Tobin Tax

HL Deb 08 June 2000 vol 613 cc1307-23

7.31 p.m.

Lord Judd

rose to ask Her Majesty's Government whether they will undertake an official inquiry into the practicability of an international tax on currency transfers (Tobin Tax) as a means of mobilising funds for world development.

The noble Lord said: My Lords, I ask this Question with some trepidation because others who will speak have a great deal of highly relevant expertise. It will therefore be particularly important to hear from them.

At the outset, I must declare an interest. I am an unremunerated member of the OXFAM association and a former director of that organisation. OXFAM, together with other kindred development NGOs, has demonstrated a good deal of interest in the virtues of the so-called Tobin tax, first proposed by Nobel prize-winning economist James Tobin in the 1970s.

In this context, I believe special mention should be made of War on Want which has been playing a leading role in the discussion. As, indeed, War on Want have eloquently spelt out, speculators gambling on currency movements care little about the human costs of what they do. They ruthlessly exploit a financial system which has conspicuously failed to work in the interests of the poor of the world. When the system goes into crisis, the remedies for recovery advocated by the IMF are often the final calamity for the most vulnerable people.

The existing global financial system is just not designed to withstand or resist globalised speculative shock waves. As we have recently seen in Thailand, Indonesia, Russia, Brazil and elsewhere, huge speculative flows mean that economies can collapse like a house of cards within days or even hours. There is no international institution with the funds to intervene to counter speculation. At the same time, in this age of liberalisation, only a very small number of countries still have capital controls at their disposal.

Ironically, as George Soros himself has put it: "Financial markets are inherently unstable. They have acted like a wrecking ball, knocking over one economy after another. The swings cannot be avoided altogether but they need to be brought under control". Like many others, I believe what needs to be examined by government is whether a Tobin tax on foreign exchange transactions could not at least alleviate some of the most damaging excesses of financial markets: whether it might not be able both to play a part in calming speculation and also in mobilising potentially billions of pounds in the fight for the elimination of poverty, whether that poverty be in the developing world, or, to our shame, in wealthy nations of the world like our own.

It has been estimated that, even allowing for the calming effect, a 0.25 per cent tax could possibly yield as much as 250 billion dollars per year.

In the 1998 crisis it has been estimated that during the first few months 10 million people lost their jobs, with millions more subsequently pushed into poverty and debt. In Brazil, for example, 30 billion dollars in capital fled the country in just a few weeks, deeply damaging future long-term investment prospects. More generally, in affected countries, as governments seek to prop up their currency, debts increase and grim cuts in already minimal health, education and welfare programmes, coupled with unemployment, cruelly punish the weak.

At this point I should perhaps underline the background. With the encouraging exception of DfID here in the UK, international aid flows have deteriorated in the past decade from approximately 70 billion dollars to approximately 50 billion dollars per year. Indeed, OECD has calculated that they have fallen 15 per cent in the past two years.

There seem to be three principal reasons for the increasing interest in what a Tobin tax might have to offer. First, the volume of foreign exchange trading has by far outstripped the amount necessary to finance trade in goods and services. Approaching 2 trillion US dollars a day is being traded and only five per went—I repeat, only five per cent—of this is necessary for financing trade in goods and services The rest is speculative. It is sobering to contrast this with 1975 when 80 per cent of transactions were trade related.

Secondly, globalisation and deregulation have exacerbated volatility. Pessimism and optimism unrelated to economic realities cause violent fluctuations. It is these which aggravate the social havoc and human misery.

Thirdly, a Tobin tax is seen as a useful and effective way to assist in raising the resources for economic and social development.

There are obviously questions a government review would need to examine. What would really be the effect on world trade? Would it be adverse or would it indeed be beneficial because greater confidence about exchange rate levels would permit better planning and forecasting of trade transactions? Advocates of the tax argue that as trade is essential for economic growth a small tax of 0.25 per cent is unlikely to prove restrictive. It is just as well to remember that some 40 per cent of current trade takes the form of shipments between the branches of trans-nationals, financed by bookkeeping entries rather than currency conversion. Consequently, most of these transactions are not liable to tax.

There is the question of what transactions should be subject to tax. To be effective, its scope would almost certainly need to be wide. Virtually all foreign exchange transactions would surely have to be covered, including spot and forward transactions, foreign exchange swaps, and contracts involving the right to purchase currency at a future date. Clearly, definitions would need to be revised from time to time if innovative methods of evasion became evident.

What about collection? Over 80 per cent of foreign exchange transactions occur in no more than nine countries. In 1998 32 per cent were negotiated in London. Is there not therefore a case to concentrate it initially on the nine and a few others? What kind of international agreement would make most sense? What kind of national supportive legislation is required? Would the national central banks have a key role? Would the continuous linking settlement bank be relevant?

This brings us to the application and administration of the revenue. What should be the respective roles of the international financial institutions, of the mainstream UN system, and of the regional organisations and banks?

Here I would just underline that Jubilee 2000, which has been so warmly commended by the Government, has estimated that to wipe out the south's unpayable debt requires 160 billion dollars. It is illuminating to compare this figure with the 250 billion dollars a year a Tobin tax of only 0.25 per cent might yield.

I touch briefly on evasion. Would speculators find a way to avoid payment? Income, value added, property and inheritance taxes all suffer some evasion, but they still prove worthwhile sources of revenue. In any case, electronic tracing will become constantly more effective. Even if speculators were tempted to achieve evasion by more complicated methods of transaction, the costs and risks involved could well prove a disincentive when compared with the cost of a small tax itself. As for havens, if transactions were to be taxed at the site of deals this would complicate the attractions of relocation. Anyway, the cost of relocation would again have to be weighed against the cost of a minimal tax level.

It is also worth considering whether, if necessary, higher levels of tax could be imposed as a deterrent at the point at which transactions made via havens entered into the official world markets.

The question remains as to whether a Tobin tax would have prevented the last crisis in south-east Asia. In my view, there can be no doubt that other regulatory measures would have been necessary. But, equally, I am certain that a Tobin tax could have played a vital part. For the future, there is also the concept of the so-called "Spahn mechanism", which would involve a two-tier system; a minimal normal rate and a higher rate to be triggered at times of turbulence.

People have asked about job losses in the City of London. Those have to be contrasted with the potentially immense social benefits around the world and the continuing life and death issues if we do not take action. They also should be seen against what anyway happened on Black Wednesday.

I have raised these questions—and there are many others—not because the Government have not yet committed themselves in principle—I wish that they had—but because I believe that there is a groundswell internationally in favour of some kind of Tobin tax. It is a groundswell strengthened by a sense of moral outrage at what goes unchallenged today. It is therefore sensible to start looking constructively at the issues involved. This Government have established an enviable reputation for their commitment on international development and related financial challenges such as debt. To take forward an inquiry of the kind I propose would be to build on that record. Either, in the end, we are for social responsibility or we are not.

7.41 p.m.

The Lord Bishop of Oxford

My Lords, I am grateful to the noble Lord, Lord Judd, for initiating this debate on a subject which is both important and timely. I fully recognise that in a free market currency transactions are essential. But the percentage of those transactions which are at present related to trade and industry is tiny. As the noble Lord emphasises, it amounts to perhaps as little as 5 per cent. The rest is simply short-term speculation.

James Tobin's original suggestion for a tax on currency transaction was to counteract some of the volatility caused by this speculation. That may be a necessary and laudable aim, but it is one primarily for economists to debate. My concern is that money could be made available from such a tax to support different aspects of the work of the United Nations and, in particular, development projects.

If people want to speculate, in a free society that is up to them. But a free society can only be truly free if it is set within a moral framework whose purpose is to serve society as a whole. Taxation is an essential and legitimate means of ensuring that some of the wealth generated by the market goes to help those least able to benefit by it—and, indeed, sometimes those who are suffering most as a direct result of it. We accept that a percentage of the profits which come from betting on horses goes to benefit the racing industry. Is it any less appropriate for a percentage of the profits on short-term financial transactions to go to the benefit of the human project as a whole?

Such a tax would not in any way hinder essential currency transactions for it would be small—perhaps as little as 0.1 per cent—and it would bite only on short-term transactions. About 80 per cent of transactions involve round-trips of fewer than seven days and more than 40 per cent involve round-trips of two days or fewer.

Of course, inevitably, a number of questions have been raised. Is it really feasible to enact this kind of tax? We already have a stamp duty on shares and stocks which are traded on the market—in fact, a bigger one, at 0.5 per cent, than what is envisaged for the Tobin tax.

Then it is thought that the diversity and complexity of the world's financial markets would make it impossible to collect such a tax. But in fact the main financial centres are relatively few. The UK has approximately 32 per cent of the market; the United States has 18 per cent; Japan has 8 per cent; Singapore has 7 per cent; Germany has 5 per cent; Switzerland has 4 per cent; Hong Kong has 4 per cent; and France has 4 per cent. That is a very limited number which it would be possible to involve in the tax.

Of course, people would try to find ways around such a tax. No doubt some rogues would arise. But as the Canadian Greens wrote, referring to the G7 Halifax meeting which discussed the Tobin tax proposals: Piracy for the most part was brought under control when nations co-operated to bring the open seas under the rule of law. Should we not be preparing a foundation for renewed order before the financial pirates have appropriated all of the world's wealth?". I believe that the noble Lord, Lord Judd, dealt most convincingly with that point.

Would governments be motivated to bring about such a tax? If they received 50 per cent of the taxation for their own country, as has been suggested, I believe that they would be. Furthermore, I believe that nation states will increasingly see it as being in their interest to achieve international co-operation in controlling the world's financial institutions. Some governments have already begun to see this. For example, the Canadian House of Commons, by 164 votes to 83, voted, That in the opinion of the House the Government should enact tax on financial transactions in concert with the international community". The nations of the world have already shown that when it comes to the remission of unsustainable debt of the poorest countries, significant action can be taken. The Jubilee 2000 campaign, initiated by the Churches and supported so strongly by the Chancellor of the Exchequer, has achieved, although not everything yet, what most people would have regarded as impossible a few years ago. Then it was thought as belonging to Never Never Land; a fairytale. Discussion of the Tobin tax is at an early stage and may arouse the same kind of feelings. But there is no reason to believe that a similar political will cannot be engendered. I believe that it can and should be.

7.46 p.m.

Lord Grenfell

My Lords, I thank my noble friend Lord Judd for introducing the debate. It comes as no surprise that someone who has been so long and so profoundly committed to global economic and social development—as has been the right reverend Prelate the Bishop of Oxford, who spoke most impressively— should focus our attention on this tax.

Earlier this month, the World Bank, my former employer, published an alarming report on the prospects for Africa in the 21st century. Earlier this week, the Bank for International Settlements warned that the recent high volatility in the equity and exchange markets looked likely to continue. A few days before that, the Financial Stability Forum warned some of the leading offshore financial centres that they would have to improve standards of supervision and transparency.

In their differing ways, these are all developments relevant to a discussion on instituting an international tax on currency transactions as a means of mobilising funds for international world development. Many of these issues have been extensively addressed in OXFAM GB's thoughtful discussion paper. I congratulate OXFAM on producing such a useful document.

In six minutes it is impossible to do justice to such a complex proposal, which has already been extensively explored over the past 22 years. The best one can do is to state one's position as succinctly as possible and hope that noble Lords will take it on trust that one's conclusions are based on a careful weighing of the arguments of experts on both sides of the issue and including therein the moral argument.

Of course, the Tobin tax, globally accepted and successfully implemented, could provide very substantial new funds for development purposes. I think in particular of the 250 billion dollars that could be realised from a 0.25 per cent tax and what that could do to reduce the crippling debt burden of the poorer countries in place of the painfully slow and inadequately funded multilateral arrangements currently in place.

Mobilising funds for development was not, as has been pointed out, the primary objective of Professor Tobin's original proposal in 1978. He saw it as a byproduct. But if there were a single justification for it today, that would be it. I say that because I am as sure as I can be that, as a means of discouraging volatile short-term trading and its destabilising effects and as a means of enhancing national control over tax policy, the tax simply cannot pass the test. And, left with the revenue mobilisation as a sole objective, in my view it cannot pass that test either because, regrettably, it cannot be implemented effectively as an international tax.

As a means of discouraging short-term trading, I agree that such a tax, if set high enough, would make the round-trip movement of large sums of money in and out of countries more costly. However, the cost to traders of moving to non-tax jurisdictions is also high, and if the tax is low they will not readily be deterred from unproductive but profitable speculation. Further, investors who speculate in, say, a possible 15 per cent devaluation of a currency will not be deterred by a Tobin tax, even if set as high as 0.25 per cent. Those are the speculative operations that do most or the damage.

I happen to be among those who believe, although many do not, that reducing the volume of short-term trading, which in turn reduces liquidity, carries the serious risk of increasing and not decreasing volatility I believe that the more players there are in the market, the wider and more diverse the views on where the market is likely to go and the lower the risk of the herd mentality infecting the whole market.

And what about delivering more policy autonomy? As most experts on the proposal believe that the tax rate should not exceed 0.25 per cent and probably should be closer to 0.1 per cent, it is hard to see that a tax at that level will provide policy-makers with more than a minute margin of extra autonomy.

In short, I do not see a Tobin tax delivering on the objectives set by its proposer, even if it can be implemented. And can it be implemented? Again, I fear not—at least, not effectively. First, it can be implemented successfully only if it is universally accepted. It has been suggested that by taxing at the point of the deal and imposing extra heavy penalties on transactions which are destined for non-tax jurisdictions, the system can work with less than global adherence.

However, we have been through all that with the EU's proposed withholding tax on cross-border savings. Less than universal adherence means ineffectual implementation. It has been suggested that a commitment to levy the tax should be a condition of membership in the United Nations and its agencies, especially the World Bank and the IMF. However, to impose that retroactively seems to me to be a politically impossible task.

I am not suggesting that all further exploration of the practicality of a Tobin tax, or a variation thereof, is useless. Far from it. It could be that in time developments in electronic tracing will render it more feasible. Perhaps one day tax havens will be only a bad memory of the less socially responsible financial landscape. Who knows? But at present I do not believe that finding the way to make this kind of transaction tax-feasible and effective is an immediate prospect. Perhaps it never will be. However, some of the best minds in economics are focused on it and perhaps one day they will come up with the solution.

In the meantime, reducing the developing country debt burden and raising the necessary finance for global development needs remain huge challenges. If a Tobin tax cannot help us to meet them, as I believe to be the case at present, then higher levels of aid and debt relief, greater market access for developing country products, and steadier flows of productive investment funds must be secured and sustained. I wish sincerely that a Tobin tax were feasible but I fear that it is not, and I must be realistic about that. Nonetheless, I thank my noble friend sincerely for keeping us thinking about this serious issue.

7.54 p.m.

Lord Joffe

My Lords, I add my thanks to the noble Lord, Lord Judd, for raising this important matter. In his eloquent speech, the noble Lord made a powerful case for an official inquiry into the practicability of an international currency tax and I support that case, declaring at the same time an interest as chair of Oxfam.

Oxfam, whose objective is to eliminate poverty, is acutely aware of the adverse effect on the economies of developing countries of currency speculation and the damaging capital flows which result. The damage caused impacts in several ways, some of which have been touched upon by the noble Lord, Lord Judd. It contributes to the collapse of the economies of the countries, leading to large-scale unemployment.

The crash in Asia, which was partially caused and exacerbated by currency speculation, inevitably hits the poorest first. In Indonesia, for example, between 1996 and 1998 the number of people who lived in poverty doubled to 40 million. It adversely affects long-term investment, and the noble Lord, Lord Judd, has already drawn attention to the 30 billion dollars which fled Brazil. Alongside that, the IMF programmes which follow the currency crises often focus on cuts in welfare programmes so that the poorest are hit again.

As the noble Lord, Lord Judd, pointed out, one of the aims of the tax is to help to deter speculation, which causes sharp exchange rate fluctuations and serious damage to economies. I accept, as the noble Lord, Lord Grenfell, pointed out, that the tax itself will not solve the problem of stabilising financial markets. That would require a range of policy measures at national and international level. However, there can be no doubt that such a tax would be an important component of those measures and a move in the right direction.

I am not an economist and therefore I hesitate to contradict the noble Lord, Lord Grenfell, on his views of the efficacy of the tax. However, many eminent economists have a quite contrary view. The importance of the proposal by the noble Lord, Lord Judd, is that the measures should form the subject of an official inquiry so that all views on the tax, its effectiveness and the possibility of its implementation will be explored carefully.

I believe that there is consensus that the Tobin tax, if implemented and equitably applied, could transform the level of overseas aid. Again, as the noble Lord, Lord Judd, pointed out, that aid is, and in the past year has been, cut significantly by countries, with the honourable exception of the United Kingdom Government, which, to their great credit, increased their budget.

It seems particularly appropriate that the United Kingdom Government should take the lead in inquiring into the practicability of such a tax because, by a considerable margin, London is the world's biggest foreign exchange market. The idea of an international tax initially may sound wildly Utopian. However, other similar ideas which were thought to be Utopian, such as debt relief, the banning of landmines and the sale of gold stocks, seemed Utopian at the time that they were first raised. Yet they are now regarded as sensible and mainstream and are backed by politicians and international institutions alike. After 20 years, there is a growing interest in the Tobin tax by economists and others, and the proposed inquiry might well recommend that its time has come.

7.58 p.m.

Lord Rea

My Lords, I am very pleased that my noble friend has asked this Unstarred Question, and I am particularly pleased with the way in which he has phrased it. Sensibly, he asks for an inquiry, which may just be acceptable to the Government, rather than for the adoption of the Tobin tax, which certainly would not. He and other noble Lords have spoken on the subject most expertly, particularly my noble friend Lord Grenfell, who has the position of banker within his experience.

So far as I am aware, this is the first time that your Lordships have debated in any detail a proposal to harness the enormous sums of money which are transferred every day in the currency market and to use them for productive purposes.

As has been pointed out, Professor Tobin did not design his tax primarily to raise revenue but to act as a deterrent to currency speculation which, even in the mid-seventies, 20 to 25 years ago, was a serious destabilising factor. But, as has been pointed out by other noble Lords, the activity has grown massively since then, especially since the mid-1980s. Today's 1.8 trillion dollars which is exchanged every day, is nearly 10 times greater than the 188 billion dollars of 1986. The growth is due, among other things, to the ending of fixed parities, the liberalisation of financial markets and electronic trading.

The annual sums involved are some 55 times greater than the total value of world trade in goods and services and 18 times greater than the global turnover in equity markets, which is huge enough: 21 trillion dollars in 1995. It is no wonder that currency speculation has been a major factor in the economic crises of recent years which other noble Lords have mentioned; for instance, the tiger economies of South-East Asia, Brazil and Russia and, of course, ourselves in 1992 on Black Wednesday.

The inquiry for which my noble friend asks would explore the practicability of levying the tax. There would be many problems to overcome; not least that it would have to gain international acceptance, which is a long way off at present. But I suggest that Professor Tobin would not put forward an unworkable plan. His Nobel prize was awarded not for the currency exchange tax proposal which he made in 1978. It was made three years later in 1981 for, his analysis of financial markets and their relations to expenditure decisions, employment, production and prices". the very building blocks of modern economics.

He looked at the possible difficulties of introducing the tax—many of which have been mentioned by noble Lords—such as evasion, piracy, tax havens and how to administer the tax. Those who now promote the tax know of those problems but can show that they are surmountable, given the international will to make it work.

My noble friend and all who have spoken tonight are concerned with the tax being an opportunity to realise a sizeable sum of money which could be used for world development and the elimination of poverty. Again, there will be snags, not only in collecting the tax but in allocating and distributing it. The countries where the largest amount of transactions take place—ourselves and the United States—might feel that they have a right to the revenue, or at least to decide on its allocation. But as international collaboration will be essential in imposing the tax, some form of international distribution of the product would be the fairest outcome. As the right reverend Prelate stated, funding the United Nations through the tax is one possibility. That is not particularly popular with the United States at present. There are other, rather more realistic, suggestions which recognise that the countries collecting the tax should be allowed to keep varying proportions of it according to their state of development, with the poorest keeping the most.

To my mind, the most important reason for putting this tax concept on to the official agenda is that it would start the process of considering how to capture a modest share of the wealth which swings rapidly round the world from one country to another, making rich people richer, for the benefit of world society as a whole. Globalisation has allowed capital to escape from national confines. Multinational corporations are now more powerful than all but the largest countries and, through their friends in high places, are setting the rules. I refer, for instance, to the World Trade Organisation and the multilateral agencies. At present, they are having a bonanza, growing ever wealthier while the gap between the rich and the poor widens.

I suggest that a small tax on the most obvious speculators, the short-term currency dealers, is a feasible first step. I hope that my noble friend on the Front Bench will agree seriously to consider backing the Tobin tax, or one very similar, as a positive step towards a fairer world.

8.4 p.m.

Lord Taverne

My Lords, I deeply regret that such a vitally important issue is one for which we have so little time, so I shall make a few short points.

First, I find the idea of the Tobin tax an attractive way of increasing the amount of aid which goes to the developing world. The noble Lord, Lord Judd, in his excellent introductory speech, said that it is an absolute scandal that the amount of aid is declining. There has been a great deal of waste. However, that is a matter which can be remedied. I believe that every single person in this House could think or any number of forms of aid which would make an enormous difference to the rest of the world. It is an attractive idea to have such a potentially large source of revenue, especially if one arranged, as an incentive, for half the proceeds to go to the country collecting it.

Secondly, I do not take the view that we should not intervene in markets. Sometimes it is argued that markets are efficient and that, with floating exchange rates, one should not intervene. It seems to rue that markets are not efficient. Floating currencies tend to overshoot. One only has to look at the present situation to see that periods of great misalignment are frequent. Not only does one have the example of the pound and the euro at present; there is the way in which the dollar and the mark moved between 1980 and 1985. The value of the mark halved, although German policy was stable. American policy at that stage was rather lax. Again, if one looks at the period between 1990 to 1995, the dollar halved against the yen, although the Japanese at that stage were already increasing the asset bubble and the United States' policy at that time was rather stable. The market moved completely against economic fundamentals.

There is an idea that international liquidity is a case of Mr Soros carefully considering factors which he has to weigh, and intervening intelligently and rationally. International trade consists of a lot of young men in braces yelling gibberish. They would not know an economic theory if they saw one.

Thirdly, I am rather sceptical about the idea of a great exodus if the major centres were to adopt a Tobin tax. After all, we are not here dealing with a 20 per cent withholding tax but with a proposal for a 0.1 to 0.5 per cent tax. If that is a good idea, I see no reason that the United Kingdom should not join Canada in seeking to convince others to adopt this tax.

If the Tobin tax worked, that would be great. But, for the reasons advanced by the noble Lord, Lord Grenfell, who knows much more about this than I do, there are a large number of practical problems. I have done a limited amount of reading about the tax, but I am not sure that some of the questions raised have ever really been answered by its advocates. First, would a tax of between 0.1 per cent and 0.5 per cent act as a stabiliser? At times of panic and turbulence, people expect to make far higher margins. It might be the case that there is to be a higher rate only at times of misalignment. However, there is, at present, a constant time of misalignment.

Fourthly, who do we tax? Do we tax the market makers and those who provide liquidity and may provide a service? We would probably have to do that because the tax could not be confined to speculators. What do we tax? Do we tax spot transactions? They would be likely to move into derivatives. I am advised that the ingenious people in the City would soon devise new instruments that could be used or invented to circumvent the tax.

If we are successful in throwing grit into the international wheels of monetary movements, is it wise to decrease liquidity? That is a question raised by the noble Lord, Lord Grenfell, and one to which I do not know the answer.

I do not want to be negative about this. I am somewhat sceptical, in the light of those questions, whether the tax would achieve its objectives of stabilising currencies. But I am not sure that that is necessarily an answer to the question. Perhaps we are putting the wrong question. Perhaps the question should not be: will this tax stabilise international currency? But, putting it the other way round, is there evidence that the tax will cause positive harm? If it did not cause positive harm, it would be an attractive way—if we could convince others to do so—of raising the money for what we are all agreed are the most worthwhile of ends. It would have the great advantage of providing an independent mechanism for raising such funds with an incentive for countries to raise funds for themselves as well, and it would no longer make us dependent on the generosity of individual nations, which has not been greatly evidenced in the past.

8.10 p.m.

The Earl of Northesk

My Lords, I join other noble Lords in congratulating the noble Lord, Lord Judd, on securing this debate.

The arguments in favour of a Tobin tax are tantalising. Who could disagree with the view that: Other reforms of the international economic architecture are needed but the Tobin Tax is a start … It would help calm the markets and reduce purely speculative transfers without interfering in legitimate trade and, as a bonus, it could generate cash to undo some of the harm done by the global gamblers". If only it were that simple. As Richard Colbey put it: Attractive though such a tax may seem, the difficulties in implementing it would be enormous". But it is not only its implementation that causes difficulties. As the noble Lord, Lord Grenfell, pointed out, it is all but impossible that it would achieve its two primary and substantive objectives.

Like the noble Lord, Lord Grenfell, I pay tribute to Oxfam for its work in this area and for the contributions from some of its stalwarts in today's debate. It pointed out that, Economists are divided as to whether a currency transaction tax significantly reduces systemic instability in foreign exchange markets … the beneficial effect of the tax on its own should not be overstated". And, The most politically viable tax proposal would allow revenue-collecting governments to keep most of the money, with perhaps a small contribution going to development … it is probably necessary to sacrifice to some degree the development financing aspect, keeping the proposals and expectations modest". But what of the practicability of the tax? The noble Lord, Lord Judd, alluded to the work of Paul Bernd Spahn in this area. He observed that, As a pure transaction tax, the Tobin tax would not be effective … [it] would impair the operations of the international financial markets and create liquidity problems without deterring speculation". He goes on to suggest four crucial areas where the effectiveness of the tax is constrained. The first is the tax base. In order to limit financial market distortions, a Tobin tax would have to be imposed on all foreign exchange trading. But such a base would not be able to distinguish between speculative trades—its real target—and normal trading. Perversely, the effect of that could be to create, rather than prevent, currency instability and reduce the capacity of international financial markets to engender economic growth in less developed nations.

The second area is taxable transactions. The presumption is that a Tobin tax would apply to all spot transactions involving foreign currencies. The first point here is substitutability. To avoid the tax, all the markets would have to do would be to switch to alternative trading mechanisms, notably derivatives. As E.V.K. Fitzgerald observed, Ironically, it is the sophisticated traders who will be best equipped to use alternate instruments to avoid the tax; the same traders who are the prime target of the tax". Moreover, as Rodney Schmidt puts it, unless a world-wide uniform tax is imposed on all instruments for transacting in foreign currency, the tax will be largely ineffective". And, as a corollary to global coverage, it would be necessary to obtain international consensus. Were a tax to be introduced piecemeal, those participating in foreign exchange markets could simply transfer their operations to jurisdictions where it was not levied. That would neutralise the desired objective of stability in the currency markets.

This issue cannot simply be reduced to a matter of political will. It is unrealistic to expect the world's major financial centres to view the prospect of a tax, which could see a loss of jobs, a fall in international trade and a mass relocation of their industry, with equanimity.

The third area is the tax rate. As the noble Lord, Lord Judd, and others explained, what is proposed is a rate as little as 0.25 per cent on the value of currency trades. Although that would generate considerable revenue, there has to be doubt about the efficacy of such a small tax. The size and volume of foreign exchange markets are such that the potential returns from trading would outweigh a transaction cost set at such a low rate. Bluntly, at such a level it would be unlikely to deter speculative trading.

The fourth area is the distribution of tax revenues. If we accept that the tax is international in character, requiring international co-ordination to set and enforce the rules, by inference the revenue it raises must also be international in character. That logic justifies the concept that the proceeds of the tax should be hypothecated for "world development". Inevitably, that runs into the buffers of whether or not nation states should retain authority over their own tax revenues. It also raises the prospect of conferring considerable power on the international organisation to which the tax revenues were assigned, which would inevitably arouse national resentments. Nor is it possible to be entirely sanguine about the effectiveness of supra-national organisations in delivering aid to where it is needed. I have in mind particularly that both the UN and the EU have been exposed to criticism on that front in recent times.

By no means do we on these Benches belittle the worthy ambitions of those who advocate a Tobin tax. Nor do we gainsay the moral imperative that underpins it. In its own terms, there is no more deserving cause than the desire to do what we can to reduce levels of poverty and deprivation in the world. But the reality is that a Tobin tax struggles vainly to live up to its promise. While we could all wish it were not so, there really is no pot of gold at the end of this particular rainbow at the moment.

8.16 p.m.

Lord McIntosh of Haringey

My Lords, as the noble Lord, Lord Taverne, said, this has been a short but well-informed debate and I congratulate my noble friend Lord Judd on inspiring these excellent contributions.

In the time available I should like, first, to agree with everybody who talked about the dangers of currency market instability; then to talk about the benefits of globalisation but to worry as to whether or not the benefits have converted themselves into an effective policy for reducing poverty. Then I want to talk about what we, the British Government, and through us the international community, are doing about strengthening the international financial architecture, about debt relief and aid programmes. Then I should like to turn to the Tobin tax itself; its economic implications; whether it would achieve its goal of reducing instability; and how it could be implemented, if at all. I want to conclude by referring to the wording of the Question and the research for which it calls.

Let me start with the agreement. Of course it is an enormously valuable objective to reduce international market instability. All of the figures quoted in relation to currency transactions and the way in which they dwarf not just world trade in goods and services, but also equity transactions, show how enormously they have increased since James Tobin first proposed the tax in 1978. The size of the currency transaction markets increases the danger of the kind of recent turmoil we saw in the Asian markets and, as the noble Lord, Lord Joffe, reminded us, subsequently in Brazil. Those crises certainly highlight the weaknesses in the global financial system.

So we share the desire for more stable capital markets which are better placed to deliver the economic growth and development that poorer countries need. I was as amused as the noble Lord, Lord Taverne, by my noble friend Lord Judd quoting Soros on the dangers of instability. I thought that that was the poacher turned preacher, rather than gamekeeper, in this case. It is certainly true that it would quite irresponsible for us not to look for every possible policy tool to deliver greater stability. It would be irresponsible not to consider the Tobin tax as one option for that purpose.

However, more fundamentally, it is important that we should avoid the fashionable temptation to knock globalisation. The increases in cross-border activities that we saw in the last half of what we must now call the last century—trade, capital flows and foreign direct investment—have produced rapid rises in global output and wealth. It is very difficult to argue that they have not at the very least permitted, if not caused, such rapid rises in global output and wealth. In the past 20 years alone, world trade rose from 2,000 billion dollars a year to 5,500 billion dollars a year. World foreign direct investment inflows rose from 55 billion dollars to 640 billion dollars. At the same time, world GDP rose from 10,000 billion dollars to almost 30,000 billion dollars. For every trade or investment transaction there is a corresponding capital flow.

Trade or investment transactions take place in an atmosphere—a sea, if you like—of currency flows. So the GDP growth that we have experienced would not have been possible without the oxygen of open capital markets.

However, it is disappointing that the benefits of globalisation have not been translated into comparable falls in poverty. Yes, the number of people in developing and transitional economies in abject poverty has declined; but the falls have been terribly small in comparison with what ought to have happened. That is why I want to say something about what the Government are doing with our international partners on measures to spread the benefits of globalisation more fairly. However, I wish to do so in the context of saying that it would be quite wrong to retreat from globalisation and to deny the poorest countries the development opportunities from which we have benefited.

National governments depend for investment funds on the day-to-day confidence of international investors. So they must pursue consistent and credible policies that guarantee stability. In 1998, the G7 took international action rather rapidly and very decisively to deal with the financial crises of that year. We held the G7 presidency that year and took a leading role in developing long-term disciplines to promote greater stability—a new framework of rules that effectively and fairly met the demands of the global market place—which had to be agreed nationally and applied internationally.

Over the past 18 months we have made significant progress in four key reforms of the international financial architecture: first, a framework of internationally agreed codes and standards, to be implemented by all countries that participate in the international financial system; secondly, global financial regulation, to make the international and national bodies responsible for financial sector supervision work together more effectively—the Financial Stability Forum was established in April of last year and it could become the world's early warning system for regional and global financial market risk; thirdly, a new framework for crisis prevention and crisis resolution, based on a partnership between the public and private sectors; and, fourthly, a framework of new social principles. The Financial Secretary to the Treasury, Stephen Timms, set out the detail of those reforms in a debate on the Tobin tax in another place on 18th April.

I turn now to other government measures. The right reverend Prelate the Bishop of Oxford referred to debt relief and the work of Jubilee 2000. I also pay tribute to those involved in that work, but the advance that has been made has come about more particularly because of action by the IMF and the World Bank, under very considerable pressure from our Chancellor of the Exchequer. The heavily indebted poor countries (HIPC) agreement reached at Cologne last year set out to cancel 100 billion dollars of developing countries' debt. We are working for faster, wider and deeper debt relief. Our initiative is to give 100 per cent debt relief to every country that qualifies under the HIPC initiative. We are still at the forefront of efforts to persuade our international partners to meet these agreed targets. We know that this is necessary in order to break the vicious circle of debt, poverty and economic decline and, instead, create a virtuous circle of debt relief, poverty reduction and economic development.

On aid programmes, I was glad to have recognition from my noble friend Lord Judd of the outstanding way in which DfID has performed during the past three years. But I am sorry to have to agree with him that other countries have not performed in the same way. In addition to the increase in budget, we have focused our programmes on the poorest people in the poorest countries. Our bilateral programmes are structured to deliver our key goal of halving the proportion of people in absolute poverty by 2015. Between 1999–2000 and 2001–02 the aid budget will rise by 28 per cent in real terms.

We are also taking forward the reform agenda at the international institutions, including the comprehensive development framework being developed by the World Bank. If we add this to the implementation of the social principles to which I have already referred, we can see that this is the right approach towards reducing the proportion of people living in extreme poverty. So strengthening the international financial architecture, relieving debt and improving development aid are proper responses to the challenges that have been so movingly described. They will help to achieve our shared objective of more stable financial markets, consistent with economic growth.

But what about the Tobin tax? Problems arise with economic implications with regard to its ability to reduce instability and, of course, with its implementation. I am afraid that there is a danger that it could introduce serious economic distortions to the international financial system. The problem is that some currency transactions reflect pure speculation and contribute to financial crises, while others help economic adjustment and stabilise markets. But a Tobin tax could not distinguish which was which; the danger is that it would slow the adjustment of financial markets and slow recovery from a crisis. Artificially slowing market adjustments to genuine price shocks might actually have a higher economic cost than rapid adjustment.

As to reducing instability, I believe that many of the advocates of a Tobin tax have actually moved away from that argument, because it is not clear that a modest tax would actually have much effect. Indeed, enough has been said by other speakers tonight, so there is no need for me to expand on that point. However, it might actually increase market stability. The latter depends on efficiency and price transparency, which, in turn, depend on capital liquidity. A tax which successfully reduced the overall number of trades—which is what would be necessary if we were going to reduce instability—could diminish liquidity, reduce market efficiency and transparency and actually increase volatility.

What about implementation? I am afraid that a number of noble Lords—starting with the noble Lord, Lord Grenfell, continuing with the noble Lord, Lord Taverne, and then the noble Earl, Lord Northesk—really put the boot into the tax rather more forcefully than I am prepared to do. But I am afraid it is not good enough to point out, like my noble friend Lord Judd, that 80 per cent of these transactions are in nine countries. Currencies can be traded anywhere in the world; capital markets can move quickly. If we had a tax, a serious one, traders would simply move their activities to regimes which might perhaps be located offshore. Driving the markets offshore to less well-regulated financial centres would add to the instability of the financial system. Therefore, we would need to have international agreement. Even if we did not, the situation would encourage traders to develop derivatives or other financial instruments that could be traded without tax liability. From that, we might move to derivatives of derivatives, and so on. I am sorry, I would like to think that it would work but I cannot believe that it can.

We are, of course, pleased to see that War on Want and Oxfam are engaged in this debate. We are pleased that the debate has encouraged so much academic research. However, we must live in the real world. There is not a multilateral mechanism for establishing a Tobin tax. We shall keep in touch with developments in the debate but we are not convinced that an official inquiry of the kind asked for would be a good use of public resources.

Lord Judd

My Lords, before my noble friend sits down, will he say whether the Government are prepared to consider an inquiry?

Lord McIntosh of Haringey

My Lords, I have just said that I am sorry to say that we are not convinced that an official inquiry would be a good use of public resources.