There’s a long article in The Guardian from 2014 by four academics, Ewald Engelen, Sukhdev Johal, Angelo Salento and Karel Williams, entitled How to Build a Fairer City. The purpose of this blog is not so much to dissect this article in detail, but to point to it. Because it’s important for our competitiveness investigations. Its introduction is framed like this:
“The central argument is that we can move towards a fairer city by reframing our problems and rethinking our solutions in two ways:
1. Break with the dominant old problem of the competitive city, which competes economically against other cities and sponsors internal competition for limited opportunities.
2. Stop fixating on redistributive policies which will not deliver fairness, and start thinking about reorganising policies which build a grounded economy in the areas which are not exposed to competition.
The global obsession of our age is competing everywhere with everyone for everything. In the mainstream imaginary, every city has to chase competitive success in a league table where it secures prosperity by getting ahead of others.”
It has been widely suggested and supposed that the abolition of exchange controls – one of the great episodes of financial deregulation in the United Kingdom since the 1970s – was the result of lobbying by the City of London. In this post for Fools’ Gold, Jack Copley of Warwick University explores the history, and finds a rather different story, focusing particularly on the issue of ‘competitiveness’ as it applies to the exchange rate.
What role did the ‘competitiveness agenda’ play in the Thatcher government’s deregulation of finance?
The case of exchange controls
By Jack Copley, Warwick University
Fools’ Gold has continued to expose the nefarious power of the City of London in British policymaking. As the biggest sector of the British economy, it is able to exercise undue influence over the government in order to secure preferential treatment. The notion that the City must remain globally competitive, and that ordinary people should be concerned about ensuring this, is a key part of the ‘competitiveness agenda’ in the UK.
Margaret Thatcher is the British politician most commonly associated with the City. Under her administration, a number of key financial deregulations took place, including exchange control abolition (1979), the Big Bang (1986), and the Building Societies Act (1986). Experts generally points to two explanations for the Thatcher government’s deregulatory agenda: 1) the City’s lobbying power; and 2) Thatcher’s ideological desire to promote the interests of the City over those of industry. This was particularly the case with exchange control abolition, which is widely perceived to have been a case of Thatcher giving a direct subsidy to financial elites and justifying it with rhetoric about national competitiveness.
Update: also see Anti-Tax, Anti-Regulation Sirens emerge after Brexit.
We have our own particular reasons for disliking Brexit – the recent decision by the UK to leave the European Union. In a pre-Brexit analysis the Tax Justice Network quoted Adam Posen, director of the Peterson Institute for International Economics, who articulated a huge generic concern:
“If you’re anti-regulation fantasists to begin with, you start going down the path, ‘Oh we can become an even more offshore center. We can become the Cayman Islands writ large, or Panama writ large.’ And this frankly is the way I think this also spills over to the rest of the world, is that the UK decides, ‘Hey, regulatory arbitrage, letting AIG financial products run in London, actually destroyed the US financial system, but didn’t hurt us – made us a lot of money. Let us continue down this path. Let us be the ‘race to the bottom’ financial center. And I think this that’s where this going, because they’re not going to have any other option. It’s not good.”
The British-based non governmental body Actionaid has for some time been at or near the forefront of efforts to lobby for progressive reforms to the international tax system for the benefit of developing countries. This week their ‘Tax Justice Policy Adviser,’ Diarmid O’Sullivan, wrote a blog entitled The UK: always the bad guy on anti-tax haven rules? which says, in the first paragraph:
“Poorer countries badly need more tax revenues to pay for public services such as schools and hospitals, but they stand to be among the losers from the UK’s insistence on protecting its “competitive” low-tax regime for companies.”
We’re really delighted to see the c-word in quote marks: it’s an important signal that the writer has seen through the nonsense of so-called ‘competitive’ nation states.
One our core arguments is that if you shower wealthy people and large corporations with goodies, two things happen.
First, you may help them and you may be able to demonstrate some benefits, somewhere in the economy: such as improved performance for the stock options held by the executives at the multinationals concerned.
Second, though, there is the annoying snag that those benefits entail costs elsewhere in your economy.
Someone has to pay for these goodies! Who will it be?
There’s been a lot of talk for a long time about a threat from globe-trotting HSBC to move its headquarters from London to Hong Kong. It seems there’s been a resolution of the question for now, of sorts. As Bloomberg puts it:
“HSBC Holdings Plc recommitted its future to London, ending 10 months of deliberations over whether to move its headquarters, after securing concessions from the U.K. government on regulation and taxes. The shares rose.”
That’s the Competitiveness Agenda at work, right there. Shower goodies on mobile capital and its owners for fear that they’ll flee elsewhere. More specifically, via Reuters:
Two FG authors, in partnership with Duncan Wigan of the Copenhagen Business School, have just published this new paper in the British Journal of Politics and International Relations.
And the quote of the day is this one, via The Guardian newspaper and Professor Rowland Atkinson of Sheffield University, author of a two-year study of the super-rich in London.
“You can argue that the rich are a tax on everybody [else] in London”
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:
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:
(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:
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.
Update: Farnsworth’s work has been generating huge media coverage in the UK, because of the role it has played in new Labour Party’s preliminary economic platforms – making it subject to attack from many different people. See Farnsworth’s responses here.
Kevin Farnsworth at York University has been exploring the scale of corporate handouts in the UK. Via The Guardian:
“Taxpayers are handing businesses £93bn a year – a transfer of more than £3,500 from each household in the UK. The total emerges from the first comprehensive account of what Britons give away to companies in grants, subsidies and tax breaks, published exclusively in the Guardian.”