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Why ‘competitive’ banking policies mean Too-Big-To-Fail banks

POSTED ON November 27th  - POSTED IN Blog, Financial Regulation, The Harms

TBTFThis month the New York Times republished a press release from discussed a recent report by the British Bankers’ Association, a lobby group. The NY Times article was entitled Britain Losing Its Competitive Edge in Banking, Trade Group Warns, and it began like this.

“The British government needs to take “urgent action” to address concerns about its regulatory and tax environment if London is to remain a global financial center and if lenders based in Britain are to remain competitive internationally, according to a banking trade group.”

Bob Jessop: an historical approach to national competitiveness

POSTED ON November 20th  - POSTED IN Blog, What is competitiveness?
Professor Bob Jessop, Lancaster University

Professor Bob Jessop, Lancaster University. Jack Copley probes his ideas on national competition.

Fools’ Gold has generally urged extreme caution when considering using c-words such as ‘competitiveness’ or ‘compete,’ in the context of the behaviour of whole countries or states. As we’ve noted, a failed company that can’t compete is one thing: a failed state is quite another; and the processes that these words are normally trying to describe tend to be generically harmful.

A particular bugbear of ours is what we call the Competitiveness Agendathe idea that it’s essential to shower tax cuts and other subsidies on footloose Capital and its owners, for fear that they’ll run away to more hospitable climes. It is a policy prescription (or set of policy prescriptions) dressed up as a threat.

Many politicians and vested interests know that the c-words (and their like) are a remarkably effective set of tool for bamboozlement: a way to get people to accept these prescriptions without really thinking about them. Who, after all, could be against something called “competitiveness?” Because of the risk of bamboozlement, we really don’t like using the c-words to talk about whole countries unless we really have to.

Yet of course ‘competitive’ is a word in the English language that people can choose to define in ways that don’t subscribe to the Competitiveness Agenda, and in some senses countries do ‘compete’ for investment. One thinker who does use the c-words in more progressive (and thoughtful) ways is Bob Jessop of Lancaster University. In conversations with FG, Jessop has talked of a “high road to competitiveness”, which might be summarised as ‘upgrading’, and a “low road” via deregulation. He dislikes critiques by Krugman and others (see here) because, he says, their starting point is neoclassical economics, which airbrushes out a lot of messy institutional and other factors from the real world. Jessop adds:

“My critique of competition is: be brutally clear about how competition works, and how competitiveness works, and don’t just dismiss it as so much rhetoric because it is misused by politicians and ideologues.”

Now Jack Copley of Warwick University has written us a guest post looking at his ideas in more detail.

Bob Jessop: An historical approach to national competitiveness

Who runs our countries: us, or global finance? It can be us

POSTED ON November 10th  - POSTED IN Blog, Financial Regulation, Tax, What is competitiveness?
Stuart Fraser

Stuart Fraser of the City of London Corporation

Stuart Fraser is the former head of the powerful Policy & Resources Committee of the peculiar City of London Corporation, and an influential figure in Britain. He’s quoted in The Price We Pay, a recent documentary on tax havens and corporate tax avoidance.  He says in the film:

“Many politicians have an illusion that they actually run their country, when actually they run their country within the confines that the global financial system places on them.”

Now then. You’ve probably heard this before. 

UK’s bank levy reforms will cost £4.2bn in tax over 5 years

POSTED ON November 4th  - POSTED IN Blog, Financial Regulation, Tax, The Harms

Britain’s summer budget in July 2015 contained a set of reforms to the tax regime for the banking sector which it presented like this:

Bank levy costings

What those numbers mean, essentially, is that the changes will mean that the banking sector is going to be paying more tax. Hooray!

Time to get out the champagne?

In a word, no. There is serious mischief in here. We have just had a reply to a Freedom of Information request which confirms this.

Here’s the thing. Recently we posted an article entitled “Why a ‘competitive’ economy means less competition.” It explained, by way of background, how the ‘competitiveness agenda‘ – under which possibly politically astute (and possibly economically illiterate) politicians urge the government to shower subsidies on banks, multinational corporations and wealthy individuals under threat that they’ll flee elsewhere – will tend to boost the large and wealthy players more than they otherwise would have, enabling them to kill their smaller and more locally-rooted competitors on factors that have nothing to do with genuine innovation or productivity, and everything to do with pure wealth extraction.

We showed how this was the case both in the field of corporate tax, and in the financial sector too. (It doesn’t stop there, but that’s another set of cans of worms.)

Our article noted how the bank reforms in the summer budget were in fact two reforms: first, a reduction in a tax called the ‘bank levy’ (which hits the largest banks hardest, and predictably led to a load of hyperventilating claptrap about ‘tipping points’ and other such nonsense); and second, a new eight percent ‘bank surcharge’ (which hits a much wider range of banks, including the smaller so-called ‘challenger banks’.)

The first means less tax; the second means more tax; and the net result is forecast to be slightly more tax.

What was the justification given for these reforms? Well, they said:


Competitiveness, once again. (In fact that short section contains three more versions of the c-word, including this variant: “reducing the risk of . . .influencing banks’ decisions on the location of internationally mobile activities.”)

To summarise: the smaller banks will be penalised relative to the bigger banks – in the name of ‘competitiveness.’

This, of course, is likely to reduce competition in banking — which is what we argued in our more detailed earlier post.

But one of the things we noted then was that that in the official explanation for the bank levy, and even in the detailed budget policy costings, they didn’t (for obvious political reasons, it seems) break down the impacts of the two separate tax changes.

This was devious: it would have been a piece of cake to publish this data, but this would have exposed what was going on. Much easier to mash up the two different reforms and present it as a politically popular tax increase on the banks. It’s probably doubly devious in this respect – but we’ll get to that in a second.

Now then.  Fools’ Gold submitted a Freedom of Information request to obtain this data, and the results of this request are now in:

Bank levy

(We’ve pasted the relevant part of the FOI response itself below.)

To be precise, they are forecasting that the changes to the bank levy will cost UK taxpayers £4.2 billion over the next five years. (And, of course, there’ll be a whole lot more after that.)

Update, Nov 9: we thought this was new information (and it still appears to be, in terms of precision), but Simon Bowers points out these less precise numbers on p94 of this OBR document.

For fuller context and explanation, please see our original blog.

One fourth-last thing. Let’s not forget that the bank levy was put in places for damned good reasons.

One third-last thing. We said earlier that they may have been doubly devious here. What we meant was that this may have been cynically planned as a long term double whammy to get rid of all those pesky bank taxes.

First, you cut the bank levy sharply, but soften up the population by dressing it up as just being part of a tax hike on banks. Next people will see what’s going on and say ‘but hey, this is reducing competition!’ And you use that as excuse to row back on the eight percent surcharge (or you simply repeat the exercise until the bank levy has finally been throttled.)

One second last thing. To be more precise about that FOI response we had, HM Revenue & Customs said this:

FOI bank levy


One final thing. Fools’ Gold posts have been a little thin, of late. Apologies. This is because of a big project that’s been going on elsewhere: that’s now done (and do check out all those country reports). We will shortly get back to more regular posting, once the backlog we’ve built up gets out of the way.


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