Brown Says G-20 Should Consider Tax on Speculation

Nov. 7 (Bloomberg) -- U.K. Prime Minister Gordon Brown said the Group of 20 nations should consider measures such as taxing financial transactions to penalize excessive risk taking and limit the burden on taxpayers of bank failures.

“It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us,” Brown told G-20 finance ministers and central bankers at a meeting today in St. Andrews, Scotland. Tighter capital rules and pooled bank resolution funds could also be considered, he said.

The comments add momentum to a global debate on how governments should rein in markets after bad bets almost toppled the global financial system, triggering a worldwide recession and a string of government bailouts. French President Nicolas Sarkozy and Adair Turner, chairman of the U.K.’s Financial Services Authority, have both supported a so-called Tobin tax.

Brown, who didn’t say whether he’d endorse a levy, said any policy would need to be implemented by all financial centers including those in the Middle East, Asia and Switzerland. He also acknowledged the “enormous and difficult” issues that need to be overcome to set up a “globally cohesive system.”

The debate over whether to implement a global levy on speculation has mounted in recent months with the G-20 asking the International Monetary Fund in September to study it. Twelve nations including Britain, France, Germany and Brazil agreed last month to set up a panel of economists to research its feasibility.

Currency Trading

Their inspiration is a 1971 proposal by U.S. economist James Tobin to tax currency trading to deter speculation in the wake of the collapse of the Bretton Woods system of pegging exchange rates. Tobin, who died in 2002, won the 1981 Nobel Prize for his work on financial markets.

For Brown, who is trailing in polls less than seven months before the next U.K. election is due, the comments are designed to open a divide with the Conservative opposition. While the Conservatives say the biggest risk to the economy is the government’s record budget deficit, Brown has stepped up his attacks on banks.

Brown and Chancellor of the Exchequer Alistair Darling say loose oversight of the banking industry allowed institutions to take on too much risk, destabilizing the financial system by the time the subprime crisis dried up credit in 2007.

Social Contract

“There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards,” Brown said today. “We need a better economic and social contract to reflect the global responsibilities of financial institutions to society.”

Some G-20 members are already acting alone on trading taxes. Brazil last month imposed a 2 percent tax on foreign purchases of equities and fixed-income securities in a bid to fend off excess speculation.

“Various countries have discussed the measure and are even thinking of adopting it,” Brazilian Finance Minister Guido Mantega said in a Nov. 5 interview with Bloomberg Television.

G-20 finance ministers and central bankers are meeting in the so-called home of golf to hammer out policies that will cement a recovery from the worst global recession since World War II and prevent a repeat of the financial crisis. After channelling more than $500 billion to bail out banks such as Royal Bank of Scotland Group Plc and Citigroup Inc., they’re also looking to impose tougher banking regulations.

Banking Mess

Brown’s speech “clearly opens the door for a financial transactions tax to make the bankers pay for the mess they’ve caused,” said Max Lawson, a policy adviser at aid organization Oxfam International. “There is a real rage against the banks which the prime minister is speaking to. There are big obstacles for such a tax, but this is a big moment.”

A tax of 0.05 percent on financial transactions may raise up to $700 billion a year, according to the WWF, a global environmental pressure group.

The British Bankers’ Association issued a statement saying that regulatory changes must be “properly costed” and the “timetable for change clearly set out.”

Economists are divided over whether any tax on financial transactions could work.

Former European Central Bank Chief Economist Otmar Issing said Oct. 26 that talk of such a measure is “like the Loch Ness monster; it appears once or twice a year, then goes away,” arguing it could never be imposed across borders and investors would circumnavigate it.

French officials including Sarkozy have suggested a levy on speculation for most of this decade without success.