Osborne will score a financial own-goal tomorrow

The Chancellor, in turning down the chance to implement a Financial Transactions Tax, will cost the UK dearly.

A fiscal measure that could raise £8bn, boost GDP by 0.25 per cent, provide vital funds for job-creation, infrastructure projects and poverty reduction, calm excessive speculation and reduce the regularity of financial crashes would seem like a no-brainer for a Chancellor. Struggling to reduce the deficit and bring public finances under control, George Osborne is set to score an own goal by refusing to sign up for the Financial Transaction Tax (FTT) which is rapidly becoming a reality in Europe.

Twelve European countries, including the big economies of Germany, France, Italy and Spain, have agreed to a small transaction tax of 0.1 per cent on equities and bonds and 0.01 per cent on derivatives. The initiative, which could generate €37bn per year, is expected to be given the green light by the European Parliament on 12 December.

The UK government’s reasons for rejecting the FTT are flawed on many counts. The Chancellor stubbornly clings to the argument that the FTT must be global to work. This ignores the fact that over 40 countries including some of the world’s leading financial centres and dynamic economies, have successfully implemented FTTs.

Hong Kong raises £1.7bn a year through taxes on derivative transactions while South Korea raises £3.8bn. Even Switzerland and the US have their own taxes on transactions which do not seem to have harmed their reputations as financial centres. Indeed, the UK’s very own stamp duty of 0.5 per cent on share transactions currently raises about £3bn a year for the Treasury; much of this tax (around 40 percent) is paid by people, including non-British, based abroad, who trade in UK shares.

Another myth often touted is that ordinary people and pensioners will end up paying the price. But the rate for the FTT is set so low precisely to avoid hitting longer term investments such as people’s pensions. On the contrary, a paper published this week shows that the FTT is an opportunity to help safeguard pensioners’ investments through reducing short-term speculative activity and encouraging pension funds to return to their traditional, less risky role as buy-and-hold investors - exactly the sort of cautious, long-term funds which experienced the most growth over the rocky 2008-2010 period.

Sparked by recent low interest rates, the increased turnover of assets amongst pension funds contributes to management costs of between two and 20 per cent. It is these high fees - reaped by intermediaries such as advisers, managers and brokers - that are having a major impact on pensioners’ returns.

The tax will also help improve market stability by reducing high-frequency trading including computer-driven trading in which shares are bought and sold hundreds of times a second. Virtually unheard of seven years ago, high frequency trading now accounts for up to 77 percent of all trading in UK equities.

Dictated by computers, too fast for humans to monitor, high frequency trading can create sudden crashes and wild fluctuations in stock prices that bear no relation to market fundamentals and serve little economic purpose. Applying a tiny tax every time a stock is traded will dramatically reduce the incentive to use computers at lightening speeds as the tax outweighs the wafer-thin profits. This will improve financial stability and help reduce the likelihood of future crises, which can lead to a higher level of GDP in the future.

If a levy of 0.1 per cent also makes other elements of City trading unprofitable, you have got to ask how valuable was that activity in the first place?

By triggering a shift away from short-term trading in favour of long-term holding the FTT will thus help reduce misalignments in markets and their subsequent abrupt adjustments or crashes, decreasing the likelihood of future crises. Indeed, countries with FTTs were amongst those least affected by the 2008 crash.

At a time when the UK government continues to struggle with the impact of a crisis that will according to the Bank of England, ultimately cost the UK at least £1.8trn and as much as £7.4trn in lost GDP, it seems reasonable to expect the financial sector, largely responsible for creating the crisis, not just to contribute to repair the damage but also to adopt measures to help reduce the likelihood of future crises.

To us and 50 other financiers who wrote to David Cameron and other European leaders in support of the tax, it is clear the FTT would help rein in markets, help kick-start national economies and provide money to help the world’s poorest countries. The FTT will shortly be a reality in Europe’s biggest economies. The UK cannot afford to ignore it.

Campaigners for a FTT protest in Westminster. Photograph: Getty Images

Jack Gray is currently an Adjunct Professor at the Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology Sydney and an adviser to pension funds in Australia and overseas.

Professor Stephany Griffith-Jones is Financial Markets Director at the Initiative for Policy Dialogue, Columbia University.

Getty
Show Hide image

I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.