Innovative mechanisms for financing development, and in particular the Financial Transactions Tax

by Fraser Reilly-King, Coordinator, Halifax Initiative Coalition
May 6, 2010

My name is Fraser Reilly-King and I am the Coordinator of the Halifax Initiative, a coalition of eighteen development, environment, faith-based, human rights and labour organizations. We focus on international finance issues, in particular with respect to the World Bank, International Monetary Fund and export credit agencies.

Thank you for inviting us to appear before the Standing Committee to discuss issues related to this year’s Group of Eight and Group of Twenty meetings in Canada. I appeared before the Committee last October with one other colleague from the 2010 G8/G20 Civil society Coordinating Committee at which time we emphasized the importance of discussion among parliamentarians about the themes leading up to the 2010 summits. So I am pleased that the Committee has taken the initiative to hear again from Canadian civil society.

I am here to speak about on e component of the civil society platform as it relates to economic and finance issues, that I feel ties all the preceding presentations on child and maternal health, the MDGs and climate change together: the need to explore innovative mechanisms for helping to finance development and climate change, beyond just aid.

This issue already has a lot of traction.

In the next few weeks, the Leading Group on Solidarity Levies for Development – an informal intergovernmental body with 55 member countries, including 11 from the G-20 – will be releasing a new report looking at various innovative mechanisms, including the financial transaction tax.

In February, the United Nations convened a High Level Advisory Group on Financing for Climate Change with heads of state from the United Kingdom, Ethiopia, Guyana and Norway. Representatives from 12 G-20 countries, many of them government officials, sit on the panel.

Canada is on neither of these.    

Finally the G20 itself announced last September that it wanted the IMF to look into how the financial sector could contribute to the costs of the bank bailouts.  The proposals that the IMF made two weeks ago, and others made by European governments, have all been opposed by Canada. Some of them rightly so. (REFER TO HANDOUT)

If we are to address these issues, Canada needs to play a more constructive and helpful role in terms of thinking about innovative sources of finance. In recent years it played a lead role in promoting the idea of advance market commitment. It can follow suit in other areas.

Climate change mitigation and adaptation, realizing the MDGs and now the costs of the economic crisis have put significant pressures on governments North and South. Bruno Jetin, an Economist at the University of Paris, estimates that governments will require $710 billion per year as of 2012 to pay for all of this.

Innovative finance is clearly essential at a time when the world is faced with such a daunting set of crises.

One of the innovative sources of finance in which we are most interested is the Financial transactions tax or FTT.

I won’t explain in too much detail what an FTT is – I have provided a one pager in English and French on this. (REFER TO HANDOUT)

But essentially, the FTT is a tiny tax that would be levied on all financial market transactions. This includes stocks, bonds, foreign exchange, and derivatives both on stock and futures exchanges, but also off-exchange (or “over the counter”) transactions.  (So it is much broader than a Tobin Tax). Ordinary consumer transactions such as payments for goods, paychecks and cross-border remittances would not be subject to the FTT. It would be collected through centralized clearing or settlement systems that are used on all important exchanges through which all financial transactions (including OTC transactions) must pass. Finally it is estimated that even with a decline of 60 percent in the size of the market, a levy of 0.05 percent could generate around $650 bn per year. And we feel this should be used to help tackle climate change, the MDGs and help governments boost their economies and pay for deficits and debts.

So why the opposition to the tax? I would like to use my remaining time to address these concerns, and other criticisms that have been raised, in particular in the Canadian context.

1. “An FTT can’t be done” – NOT TRUE. The IMF definitively put that doubt to rest two weeks ago in its report to the G20 on various options for taxing the financial sector. It said, “The FTT should not be dismissed on grounds of administrative practicality.” We already knew this. The IMF simply confirmed it.
2. “Our banks didn’t need bailing out” – TRUE. The Canadian government has a lot to teach our G20 counterparts - our strong recovery is a testament to our robust banking system. This started off as a credit crisis, and to the extent that our banks and financial institutions were well regulated, we avoided the brunt of this financial crisis. But like the rest of the world, we were still hit by an economic crisis. Have we already forgotten that our manufacturing, forestry, and construction sectors were all hard hit, and just a year ago were all demanding bailouts from the government, which they got. The unemployment rate is still two percent higher today than it was pre-crisis. We have a large deficit. “Our banks didn’t need bailing out”. Sure. But this as much an economic crisis, as it is a financial one. 89 million more people are now living below the poverty line as a result, and 34 million more people are unemployed relative to 2007. In this highly interdependent globalized world, saying this isn’t our problem, we didn’t cause it, is like sitting in a sinking boat and saying my part of the boat is fine. We need to consider not only the financial impacts of the crisis, but also the economic ones. The FTT could help address that.
3. “We don’t raise taxes” – TRUE. These are extraordinary times. And while the government’s commitment to this pledge is laudable, what are the options. We could grow ourselves out of this, but this is in part dependent on our trading partners recovering. And right now, the world’s economic situation is still precarious, with Greece just last week getting the largest bailout in history, and other countries in Western and Eastern Europe on the brink of collapse. And what are the alternatives if we are not going to raise personal or corporate income taxes, EI premiums, GST, or any kind of value added tax. This is a tiny tax that could generate a huge amount of revenue. And besides, this isn’t a tax on Canadians as much as it is a tax on globalization. Sure globalization has its benefits. But we are now seeing its costs.
4. “The banks will simply past the cost onto consumers” – NOT TRUE. Research has shown that the initial “incidence” (i.e. who pays) of such taxes will fall primarily on high net worth hedge fund investors and hedge fund employees and investment banks and to a lesser extent on commercial banks. These actors trade huge amounts every day. In fact, one company in Toronto makes between 500,000 and 1 million trades every day. A relatively small proportion will go to bank shareholders, pension funds and corporate customers, all of whom are investing for the longer term. For example, if you buy $1000 worth of shares, at 0.05% you will pay 50 cents. (Remember, stockbrokers already charge you 2 to 3% (or $20 or $30) just for doing the deal.) Further safeguards can also be built in by government to ensure that the costs are not passed on to the ordinary consumer.
5. “It can only be done if everyone is on board” – NOT TRUE. The London Stock Exchange already has a stamp duty of 0.5% on all stock trading, and it is still going strong. Up until a few years ago Japan had a similar levy. Brazil had a bank transactions tax for twelve years until 2007, and is considering reintroducing it. In November, it successfully placed a tax of 1% on currency exchanges to help cool hot trading. Many countries are already doing it.

There are other critiques which I would be happy to respond to, but these are the primary ones made in the Canadian context.

Just to sum up, I would strongly urge the support of all parties for the financial transaction tax. We are pleased that the NDP has come out in support.

I would also urge this Committee, perhaps in collaboration with the Finance or Environment Committee, to engage in a study looking at innovative sources of financing for development and climate change. Canada is nowhere in the international debates on this. We can change that.