at the Despatch Box with remarkable vigour, almost as if he had thought it up himself. Those of us who are Brown-watchers know when he has an idea between his teeth, and we should expect the clunking fist to be hammering out the case for a modern version of the Tobin tax in the months and years ahead.

But we must not go too far. There are forces in Europe who want to replace light-touch regulation by a complete stifling of entrepreneurship and innovation in the selling of financial services. Britain makes a great deal of money by being the centre of world financial services both in London, but also in Leeds and Edinburgh. A careful eye needs to be kept on what Brussels is up to but no-one in Europe will listen to the anti-European Mayor of London, Boris Johnson, whose campaign to defeat Ken Livingstone was heavily funded by hedge funds.
If David Cameron wants to defend the City, his rejection of partnership with the ruling centre-right parties in Europe in favour of populist nationalist parties in east Europe, is a strange way of backing Britain's bankers and financial services industry.
The iron political law of unintended consequences will apply to the reforms due to be announced tomorrow.
To wish for a fair, responsible, properly supervised financial and banking sector is one thing. To achieve it is another. But, thanks to their folly and stupidity, bankers have opened the door to a new regulatory system that will be as much supra-national as it is based on UK law.
The Thatcherite era of deregulation and lax supervision is over. And given the damage to Yorkshire businesses and employees, not before time.