Gordon Brown claims credit for International Monetary Fund plan to impose tough levy on biggest banks’ profits and pay
Tough proposals to cut the world’s biggest banks down to size by taxing their profits and pay were outlined by the International Monetary Fund tonight in an attempt to spare taxpayers another massive public bailout of the financial sector.
In measures more stringent than Wall Street and the City had expected, the fund called for the introduction of a twin-track approach to the three-year banking crisis that would both force firms to pay for any future support packages and raise new taxes on their profits and remuneration.
The report, prepared by the Washington-based institution for the G20 group of developed and developing nations, was seized upon by Gordon Brown as evidence that his push for an international crackdown on the banking sector was gaining support.
Leaked in advance of the fund’s meeting this weekend, the blueprint emerged as the investment bank Goldman Sachs released better than expected first quarter revenues and admitted its bonus and pay pool had reached $5.5bn (£3.3bn) in the first three months of 2010.
The anticipated study called for a financial stability contribution (FSC), which should be paid by all financial institutions, not just banks, and used to bail out weak and failing firms. It would initially be paid at a flat rate but eventually be tailored to suit institutions’ size and riskiness.
While banks had been braced for the FSC plan, they were caught unawares by the proposal for a financial activities tax (FAT), which would be based on the profits and the pay structure of the firms.
Anti-poverty campaigners had been pinning their hopes on the IMF endorsing a so-called Robin Hood tax under which a small levy would be placed on all financial transactions. However, the fund said such an approach “does not appear to be well suited to the specific purposes” set out by the G20 in its mandate. The fund said the financial sector had become too big as a result of being taxed too lightly, and said this could be addressed by the FAT, which it compared to VAT.
Downing Street said the fund’s preference for a global deal rather than a go-it-alone approach by individual countries was a snub to George Osborne, who has insisted the Conservatives would impose a levy regardless of what other nations do. The IMF said: “International co-operation would be beneficial, particularly in the context of cross-border financial institutions. Countries’ experiences in the recent crisis differ widely and so do their priorities as they emerge from it. But none is immune from the risk of a future – and inevitably global – financial crisis. Unilateral actions by governments risk being undermined by tax and regulatory arbitrage.”
The fund added that co-operation required only broad agreement rather than complete uniformity and did not specify rates for the two new taxes. A Brown aide said the report “is radical and in line” with what they had argued for at the G20 in November – when Brown surprised his Treasury team by promoting the idea of international levies. “It is another big judgment call that Gordon Brown got right and David Cameron got wrong,” the aide said.
Alistair Darling, the chancellor welcomed the report. He said: “The recognition that banks should make a contribution to the society in which they operate is right.”
Liberal Democrat Treasury spokesman Vince Cable also welcomed the report. “If we are to create a stable banking system, we must ensure that taxpayers are not expected to underwrite the risks of reckless casino banking, and that pay and bonuses within banks do not reward irresponsible behaviour.”
A Conservative spokesman said: “We have led the way in proposing a levy on the banks so we welcome this IMF report. Sweden has already introduced a bank tax. Germany and the Unites States are in the process of introducing one – the UK should do the same.”
Max Lawson, policy adviser at Oxfam, said: “The IMF have given the green light to a tax on banks. To be worthy of Robin Hood it must raise hundreds of billions each year and be directly linked to fighting poverty at home and abroad, and tackling climate change.”
Angela Knight, chief executive of the British Bankers’ Association, said: “Clearly what this appears to say is very wide ranging and covers much more of the financial services sector than the industry expected. Taxation is not without consequences and additional taxation is not without additional consequences.”