EU Financial Transaction Tax would wipe out derivatives markets and cost UK £25.5bn

 4 November 2011

• An EU Financial Transaction Tax (FTT), or Robin Hood Tax, would impact Britain more than any other EU member state
• The FTT would eliminate derivatives trading in the City of London
• The tax would not raise any significant revenue and would increase market volatility

In a report released today (Friday) the Adam Smith Institute warns that an EU-wide Financial Transaction Tax would cripple the British economy. Its research reveals that, based on European Commission impact assessments, an FTT would cost the UK economy £25.5bn, and hit EU member state economies by £185bn in the long term.(1) This figure is likely to be even higher once Britain’s disproportionate share of financial trading in the EU is factored in. The tax would also lead to increased market volatility, reduced market liquidity, higher unemployment, greater tax avoidance and reduced tax revenues.

The impact on derivatives trading will be particularly damaging to the UK. The City of London currently accounts for 74.4% of interest rate derivatives turnover within the EU (its next biggest rival is France with just 11.7%). An EC impact assessment projected that the FTT would lead to a decline in derivatives trading activity by up to 90%. Therefore a Financial Transaction Tax would nearly eliminate derivatives trading in the UK. This would hit tax revenue and other parts of the City by preventing traders from hedging against real-world risks. As a result of this, ordinary consumers would find it harder to find fixed rate mortgages.

Advocates of an FTT argue that it will reduce volatility, but the ASI report shows there is no clear, consistent evidence that the tax would reduce volatility. However, empirical studies do show a positive relationship between increasing transaction costs and higher levels of volatility. This increase in volatility with rising transaction costs would be accompanied by significant declines in turnover, stock prices and a migration of trading activity.

An introduction of a Financial Transaction Tax would also lead to a reduction in the market volume of transactions. This would shrink the tax base considerably, off-setting the apparent revenue gained from an FTT. It would also lead to a decline in investment, which combined with the elimination of derivatives trading, would lead to job losses and an exodus of companies from the City. Our financial services sector is the UK’s flagship national industry and employs over 1.9million people (6% of the UK total) and as such must be protected from such an economically damaging tax.

Commenting on the report, Sam Bowman, Head of Research at the Adam Smith Institute, adds:

“This report reveals the huge damage that a Financial Transaction Tax would cause to the UK. It would wipe out London’s derivatives sector, destroying jobs and driving other traders overseas. By destroying a critical part of Britain’s most lucrative industry, an EU Financial Transaction Tax would be killing the goose that lays the golden eggs.

“The EU is proposing this tax to distract from the real culprits for Europe’s troubles – spendthrift governments who cannot balance their books. Using markets as a scapegoat might buy Eurozone leaders some political credibility, but it would ruin the City of London.”

(1). The figure of £25.5bn comes from applying EU impact assessment to UK GDP 2010 figures

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25 years after the Big Bang we ask: Was it a good idea?

Published in City AM here.

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 27 October 2011

On the 25th anniversary of the Big Bang, Dr Eamonn Butler argues in City AM that the deregulation was needed in order make London the world's top financial centre.

Case for high speed rail 'fundamentally flawed' says right wing think tank

Read in the Daily Telegraph here.

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26 October 2011

The Daily Telegraph write on our report arguing that there is no case for High Speed Rail

Think-tank attacks high-speed rail link

Read the article in full in the Financial Times here.

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 26 October 2011

The Financial Times covers the release of the ASI's report questioning the case for High Speed 2.

High Speed Fail – there is no case for HS2

26 October 2011

In a report released today, the Adam Smith Institute exposes the weaknesses in arguments for High Speed 2 and argues that the case for the project is fundamentally flawed. The research reveals the huge cost of HS2 to the taxpayer, and suggests that many of the uptake projections are overoptimistic. Looking at HS1 (London to the Channel Tunnel) and international examples, it is clear HS2 will not make enough revenue to cover operational and construction costs and will bring very few tangible benefits.

The cost to the taxpayer

• HS2 will become a state financed project. The first phase will cost £17bn and when extended to Scotland, £50bn, – funded at great cost to the taxpayer at a time of austerity and increasing debt interest payments
• The potential for going far above the £4bn “optimism premium” set aside for overspending is high, especially in light of current inflation. Public pressure for more tunnels (which cost much more per km to build) through environmentally sensitive areas such as the Chilterns will push up construction costs.
• DfT will have to pay for HS2 mainly through debt markets. This will put DfT’s budget under strain, meaning there is less money available for investment elsewhere on the UK railway network

Demand and profit predictions

• The figures don’t add up for HS2 to make a profitable return. HS1 (London to the Channel Tunnel) cost £5.7bn but raised only £2.1bn when sold off. Alarmingly, the financial case for HS2 is even weaker than for HS1.
• Over-forecasting of passenger numbers has plagued previous rail projects in the UK. London and Continental Railways (LCR) forecast passenger numbers for Eurostar for 2004 as being 21.4 million. In reality, passenger numbers were a third of this figure.
• Predictions of passenger numbers and demand for High Speed 2 may also be overambitious. This would have huge repercussions for HS2’s profitability.
• Passenger predictions do not take into account the potential response of classic train line franchises and airlines to generate increased demand for their service in the light of HS2 competition.

What benefits?

• Environmental benefits have been cited as one of the key merits of HS2. There is little environmental case for HS2. Carbon emission reduction projections are weak and real environmental benefits won’t be realised until Phase 3 (extending to Scotland) in at least 30 yrs time.
• HS2’s analysis suggests that ‘the impact of HS2 on carbon emissions will be between an increase in emissions of 26.6MtCo2 and a reduction of 25.0MCo2 over sixty years’. This is a tiny change, and over that time frame UK rail operations are expected to have generated a stable or lower carbon footprint than currently.
• The construction of the first phase of HS2 will have a major environmental impact along the route, especially the Chiltern Hills are and may blight house prices locally
• The justification for HS2 is based on intangible benefits such as a narrowing of the North/ South divide. A similar reason was used to justify the investment of the TGV in France – its losses continue to be underwritten by the French taxpayer.
• Looking at Europe we see that nearly all high-speed rail projects are subsidised. The TGV in France has caused SNCF’s debt to rise to c£25billion. The World Bank warned in 2010 of the debt created by high speed rail systems talking of the ‘near certainty of copious and continuing budget support for the (high speed rail) debt. The government should take heed of these warnings.

Commenting on the report ‘High Speed Fail’, Sam Bowman, Head of Research at the Adam Smith Institute, adds:

“The case for High Speed 2 is based on wildly unrealistic projections. It will probably end up making a loss, and will mean a lot more borrowing for the government in the mean time. There are no significant benefits to HS2: it will cost a lot of money and achieve virtually nothing.

“Governments are spectacularly bad at predicting the future – taxpayers should not be forced to pay for a project with no significant benefits. To spend at least £17 billion and up to £50 billion on a train network for which there is no demand is wasteful enough; to do so at a time of austerity is obscene.

“The HS2 project has itself become a runaway freight train. If the government is serious about getting tough on wasteful spending, it will hit the brakes on HS2.”

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Inheritance tax: enemy of entrepreneurs

Published in City AM here.

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Old Teaser

24 October 2011

Dr Madsen Pirie writes in City AM that inheritance tax distorts and damages the economy and should be scrapped as it creates an extra hurdle to entrepreneurs.

There is no question that the EU comes at a huge and growing price in economic terms

Read on ConservativeHome here.

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22 October 2011

Dr Eamonn Butler writes in ConservativeHome that our membership to the European Union is coming at a huge economic price.

Privatise adoption

Read in The Times here.

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Old Teaser

 18 October 2011

 Sally Thompson writes a letter to The Times arguing that the UK should follow the US model and privatise adoption agencies.

Al-Jazeera: Sam Bowman on Occupy Wall Street

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16 October 2011

From cradle to grave: The death of the NHS?

Read the article in full on Al-Jazeera here.

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13 October 2011

Tom argues that the government shouldn't be in the business of providing healthcare on Al-Jazeera.