George Osborne’s planned financial services levy is a lamentable failure according to international benchmarks. The IMF has called for any banking tax in Britain to be set at £6 billion. Last week, Left Foot Forward highlighted the socially regressive nature of the £2.5bn tax which will mean banks contributing 50 per cent less than families (child benefit and tax credit cuts) to the government’s fiscal consolidation programme.
The Chancellor has dismissed the idea of a financial transaction tax, (‘Robin Hood’ campaign), and appears reluctant to curb excessive banking sector profits and remuneration without international support.
That leaves as his only option the banking levy, which will raise £2.5bn 2013/14. The IMF, however, has argued that Britain’s financial industry should be taxed to the tune of £6bn. The exact applicable tax rate has yet to be finalised by Mr Osborne. To compound matters his plan has already been dumbed down.
The original plan was to have a £20bn threshold, with tax applying on the entirety of a bank’s balance sheet (i.e inclusive of the £20bn). Now instead of this threshold, every institution will have a £20bn allowance that will not be taxed. The banking levy will affect only liabilities above that level.
The forecasted revenue from the levy is pitifully low when compared to the costs of the banking sector bailout. According to a recent IMF report of financial sector taxes, the yet to be recovered fiscal cost to the UK is 6.1 per cent of GDP (as of end-2009).
However, this figure grossly underestimates the actual cost and exposure of the entire crisis to the UK. It is believed in most advanced and developed nations it could have been as high as 25% of GDP.
Mr Osborne’s planned levy of £2.5bn, which equates to roughly 0.2 per cent of GDP in the UK, is a clear illustration of this government’s abdication of any notion of social fairness. It simply cannot be right that a recession, caused by a collapse in the financial sector and markets, places such a disproportionate share of the burden on the public.
To reduce the iniquitous Comprehensive Spending Review fiscal consolidation settlement, the burden on the financial sector can be drastically increased with the adoption of a financial activities tax (a tax on remuneration, profits and bonuses) or a financial transaction tax (a Tobin tax or the Robin Hood campaign).
Net direct costs of recapitalisation and asset purchases is estimated to average 2.8 per cent of GDP or $877 billion for the richest G20 economies. The table below highlights the recovery rate for the advanced nations of the G20. It currently records a recovery rate of 21 per cent. This illustrates the extent to which the global financial sector has escaped its moral dues.
To his credit, the Chancellor has been pushing for an international financial activities tax, which will be on the G20 agenda next month. If his government genuinely believes in ‘fairness’, they must push hard not only for an additional financial sector tax, but one that truly prices their actions past, present and future.