In November I took a call from the HM Treasury asking if I would be willing to represent the UK Government on an international expert group to support a Taskforce of the Leading Group of Nations. The expert group was set up to examine the feasibility of various innovative funding models for global projects, such as the millennium development goals and climate change aid.
I accepted this appointment and the first meeting was held last week in Norway. The group comprises nine members, predominantly economists, all of whom hold professorial titles. In the last thirty years there have been a number of academic studies carried out on this topic, but most have come back to one particular type of funding model - a currency transaction levy. Members in the UK will have heard Gordon Brown speak supportively of such a levy in recent weeks. While a currency transaction levy has been supported internationally by a number of politicians and other stakeholders, many in the financial services industry are less enthusiastic.
Rodney Schmidt, in his major research paper “The Currency Transaction Tax” (2008) calculates that a tax of half of one basis point (0.005%), levied on the major international trading currencies, would generate an annual revenue of $33 billion. The major currencies for this exercise were assumed to be the US dollar, Euro, Yen and Sterling.
This is clearly a significant sum of money, particularly if it were an annually recurring amount. To a politician who was looking to fund worthy causes at a time when worldwide governmental funds are in a desperate state, it might seem like manna from heaven. To the City of London, where around two thirds of global foreign exchange trade takes place, it raises concern.
In principle, it is technically feasible to operate such a levy through payment and settlement systems. What impact such a levy may have on confidence in the foreign currency market, which in recent years has worked efficiently and was certainly not singled out as problematic in the recent credit crisis, is uncertain. Again, recent financial modelling indicates that it might have a minimal effect, but models cannot always anticipate human behaviour and markets can be unpredictable.
Whether this is the best example of innovative finance is also a moot point. Other examples that might be developed include an air ticket levy, a carbon tax, a global lottery or even a global bond. None on these have the simplicity of a currency transaction levy, but I am not sure that simplicity of itself is a valid basis for proceeding.
I have not gone into the details of who would collect such a levy and then all the governance and accountability arrangements concerning how it would be collected, how projects would be considered for funding and how any funds would be distributed.
Over the next few months, as this report comes together, I would be interested to hear from members (and others) on other ideas that might be considered and your views on a currency transaction levy.