Financial transaction tax will cost City £4bn, study warns

by Richard Crump

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04 Apr 2013

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THE EUROPEAN COMMISSION'S planned tax on financial transactions will add billions of pounds to the cost of borrowing for Britain's companies and government, a study has warned.

The levy on trading financial securities would add £3.95bn to the cost of issuing UK government debt and could "seriously" increase the cost of capital for businesses and governments across the continent if it were in place today, according to research sponsored by the City of London Corporation.

Eleven EU Member States signed up to the directive in February, though non-participating countries - including the UK - will face similar increases to their cost of capital, the City of London said.

According to the study, the cost of capital-raising could increase by 100 basis points (bps) or more for countries that have opted out of the tax because of the greater reliance they place on debt capital markets.

"The FTT is an ill-conceived idea that risks significantly damaging economic prospects across Europe. Not only would it adversely affect the cost of sovereign debt but it would also make it more difficult for businesses across the continent to access funding" said Mark Boleat, policy chairman at the City of London.

"In reality, the FTT is likely to negatively affect end users such as pension funds, while generating less revenue than estimated due to the behavioural change that would result. Policymakers need to reconsider this proposal in light of the negative impact it would have on investment, job creation and growth."

The tax could also distort competition between financial instruments and hit returns for corporate bonds from non-participating Member States, the research said. The report also indicated that the levy could lead to a "substantial" reduction in activity in the repo market due to increased costs on counterparties.

"This could make it more difficult for banks to use repo markets for short-term funding that is linked to lending," the report said.

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