Opt-out may not protect financial firms from an EU transaction tax

By ERIKKA ASKELAND
Published on Monday 6 February 2012 00:00

BRITAIN’S financial services firms could pay up to 60 per cent of the proposed European transaction tax even if the UK opts out, a report will warn today.

The Ernst & Young Item Club has calculated that the UK would be liable to pay 75 per cent of the revenues from the European Commission’s Financial Transactions Tax (FTT) because of the size and scale of Britain’s financial services sector relative to the rest of Europe.

But even if the UK opts out, the country’s financial sector would still have to contribute about 60 per cent of total revenues if a “reverse charge mechanism” was applied.

The Item Club said that, although the European Commission (EC) has not yet published detailed revenue estimates of the FTT at a national level, it has acknowledged they would be distributed unevenly in line with trading volumes at European Union (EU) exchanges.

Neil Blake, the Item Club’s senior economic adviser, said: “Taking the EC’s estimates at face value, if the FTT is introduced across the EU, the UK financial sector would generate around 75 per cent of the total revenues.

“However, even if the UK were to opt out of the FTT, if a reverse charge mechanism was applied, we expect the UK financial sector would still contribute around 60 per cent of total revenues. These revenues would flow directly to governments in the eurozone rather than to the UK Exchequer.”

The firm’s report, The Outlook for Financial Services, also predicts bank lending will contract in 2012, hitting SMEs, commercial property and personal customers outside of standard credit terms particularly hard. Total bank loans, which grew by 4.3 per cent last year, are expected to contract by 2.2 per cent in 2012, with just 0.9 per cent growth forecast for 2013, Item Club said.

Blake said: “We have been warning about the impact bank deleveraging could have on the economy for some time, but this is the first time there will be an annual contraction in total loans since 2009, when the UK economy was still suffering from the immediate effects of the global financial crisis.”

The contraction in corporate loans is expected to be particularly sharp, with a 5.7 per cent fall forecast for 2012. Financing conditions are likely to be particularly tight in the construction and real estate sectors and smaller companies will be particularly badly affected.

He added: “Funding for small and medium-sized enterprises is likely to be particularly difficult to obtain as banks seek to reduce credit risk. The average interest rate on smaller loans, of £1 million or less, is already double that charged on loans of £20m or more, and we expect this trend to continue.

“As these young companies tend to be high-growth businesses, this will have adverse knock-on effects for economic growth.”

The banks’ shrinking loan books will also prove difficult for personal borrowers, leading to further expansion of alternative or “shadow” banking operations, including high-interest charging payday loans firms.

Net lending by alternative high-cost consumer credit providers has risen by 42 per cent, or £29bn, since 2007.

Consumer credit is expected to contract by a further 5.4 per cent in 2012, and will not hit 2011 levels again until 2014, it is forecast.

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