Tobin Tax

HC Deb 18 April 2000 vol 348 cc143-62WH

Motion made, and Question proposed,That the sitting be now adjourned.—[Mr. Robert Ainsworth.]

10 am

Mrs. Maria Fyfe (Glasgow, Maryhill)

May I begin by saying how grateful I am to have secured the debate, given the competition with other hon. Members for debates in Westminster Hall? I am particularly grateful, as this is an opportune time to debate the subject.

In case anyone in the room does not know what a Tobin tax is, perhaps I had better briefly explain that it is a shorthand way to describe a tax on foreign currency exchange. It is named after Senator Tobin, a Canadian who devised the idea some years ago. I have tabled a parliamentary question on the subject, so I know the Government's view: they reject the idea on the grounds that it would be almost impossible to achieve a global coverage, and there would be huge scope for avoidance.—[Official Report, 15 March 2000; Vol. 346, c. 188W.] However, I am not sure whether the advisers in the Treasury are familiar with the work of some highly qualified people who believe that the proposal should be considered, as it is workable and could create enormous benefit worldwide.

A highly regarded economist and former adviser to the Canadian Government, Dr. Rodney Schmidt, recently attended a series of War on Want-sponsored meetings. He argued that, due to changes in technology and banking practices, a Tobin tax would be relatively easy and cheap to impose. He said that the tax could be applied to all deals through the settlement system, which tracks every trade and would be unavoidable. Evasion of the tax and the establishment of Tobin tax havens would be impossible. Dr. Schmidt's paper is available from War on Want. Even if his case were incorrect and the tax were not totally unavoidable, it would be largely unavoidable and should be explored.

An international group interested in the Tobin tax met in Cologne at the G8 summit in June. It heard that a more sophisticated version of the tax with a variable rate could be used to put a stop to the kind of speculation that undermined the south-east Asian tiger economies in 1997–98. A loose grouping of nongovernmental organisations and campaigning groups has set up an electronic bulletin board that will allow future research and co-ordination of activities. There are now many international Tobin tax websites, and War on Want can supply a list of those that it considers best informed.

The tax has political support. In this country alone, about 100 Members of Parliament from all the major parties have expressed support for it, and I congratulate my hon. Friend the Member for North-East Derbyshire (Mr. Barnes) on his activities on the subject. The Trades Union Congress backs the Tobin tax, and a fringe meeting with my right hon. Friend the Secretary of State for International Development at last year's Labour party conference attracted more than 200 delegates. Thousands of War on Want members and supporters are keen on the idea, and it is no wonder that people are so interested. Levelled at a modest rate—say 0.25 per cent.-it could raise the astonishing figure of $250 billion a year to help fight poverty and calm down volatile markets.

Who would be upset if the tax were imposed? Apparently, HSBC, NatWest and Barclays are major players in the currency trading markets. Pension funds, hedge funds, insurance companies, trans-national groups and some rich individuals play the currency market. It would be interesting to know what profits are made from currency speculation. By way of a few examples, however, I learnt that NatWest made £432 million profit from currency trading in 1998 and that the Hong Kong and Shanghai bank claimed £2.3 million profit a day from currency speculation.

The volume of foreign exchange trading has grown over the years and far outstrips the amount necessary for trade. Up to $2 trillion a day is traded, but only 5 per cent. is necessary to finance trade in goods and services. If asked to consider the matter, most people would not believe that; they would think that currency speculation was to do with buying goods and services. However, very little of it is, and the rest of the $2 trillion represents speculative activity. In 1975, 80 per cent. of foreign exchange transactions were trade related.

Those who are busily engaged in mopping up so much money for no productive effort could easily cope with a small universal tax on their transactions. The banks already levy pretty hefty charges. The margin between buy and sell rates for foreign exchange is a sight more than 0.25 per cent, as we can see for ourselves next time we go on holiday and buy pesetas or drachmas. If banks can get away with that, why is it so difficult for Governments to tax currency speculators by a tiny amount? One argument is that the tax could reduce international trade by increasing costs. However, trade is an essential activity, so a small tax is unlikely to kill it. War on Want recommends a very modest rate of 0.25 per cent., but the level would be up for discussion if the principle were agreed.

Let us consider avoidance and evasion. At present, 84 per cent. of all foreign exchange transactions occur in only nine countries. We would not, therefore, need worldwide accord to create a workable tax regime. War on Want recommends that the tax should be created through an international agreement backed by national legislation and the national central bank should collect it when transactions occur. The setting up of a global settlement bank—the continuous linking settlement bank—in mid-2000 will make such taxation simpler to carry out.

It is hardly reasonable to argue that the tax will fail because speculators will find ways around it. Our current taxes present the same problems, but the fact that big businesses attempt to evade or avoid corporation tax does not prevent us from imposing it. If people were determined to evade a microscopic tax such as the Tobin tax, they would have to go to the considerable expense of carrying out their transactions in a non-Tobin tax country, which is likely to be more costly than the tax itself. It is a matter of finding the right level of tax, so that we have an effective deterrent against such a strategy. Besides, the money involved in evading the tax must come back into official world markets, and it could be taxed more heavily as a deterrent against such a ploy.

The Treasury's view is that there are already high transaction costs on speculation. The Government are taking measures to redesign the international financial architecture, but there is concern that the Tobin tax campaign could detract from them. In that case, we need to hear more about those measures and what they are intended to do. If they involve a tax, the Treasury has presumably found a way to overcome at least substantial avoidance and evasion; if they do not, what are they? Would they promote stability better than a Tobin tax? Would they raise a large sum as cheaply and easily as a Tobin tax? Could they help to create a substantial fund for international development and to support countries through disaster relief? If the Treasury's proposed measures are all those things, I hope that we shall soon hear about them; if they are not, I wonder what reasons it has for introducing them.

Granted, there may be technical difficulties with the Tobin tax, but the issue remains whether the tax would offer a nation or the globe greater net benefit than leaving the problem unaddressed. Has a better alternative somehow escaped our attention? The European Union funds its infrastructure through a supranational VAT collected by each member state, with each state keeping 10 per cent. of the revenue that it collects. If that can be done, why is a Tobin tax so difficult? It probably comes down to this: do we believe that we should have an international economic order based on openness, multilateralism and co-operation? If so, how will we create it? Global wealth is increasing by hundreds of billions of dollars every year. The funds and the knowledge exist to end absolute poverty and conserve our planet. Will we allow the greed of the few to override the needs of the many?

On that subject, I will quote from an article sent to me by Mr. Gary Brisley, a senior currency trader at NatWest for several years, in which he says: Speculation does not arise because of market consensus about economic fundamentals. That is just a fantasy story created by the markets to disguise the ugly truth of what they really do. In fact, the majority of traders have very little economic expertise at all. What dealers have is a gambler's instinct for a one-way bet and a quick profit. To be frank, they would be equally at home plying their trade in a Las Vegas casino…A speculation tax would be the first step on the road to restoring some sanity to a global economic madhouse run by a minority for a minority.

To conclude, it is always possible to find reasons not to do things. If we want to find reasons to explore the Tobin tax, we are not short of them: there is massive world poverty and there are huge environmental problems. Millions of dollars in relief are required to cope with disasters. If another way exists to raise money globally for such endeavours, let us hear it. However, we should not dismiss out of hand a proposal that has a huge amount of expertise behind it. For that reason alone, the Tobin tax demands serious investigation.

10.12 am

Mr. Harry Barnes (North-East Derbyshire)

I congratulate my hon. Friend the Member for Glasgow, Maryhill (Mrs. Fyfe) on securing a debate that is of key significance and importance, and I am pleased to take part in it. I approach the subject as someone who has been fortunate enough in recent years to make Commonwealth Parliamentary Association visits to sub-Saharan African countries Zimbabwe, Malawi, Tanzania and Ghana. We can observe nations and developments from afar, but visiting places, meeting people and seeing the circumstances in which they live are of vast importance in shaping people's attitudes about what needs to be done in the modern world.

However, I will start by mentioning Arthur Schopenhauer, a 19th-century German philosopher, who became known as the philosopher of pessimism. He subverted Leibnitz's phrase and said that everything is for the worst in the worst of all possible worlds. If Schopenhauer were alive today, he would find plenty in third-world nations that would allow him to add to that analysis of despair, such as the floods in Mozambique and the horrors experienced by people trying to survive in those circumstances, starvation in Ethiopia, and ethnic cleansing and its consequences in Kosovo. Those are just today's recent problems that we have all observed on television screens in our living rooms.

However, the media misses and never observes much suffering elsewhere. For example, last year's massive problems in Somalia did not hit our screens. There is poverty, exploitation and environmental deterioration in much of the third world. Because of its extreme poverty, few trees are left in Malawi. It has no source of fuel and is open to environmental devastation as well as serious economic problems with its future energy supplies.

Adverse economic and social conditions lead to collapse and conflict throughout the world, even in slightly more advanced nations than the third world. I am sure that economic problems and international indebtedness were major factors in the break up of Yugoslavia. The problems in Northern Ireland could surely be tackled more readily if there were an improvement in economic and social conditions. Nation after nation in sub-Saharan Africa is caught up in indebtedness and we are thankful that the Government have taken a lead in tackling international debt. Christian Aid and others rightly want the Government to go further and their campaigns should be noted carefully by the Treasury. The Government can pick up and run with the Tobin tax and take the moral lead. They can tackle the problem of indebtedness.

Third-world nations suffer adverse terms of trade in, for example, coffee or timber—or even gold, in the case of Ghana. When its price falls on world markets, masses of people in the gold mines near Kumasi become unemployed. When one job goes in a gold mine, six other jobs within the community disappear. We always said that if one job went in a coal mine here, two other jobs would go, but, given the nature of African society, the loss of one important job will lead to all sorts of other consequences for supply and services.

The International Monetary Fund and World Bank programmes insist that there should be privatisation, balanced budgets in third world nations and free trade, although free trade may destroy indigenous commercial developments and result in the need for protection. They are called structural adjustment programmes and are forced on Governments who, surprisingly, are often still dominated by parties that previously ran a one-party command economy, as in Tanzania. Such programmes have been operated in extreme circumstances outside the control of those Governments, and are now being driven into other areas. We should be more careful about that.

Unlike Arthur Schopenhauer, we should not just throw up our hands in despair and horror, and say, "That is the nature of life and it is how things will be. One problem will be built on another." It is time for the politics of optimism. That has been shown by the Government's response to the Jubilee 2000 campaign on dealing with debt. At the very least, we need to consider ways of raising massive resources to tackle environmental, economic and social problems in the third world. Those nations should be allowed to facilitate their own development, unhindered by the problems that the more advanced section of the world has sometimes created for them.

The Government should seriously investigate the possibilities of the Tobin tax—I hope that they take that message from the debate and put the issue on the agenda. There is no ready-made solution, and we do not know all the ins and outs of how the tax would work. The principle is worthy of investigation and serious study, however, and our Government, in association with some of their partners around the world, should consider it fully. A lead should be given on accepting the tax and international agreements should be made to ensure its operation.

An increasingly wide range of commentators and politicians across the political spectrum argue that a relatively small tax of 0.25 per cent. on currency trading—the figure mentioned by my hon. Friend the Member for Maryhill—could dampen currency speculation and raise enormous revenues. If it dampened that speculation entirely it would obviously not raise those revenues, but we cannot realistically believe that it could achieve that. We are not ready to overcome speculation in the modern world, but let us draw on it for resources to help the poorer nations to whose destruction it contributes.

War on Want, which leads a campaign for the tax, estimates that even such a small tax would raise up to $250 billion a year. Those revenues could be used to tackle global poverty and environmental crises. Eradicating the worst forms of poverty in the world and providing basic health care, nutrition, education, water and sanitation would cost $80 billion a year. A further $125 billion a year could be used to address environmental problems. The Guardian has estimated that providing universal primary education would cost only £8 billion a year. We are committed to advancing basic educational provision throughout the world.

The implementation of the Tobin tax would not all be plain sailing. We would need an acceptable international organisation to distribute the resources. Some have mentioned the United Nations in that context. The IMF, despite its problems, is another possibility. We will need a universal regime to prevent traders from migrating elsewhere. There is the rub, however. Traders use sophisticated computer systems to prevent their partners from ratting on deals, and those procedures might be adapted to prevent tax evasion. Furthermore, 80 per cent. of the speculation is undertaken in seven countries, and most transactions take place in a few large institutions. Respectable banks and brokers' houses might not wish to buck a popular tax, which is seen as a tax on sin and undue speculation.

It is probably naive to believe that there could be total enforcement, but that is a problem with all taxes and laws. The most important issue faced by Tobin advocates is the resistance to it from international capital, and the need for an international political organisation to roll in the speculators. We should have the will to do those things and press for them. The Government should view Tobin's aim as a noble one, which can uplift and encourage younger generations to believe that a decent, honourable world can be built. Those of us fortunate enough to live in the richer parts of the world should play our full part in that.

Support for the Tobin tax has been growing in the past decade. There is an increasing ferment of support in France, with about 14,000 people signing up to a campaign in the past year and organising demonstrations. The Canadian Parliament and the Finnish Government back Tobin, as does the Socialist International, together with many MEPs, whose recent motion on Tobin in the European Parliament failed by just four votes. A French parliamentary committee is investigating Tobin and two of its members have come to the Commons to discuss the issues with me. I am pleased by those developments.

My hon. Friend the Member for Maryhill referred to early-day motion 312 on the Tobin tax, signed by 101 Members of Parliament from all political parties and none. Several ex-Ministers have also signed it. The Tobin tax is clearly understood and has much going for it in the Commons. I hope that we shall hear more about the campaign, which is being led by War on Want, just as we heard more and more about the Jubilee 2000 campaign.

The Tobin tax is not a panacea, but progressives should raise their sights and seriously consider the fact that it would kill two birds with one stone by curbing a certain amount of currency speculation and tackling global poverty and global warming. I hope that the Government will take a lead on this key issue, at least by pursuing a full investigation so that, in the concluding words of the early-day motion, they discuss the concept with its partners in international organisations such as the World Trade Organisation, the IMF, G8 and the European Union with a view to drawing up an internationally coordinated and feasible tax regime for currency speculation.

My hon. Friend the Member for Maryhill said that she had received a parliamentary answer saying that the Government did not favour the tax because they feared that there would be massive evasion. When I took a delegation of MEPs and representatives from War on Want to meet the Economic Secretary, we heard another argument: that the Treasury is engaged in an alternative programme to tackle currency speculation. That is welcome, but it is mistaken to claim that the Tobin tax would cut across and destroy such alternative measures.

It is obvious that a lot of work would have to be done before there could be a Tobin tax and serious agreements would have to be reached. That is some way in the future. Although the Government's programme of tackling currency speculation is an important step, we all know that ways will be found around it, as ways will be found around Tobin. Tobin could block those avenues and be additional and complementary to the Government's intended measures, not in conflict with them.

I hope that the Minister will respond positively today, because this is one of the most worthwhile measures that the House can consider. We are talking about an improved international order and a world of greater prosperity and improved trade. That is obviously in our interests too. However, Tobin should be initiated not for those reasons, but to tackle the manifest problems in the third world and to prevent the increasing occurrence of such hideous scenes. Having taken the lead in tackling international debt, and with the Department for International Development's good record, the Government should be at the forefront of these measures.

10.31 am

Dr. Vincent Cable (Twickenham)

I add my thanks to the hon. Member for Glasgow, Maryhill (Mrs. Fyfe) for introducing this useful debate. The Tobin tax is in danger of becoming a bit of a mantra, so the arguments should be properly set out and debated. I have mixed feelings about it. I normally sign most of the early day motions that come from development lobbies, but I have not signed this one as I have genuine concerns about what it means. I am not sure that the tax is a good successor to the Jubilee 2000 campaign.

As the hon. Member for North-East Derbyshire (Mr. Barnes) pointed out, Jubilee 2000 was a powerful movement. It brought together a strong moral purpose with a practical mechanism that everyone recognised debt reduction and helping poor countries to revive growth through the Paris club and official aid write-offs. The new campaign is not in the same league. It is tantalising. We are talking about vast sums of money that could be mobilised, but the mechanism is illusive. I may be damning the proposal with faint praise, but I am concerned about the idea simply running without being properly thought through.

I have a little bit of background on this. I worked a few years ago with the world Commission on Global Governance, a body set up by the Secretary General of the UN. It appointed Ingvar Carlsson, who was then Prime Minister of Sweden, and Sonny Ramphal, who was the head of the Commonwealth, to bring together a group of people to look at how the multilateral system could be sustained and financed in the long term. One of the ideas that was thrown up was the Tobin tax. There was a great deal of enthusiasm for it initially, but as we began to rub up against the practical problems, the strongest conclusion that emerged was that it should be studied further. I am a little concerned that five years further down the track we are still at the same level of argument.

Mr. Barnes

How far are the views that the hon. Gentleman is expressing the views of the Liberal Democrat party? He is presumably here to speak on behalf of his party. I had understood that the Liberal Democrats were likely to take a lead on the Tobin tax and were coming out in favour of it, in line with the arguments that my hon. Friend the Member for Maryhill and I have presented.

Dr. Cable

I am speaking as my party's spokesman. We had a good debate on the issue as part of a wider discussion on the problem of globalisation at our conference a few months ago. The Tobin tax concept was on the agenda as being worth considering, but we do not advocate it as a hard-area policy. I do not want to be destructive or to knock it down, but I shall set out its practical problems, although if someone can show me how those problems can be overcome, I shall be happy to advocate the tax.

The first difficulty is the rationale of the proposal as it relates to the workings of the foreign exchange markets. Tobin's original proposal emerged from the confusion and chaos after the breakdown of the Bretton Woods system and the collapse of the dollar in the early 1970s. It was necessary to find another, stable alternative to the exchange rate system that had operated for most of the post-war period. However, for most of the following quarter of a century we have staggered from one type of system to another, with many episodes of speculative capital damaging national economies: the history of the Asian crisis is one example.

The lesson from experience, after reflection on the history of the period, is that in a modern, globalised world where capital flows easily, only two types of system work. The first is irrevocably fixed exchange rates, such as those in the European monetary union, where there is no speculative capital, because there is nothing to speculate on. The advantage of that system is complete stability and predictability, because foreign exchange rates are not volatile. That is the future of the EMU.

The alternative is the other extreme: allowing currencies to fluctuate in the market, as the yen, the dollar, the euro and sterling do at present. For those currencies, a large liquid market for foreign exchange is an advantage. "Speculators" is a pejorative word, but those who buy and sell foreign exchange in such a market contribute to a stable environment in which speculators are not given a one-way bet, as they were when sterling was pegged, or in the Asian market.

The Liberal Democrats believe that there are serious problems with the sterling exchange rate, because sterling is seriously overvalued. It is not unstable; sterling is extremely stable compared with its main competitors. Speculators are not creating problems for sterling on a day-to-day basis. The problem must be tackled by considering Government policy, interest rates, intervention and so on.

Other countries are also worried that they will have insufficient currency if their currencies are driven up to unsustainable levels by what is misleadingly called the Tobin tax. Chile is often cited as an example of how a tax on the inflow of foreign exchange can have a beneficial effect. Chile intervened to stop inflows of capital; it is true that it imposed a tax, but it was a tax not on foreign exchange transactions as such, but on the inflow of capital, which is different. The Germans and the Swiss also imposed such a tax for a while, but they, too, had to abandon it because it could not operate within the system of exchange control freedom.

The fundamental practical problem is how to operate a Tobin tax, especially in OECD countries, when there are no exchange controls and traders are not required to record their business. There is thus no paper trail and no links connecting countries' central banks with foreign exchange transactions.

The hon. Member for North-East Derbyshire made a brave attempt to describe how the settlement system could be used as a base for calculating the tax. I am not sure how that would work, because foreign exchange dealings, more than any other, are very mobile. If there is the slightest difficulty in the market, the transactions are simply moved to the Cayman islands, Luxembourg or somewhere else. Even if the Bank of England were somehow to get hold of and tax the transactions in London's foreign exchange markets, it is not clear how such a system could be made to stick. In the past few years, we have moved from paper-based trading to electronic trading, which is even more difficult to track, and even if one accepts that it is fundamentally undesirable for people to buy and sell foreign currency, it is difficult to understand how the system would work. Could somebody plausibly explain how it could be made to operate?

Mrs. Fyfe

I will not embark on a dissertation on precisely how the system would operate—no doubt to the hon. Gentleman's great relief. Does he accept that people with enormous expertise have believed for years that the tax can work and have argued for it? All that my hon. Friend the Member for North-East Derbyshire and I ask is that the proposals be given thorough consideration. Let us hear the arguments and not push them aside because they seem difficult. We should have a proper debate and examine the proposals made by people who are convinced that they will work.

Dr. Cable

Put like that, the hon. Lady's argument makes a lot of sense and we have much common ground. I, too, would like the proposals to be studied properly. The hon. Member for North-East Derbyshire described a world in which settlement systems could be monitored and made subject to a sort of stamp duty. It would be interesting to find out whether that proposal could be described in practical terms and be shown to be operable in Britain in co-operation with other countries. I have no wish to slap down the idea of further research, because it is desirable. If that results from the hon. Lady's initiative, I shall be delighted.

My concluding comments support her arguments a little more. I accept one of her basic propositions, that people who make much income from foreign exchange should be taxed on it. However, there are different ways of taxing. The capital gains tax regime is meant to tax people on their large capital gains winnings from dealing in foreign exchange or from other activities. Equally, banks that make substantial profits should pay tax on their income. Those who have read the Cruickshank report will know that he defines excess profits in the banking system. Maybe that should be taxed additionally. I have no quarrel with the idea that income generated from foreign exchange business represents a taxable base, although that is not exclusive.

Mr. Barnes

I am not particularly opposed to the other avenues of taxation described, but is not the problem with that argument that capital gains tax and other taxes would be pulled in by each nation's Treasury? They would not create a pool of funds for international institutions to use, as the Tobin tax would.

Dr. Cable

The hon. Gentleman raises a valid point, and I will conclude on that issue. Clearly, additional resources are needed for development assistance and multilateral initiatives, which could include peacekeeping and policing the global commons, the oceans and the Antarctic, which are not the property of any country. However, the Tobin tax argument worries me, because it creates the impression that there are vast sums of money out there that can easily be captured for a global body, whereas it is very hard work for us to raise money for aid. I am strongly in favour of countries raising their levels of aid to match a figure such as the United Nations target. It would be desirable for some of that money—I would argue for a high percentage-to go towards general global initiatives from bodies such as the World Bank.

There is no shortcut round the hard political task of persuading people in rich countries that they should take such decisions and make painful trade-offs against other public expenditure. The Tobin tax debate gives the impression that there is an easy option—a vast sum of rent waiting to be collected—and a shortcut to avoid the political necessity of raising capital for aid, for which I would argue strongly.

Mrs. Fyfe

I am sorry to intervene again, but I am curious about the dismissal of the notion that there are vast sums of wealth out there. The hon. Gentleman may remember that I mentioned that the Hong Kong and Shanghai bank claimed, in 1997, that it was making £2.3 million profit each day from currency speculation. Those who benefit to such a huge extent are better able to pay towards the reduction of international debt and meeting UN targets than, for example, a Govan shipyard worker.

Dr. Cable

That may be true, but the Tobin tax is not necessarily the best way forward. If it is true that the Hong Kong and Shanghai bank is making vast profits, there is a way of taxing it. As a British bank, it will pay British corporation tax and its British shareholders will pay income tax on their dividends. Moreover, if, as the Cruickshank report says, British banks are making excess profits, a case exists for the Financial Secretary and his colleagues to find a way of taxing them. However, that is a different argument from that of the Tobin tax.

I accept the necessity for additional resources for worthy causes. Aid given through national aid budgets and multinational agencies is important and must be supported. Although it is a little further down the track and more difficult, an argument also exists for raising money for the United Nations system in a less precarious way than the current means of funding peacekeeping and other international agencies. One of the proposals that has been considered—like the clever way devised by the Treasury to auction mobile phone licences—is to derive a modest amount of income for the UN by auctioning licences for the geostationary orbit, for high-orbital televisions stations. Those fall outside national jurisdiction—they are a genuine global commons—and the income could be used for multilateral purposes. I do not know whether that is more practical than the Tobin tax, but such proposals could be used to realise income for international agencies such as the UN, the IMF, the World Bank and the World Trade Organisation. I do not discount putting the Tobin tax into the pot of ideas and researching it seriously, but I am cautious about whether it is an easy option, or whether it is ready for a substantial campaigning initiative. We have not reached that stage. I apologise to the hon. Member for Maryhill if I seem to be damning her with faint praise. I agree with much of what lies behind her proposal, but the practicalities and some of the economic reasoning appear, at first sight, to be seriously flawed.

10.48 am

Mr. Howard Flight (Arundel and South Downs)

I also congratulate the hon. Member for Glasgow, Maryhill (Mrs. Fyfe) on securing a debate on this subject. It raises separate issues, which do not necessarily follow each other. One is whether developing economies should raise and direct more money for international aid, to relieve the economies and suffering of countries that are insufficiently developed economically. Other questions are whether a Tobin tax on exchange rate transactions would be effective in producing a more stable currency regime, whether it would have undesirable side effects and whether it is practical. The two parts of the argument do not hang together. If it were practical to levy such a tax, it would be necessary, as many people have pointed out, for each country in which the tax applied to agree that the revenue raised would be placed in an international pot. In the event of genuine differences, they could agree to using any tax revenue—even, perhaps, VAT. There is nothing magic about revenue on foreign exchange dealings.

Mr. Winterton—

Mr. Deputy Speaker(Mr. Nicholas Winterton)

Order. The occupant of the Chair in Westminster Hall is called Mr. Deputy Speaker or Madam Deputy Speaker.

Mr. Flight

I apologise, Mr. Deputy Speaker.

I declare an interest in that, in 1988, I wrote a book with the rather pompous title "All You Need to Know About Exchange Rates", which nevertheless sold 15,000 copies worldwide. It was a history of exchange rates, explaining how they operate under floating regimes. At business school 30 years ago, heralding the end of Bretton Woods, my major was on how businesses manage their exchange rate exposure. In 1980, I pioneered the concept of the managed currency fund for use by individual investors, which manages a basket of currencies much like a central bank manages its currencies.

To some extent, every Member of Parliament has an interest, in that we all have beneficial interests in the House of Commons pension scheme, which, like every other pension scheme, is a major activist in foreign exchange markets. Every time it buys or sells investments in other parts of the world, it enters into a foreign exchange transaction, as it does for every dividend that it receives on such investments.

The argument that 5 per cent. of such activity is trade and the rest is speculation is inaccurate. The great bulk of such activity arises from the fact that investments, whether they are United States, UK or Dutch pension funds, are now managed and invested internationally. Every activity associated with pools of financial assets that are managed internationally results in a foreign exchange transaction. That represents much of the activity in financial markets.

The standard argument against the Tobin tax that has been echoed by the Secretary of State for International Development and two recent Economic Secretaries to the Treasury, including the current one, is that it would not be practical. The broadly accepted points that follow from that argument are that such a tax would need to be global and to cover all instruments. I shall not repeat the arguments advanced by the hon. Member for Twickenham (Dr. Cable) about the need for such a tax to be global, but covering all instruments would be tricky. In today's world of derivatives, it is easy to cover currency positions without buying currency or an instrument denominated in a foreign currency. That is a practical issue to which few people have given thought.

Tobin's proposals appeared following the end of the Bretton Woods era. Some people look back on the end of that era as a terrible event, but in fact its breakdown was inevitable. Bretton Woods was a crude system that worked okay after a major world war, when economies were essentially closed and relatively unsophisticated and undeveloped, but it could never have sustained what has happened since. Indeed, as the hon. Member for Twickenham said, all respectable economists have ultimately concluded that the only choice is between a currency bloc—such as the dollar bloc, which extends well beyond the United States, or the euro bloc—or freely floating exchange rates.

When people refer to the emotive subject of currency speculation and profits made by the Hong Kong and Shanghai bank, the biggest bank in the world, some misunderstanding is involved. Ultimately, there are no net winners. If someone makes money out of buying a currency that increases in value, someone else has lost. If everyone in the participating arena is included and costs to central banks are taken into account, there are no net winners resulting only from exchange rate movements. The banks' profits derive mainly from the margins—often small margins—that they add when they enter transactions with clients. That is not necessarily an argument against the tax, but the perception that pots of gold can be had from currency speculation around the world is not accurate. Some win and some lose, but the net effect is no winners through changes in exchange rates alone.

Mrs. Fyfe

Will the hon. Gentleman clarify whether he is in favour of the principle of taxing currency speculation if all the difficulties could be ironed out? Or does he wish to draw attention to numerous difficulties in order to prevent any such tax being levied?

Mr. Flight

I thank the hon. Lady for her point. I was about explain that I have more fundamental objections of principle to the tax proposals. It is perhaps a nice but impractical socialist idea that echoes back to Harold Wilson and the days of the gnomes of Zurich. Reading between the lines, the Treasury has the same view. It may give polite reasons why it is not practical, but it does not believe in the idea.

I shall explain why I am uncomfortable in principle. The two objectives of Tobin were to make exchange rates more stable in order better to reflect economic fundamentals and to support the autonomy of nations in the running of their monetary and economic affairs. On the first issue, a Bank of England study on stamp duty arrived at the conclusion that the effect of a Tobin tax would be neutral. A US study further suggests that the larger the markets and the greater their liquidity, the better the stability. If a Tobin tax substantially reduced the volume of transactions, it could increase the scope for volatility.

Mr. Barnes

What does the hon. Gentleman think about the size of the Tobin tax? A tax of only 0.25 per cent. might not have the impact that he fears, or is he arguing that it is the thin end of the wedge—that once the tax is introduced, it will be increased later?

Mr. Flight

My point arising from the Bank of England study on stamp duty was that a marginal tax might have little or no impact. If there were a discernible impact, as a result of either a low tax level or subsequent increases, my point of principle was that reducing the volume of transactions—Tobin's objective—would not lead to greater currency stability.

I wish to deal with studies of the UK's membership of the exchange rate mechanism and of what happened in Asia. Before I do, let me repeat that the participants in foreign exchange transactions are not a limited number of rich individuals and banks who sit around gambling all day. They are mainly the huge volume of savings funds, pension funds, corporate moneys, companies covering their assets as well as their trade, and so forth. During the bounce back in Asia last year, Asian central bank reserves increased by about $80 billion over just a few months. As I said, there is an inaccurate conception of what the currency world is about.

Under floating exchange rate regimes, there is reasonable stability until something gets seriously out of line. That is when substantial speculative activity occurs. The change in the exchange rate is a steam valve that corrects things that have gone wrong economically. A classic example is 1992, when we were getting into a worsening recession because our membership of the ERM meant that we had to have rising interest rates when we needed falling interest rates. Germany needed higher interest rates because of the post-unification boom. Hon. Members will recollect that that was a painful period—businesses were going bust, people were losing their houses and so forth. On what some people describe as black Wednesday and others describe as white Wednesday, sterling broke out of that straitjacket as a result of massive speculation, bringing huge economic relief to this country. The economy recovered strongly from that day onwards, and we were rescued from something that was causing us grave economic damage.

In the wake of the Asian crisis, many fine development economists came up with theories suggesting that it was a tragedy that should not have happened and asking what we could have done about it. However, Asia has bounced back completely in the past two years, with growth rates of 8, 9 and 10 per cent. Like the UK, Asia got into an impossible position by having managed exchange rates and not allowing its currencies to float up and down according to economic pressures. In the early 1990s, the Asian economies should have allowed their currencies to strengthen to ward off overheating pressures, and in the mid-1990s they should have allowed markets to weaken their currencies. The mistake of trying to manage exchange rates led to participants in the Asian economies borrowing heavily and relatively cheaper in dollars, depositing the proceeds in their local currencies, making a large interest rate margin and believing that they could go on doing that for ever without trouble. Of course, that was nonsense. The banking, lending and Government systems were not on top of the situation, but the explosion that occurred is leading to a considerable correction of the problems. We no longer hear calls for a change in the system of floating exchange rates, because Asia has recovered. Good has come out of a crisis that happened, mechanistically, at a peak period of currency speculation.

The crucial issue is whether one wants to raise more taxes. There is potentially an argument for the Tobin tax as a source of raising tax. That would no doubt appeal to the Government, who have thought of many new ways of raising tax. It is also argued that, if the tax were modest, its impact might not be too detrimental to the effective working of currency markets. However, the big issue is whether this country and the world want to raise tax revenues in this area. As the hon. Member for Twickenham argued, and as Ministers have noted previously, the question is whether the proposal is practical and whether one could have a wholly global tax-raising system in the world of today's electronics.

Paper currencies are no more than the common stock of the economic areas—the countries—that they represent, and there is no more of an argument for taxing transactions in that asset than there is for other stocks. There is a good argument for taxing transactions in commodities, as commodity markets work in a similar way to exchange rate markets. That is also increasingly true of labour, especially highly skilled labour, which is a global commodity that buys and sells itself, not only through pay remuneration, but with transfer fees.

There is a point of principle—why tax one stock and not others? The closest comparison is with ordinary securities, for which stamp duty acts as a turnover tax. As the Minister will be aware, there is growing pressure to end United Kingdom stamp duty on security transactions, because they can be undertaken without stamp duty in other parts of the world, including Germany. The revenue will dwindle to nothing if stamp duty continues. I do not argue the case for or against stamp duty, but economic forces tend to be against measures such as stamp duty and withholding tax.

The concept has been debated on and off for nearly 30 years and has had support from time to time in the wake of exchange rate crises and from those who believe that economies should be controlled and managed by Government, so it is not new. It has not been taken up, largely because of its impracticalities. Moreover—this is my underlying point—why should we put a turnover tax on one commodity and not do so more widely? The Government will argue that it would be nice, but it is impractical. There are much more effective ways for the United Kingdom's people and Government to assist the developing world. Currencies are a common stock; countries that have problems with their currencies have badly managed economies and bad systems of law and banking. We must do something about those fundamentals. Money will not help by itself. Pulling together to do more for developing economies is a decent and Christian cause, but it does not emerge out of the Tobin proposal. The Tobin tax runs the risk of spreading the illusion that there is a pot of gold of immoral speculative profits that can be tapped to answer the developing world's problems. The reality is not like that at all.

Mrs. Fyfe

We should not continue without remembering that the Conservative Government failed to match the United Nations target for aid and allowed our aid budget as a percentage of GDP to fall. Far from exploring what useful alternative there could be to a Tobin tax, they showed that they were not interested.

Mr. Flight

I thank the hon. Lady for her comment. A great deal was done in the voluntary sector during the years of Conservative Government. I am not aware that this Government's record has been significantly different. Encouraging the voluntary sector is the most effective method of helping to develop economies, but we are arguing not about party politics, but about the principles of the Tobin tax.

In conclusion, the Tobin tax would be unacceptable to the United States. Whatever we or Japan may think, unless the US changed its views, the tax could not become a practical reality.

11.10 am

Mr. Andrew Tyrie (Chichester)

I shall be brief. I apologise for not having been here at the start of the debate. I was on a minor mercy mission—I saw a dog locked in a car in the car park and thought I should find someone to open a window for it.

I agree with almost everything that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said. The Tobin tax is almost certainly wholly unworkable. Even if it were not, it would be unattractive, because it is not clear that a reduction in the total amount of exchange rate flows would result in decreased exchange rate volatility; it might increase volatility. Many of the advocates of the tax also seem confused about whether they are seeking to create a tax base or to reduce exchange rate volatility.

The hon. Member for Glasgow, Maryhill (Mrs. Fyfe) spoke about aid flows. Aid is more or less irrelevant to the development of most of the third world. The key issue is total trade and investment flows. Investment flows have rocketed as a consequence of globalisation and huge parts of the third world have experienced massive increases in GDP per capita over the past 20 years on the back of those increased capital flows. That has had nothing to do with state aid or activity. That is not to say that I oppose an aid programme. I support one, but we should not think that such a programme has much to do with long-term economic development and prosperity. For most of the countries involved, it is at best peripheral. I even have sympathy with some points—others of their points are confused—made by the demonstrators who were waving banners against the World Bank in Washington this week.

The only point on which I disagree with my hon. Friend the Member for Arundel and South Downs is on exchange rates as a pressure valve. They are a pressure valve only in that they can absorb short-term asymmetric shocks. All too often, advocates of free floating argue for exchange rate adjustments that then become a substitute for more fundamental adjustments—in real factor prices rather than in nominal terms—in the real economy that should have taken place anyway.

Mr. Flight

My point was that exchange rate crises force adjustments as well as correct an incorrect exchange rate, but the forcing of adjustments is the important point.

Mr. Tyrie

They may force or they may delay adjustments. As we saw in the UK during the 1960s and under the Bretton Woods system, devaluations are often a substitute for real economy adjustments that would inevitably have to take place anyway.

I shall be interested to hear how much the Treasury deviates from the line predicted by my hon. Friend the Member for Arundel and South Downs that, although it may wring its hands a little, it is as opposed to the Tobin tax as the Opposition are.

11.14 am

The Financial Secretary to the Treasury (Mr. Stephen Timms)

It has been an interesting debate with several thoughtful contributions. I will do my best to emulate the high standard that we have heard.

I congratulate my hon. Friend the Member for Glasgow, Maryhill (Mrs. Fyfe) on securing the debate, which has allowed discussion of a subject that is currently of widespread public interest.

We are all aware of the damage caused by recent turmoil on the Asian markets, referred to in the characteristically well-informed contributions of the hon. Members for Twickenham (Dr. Cable) and for Arundel and South Downs (Mr. Flight). The scale of poverty in large parts of the world was tellingly described by my hon. Friend the Member for North-East Derbyshire (Mr. Barnes). It is no surprise that James Tobin's 1978 proposal has been the subject of such widespread new interest. We have been talking about it for 22 years, rather than the 30 years mentioned by the hon. Member for Arundel and South Downs, but it has certainly been around for a long time.

As my hon. Friend the Member for North-East Derbyshire said, we have taken a lead in addressing world poverty. We have a markedly different record from that of the previous Conservative Government, to correct the point made by the hon. Member for Arundel and South Downs. The aid budget will rise by 28 per cent. in real terms over three years between last year and next year. We are now seen as a pace setter in international development. I greatly welcome public debate of such matters, of which today's debate is an instance.

The turmoil in Asian markets highlighted some weaknesses in the global financial system. We share the aspiration for more stable capital markets, which are better placed to deliver the economic growth and development that so many nations are crying out for. The key question is how best to achieve that.

It has become fashionable to disparage globalisation. However, we should remember that the increased cross-border activities during the second half of the previous century—trade, capital flows and foreign direct investment—went hand in hand with rapid rises in global output and wealth. In the past 20 years, annual world trade rose from $2,000 billion to $5,500 billion a year, world foreign direct investment inflows rose from $55 billion to $640 billion and world GDP increased from $10,000 billion to $30,000 billion.

The benefits of globalisation cannot be ignored. What is disappointing is that they have not translated into sufficiently large falls in poverty. The hon. Member for Chichester (Mr. Tyrie) was rather complacent on that point. The proportion of people in developing and transitional economies living in abject poverty has declined—and we should not forget that—but the falls have not been large enough. More needs to be done to ensure that the poorest benefit. I shall say more about that in a moment, but retreating from globalisation is not the answer. We need to make it work better, but it would be wrong to deny the poorest countries in the world the development opportunities from which we have benefited.

Globalisation has transformed the world economy. The relatively sheltered national economies from the Bretton Woods era are gone and have been replaced by a global marketplace. In the new economy, national Governments depend for investment funds on day-to-day confidence among international investors. Governments must therefore pursue consistent and credible policies that provide stability.

Faced with financial crises in 1998, the G7 countries took rapid international action. As G7 president, the UK took a leading role and we have started to put in place new, long-term disciplines to promote greater stability—a new framework of rules that meet the demands of the global marketplace. Over the past 18 months, we have worked hard in the G7 to reform the international financial architecture. My hon. Friend the Member for Maryhill asked me what we have done on that front, so let me outline progress in four key areas.

First, we have produced a framework of internationally agreed codes and standards to be implemented by all countries that participate in the international financial system. Secondly, there is global financial regulation to make the international and national bodies who are responsible for financial supervision work together more effectively. Thirdly, there is a new framework for crisis prevention and crisis resolution. Fourthly, there is a framework of new social principles allied to our initiatives for immediate debt reduction. I shall sketch out where we have reached on each of those four reforms, which should provide a backdrop for today's debate.

Those reforms will deliver the stability objective of the Tobin tax more effectively. First, the codes and standards will deliver transparency and accountability. By taking the right actions in their own jurisdictions, Governments can help to deliver financial stability at a global level, but they need to set out clear objectives and to put in place open and transparent procedures. That is crucial for investor confidence; without transparency or proper procedures, investors will not make the long-term investments that are needed. We are working internationally to put in place the surveillance machinery needed to monitor the implementation of those codes and standards and to ensure that they are effective.

Secondly, global financial markets require proper national supervision and the innovation of global financial regulation. The responsible national and international bodies must work together more effectively, so we propose to bring together the IMF, the World Bank and key regulatory authorities in a new permanent committee for global financial regulation, charged with delivering a stable financial system. The financial stability forum has now been established and has made a successful start on its work. In time it can become the world's early warning system for regional and global financial market risk.

Thirdly, the financial crises of the past two years were deep and protracted. Better mechanisms are needed to prevent and resolve crises, so we have developed a new approach, in which both the public and private sectors contribute to maintaining stability. At the summit in Cologne last June, the G7 agreed a new framework for private sector involvement in crisis resolution, which will shape private sector expectations of how crises will be handled in the future and guide policymakers' responses. We are working to ensure that that framework is implemented as soon as possible.

Sound economies also depend on welfare and social systems that build social cohesion and trust. The World Bank and the UN have been asked to develop principles of good practice in social policy, which will be used by the IMF and the World Bank to design adjustment programmes. They will ensure that the burden of adjustment is not placed on the poorest people in the world. Those programmes are not just for use in times of crisis; they will also be used in normal times to assist countries to put in place the strong social systems and mechanisms necessary to help the poorest people.

Fourthly, we are committed to reducing the debts of the poorest countries; the heavily indebted poor countries agreement reached in Cologne set out to cancel $100 billion of developing countries' debt. We are working for faster, wider, deeper debt relief. That is the reason for our initiative to give 100 per cent. debt relief to every country that qualifies under the HIPC initiative. The challenge now is to implement it. We remain at the forefront of efforts to persuade our international partners to meet the agreed targets and to go beyond the level of debt relief agreed to provide 100 per cent. relief on the commercial debts owed by HIPC countries.

Mr. Jim Cunningham (Coventry, South)

What is the attitude of the United States to international efforts? Is it co-operating?

Mr. Timms

There have been some encouraging developments on debt relief, not least President Clinton's announcement on the subject. There are good grounds for optimism about the United States in that respect.

Mrs. Fyfe

My hon. Friend listed measures that will improve stability. We are familiar with the debt relief steps taken by my right hon. Friend the Chancellor of the Exchequer; everyone thinks that they are great. Does the Treasury object in principle to having a tax on currency speculation that could be used in beneficial ways as an addition to the existing funds, or does it think that a currency speculation tax would cut across those initiatives?

Mr. Timms

The Tobin tax has a twin objective: first, to promote stability—the measures that I set out address that objective—and, secondly, the fund-raising effect, which I shall explain. It is an interesting idea, but it has a number of serious likely or possible drawbacks. First, it could introduce serious economic distortions to the international financial system. International currency transactions bring huge economic benefits by facilitating trade and investment flows. Restricting currency exchanges through taxation could have quite serious economic side effects. It might endanger economic growth in some of the least well-off countries.

Some currency transactions undoubtedly reflect pure speculation and contribute to financial crises, but others help economic adjustment and market stability. Currency transactions, as my hon. Friend the Member for North-East Derbyshire put it, are not all sinful. They are not all speculative. A Tobin tax would not distinguish between the two. By slowing the adjustment of financial markets, the tax would slow recovery from a crisis. Artificially slowing market adjustments to genuine price shocks would have a higher economic cost than rapid adjustment.

Secondly, and perhaps more tellingly, it is not certain that a modest tax would have much effect in a crisis. It might hit routine, day-to-day transactions, but it is unlikely to prevent the high volume flows seen at times of crisis. As Oxfam's thoughtful paper from last May put it 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.

There is a good argument, which has been advanced in this debate, that a Tobin tax might increase volatility by reducing liquidity. Liquid markets are more efficient and price transparent. That argument is borne out by what has happened in some emerging markets. Their transaction costs are already high compared with those in the City of London. It could be said that that amounts to a tax on capital flows, yet those are precisely the markets that have suffered from serious currency instability and capital flight.

Mr. Tyrie

rose—

Mr. Timms

I do not think that I can give way in view of the short time that remains.

Thirdly, a Tobin tax would be practically impossible to implement effectively. That point has been well made in the debate. It is probably a show-stopping practical means for achieving what my hon. Friend seeks. The UK has been leading the fight against international tax evasion and avoidance. We have taken a number of important steps in that regard, but we simply do not live in a world where taxes can be set and enforced at an international level. Every country jealously guards economic sovereignty on tax. Are we ready to cede our authority over tax matters to an international body? I do not believe that we are.

Whatever we think about financial secrecy havens and offshore centres, we must acknowledge their existence. Most of them are sovereign nations exercising exactly the influence over their tax affairs that the House and the UK Government exercise over tax matters in the UK. No international mechanism—not the G7, the IMF or the UN—is in a position to secure the agreement of all the countries in the world, or even those with a significant financial centre, to impose a Tobin tax, but that would be required to make the tax workable.

Currencies can be traded anywhere. We know how quickly capital markets can move. Traders would simply move their activities to regimes without the tax, with the likely result that the market would become less well regulated. We currently host about a third of the world's currency transactions—worth $637 billion a day. If a tax were imposed on foreign currency traders, they would move their activities to somewhere with less regulation. Driving the markets offshore to poorly regulated centres would add to the instability of the financial system at the cost of substantial job losses in the UK. Even it were possible to achieve the universal agreement that would be needed, there would still be huge scope for avoidance.

A large body of academic study is available on the Tobin tax; some support the idea and others oppose it. No one has successfully answered the concerns that I have set out. We must draw policy conclusions in the context of the practical realities of our wider international financial responsibilities. There is no multilateral mechanism for establishing a tax, and little international appetite for it.

We are pleased that organisations such as War on Want and Oxfam are engaged in the international debate about how we can ensure the stability of the international financial system and how we channel resources to the poorest countries. As Oxfam has said, the more visionary the proposals for spending tax revenue, the harder it may be to gain political acceptance for the tax. The best strategy seems to be to promote the less controversial suggestions regarding use of revenue and try to increase the allocation to development over the longer term.