The IMF: more than expected, less than hoped for

By Owen Tudor
April 22, 2010

Opinion is divided about how far the International Monetary Fund has gone in its proposals ( for how to make the banks pay for the crisis. For some, it has taken some unexpectedly radical steps forward, but for others it has not yet produced an adequate solution.

Here is the background. Last September, the G20 leaders’ summit in Pittsburgh asked the IMF to “...prepare a report for our next meeting [June 2010] with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system”. It was just one of a number of proposals made at Pittsburgh, but, as reforming the financial sector has proved increasingly difficult, it has become one of the main issues on the G20 agenda.

The IMF has produced an interim report for the G20 finance ministers meeting in Washington DC this week, called ‘A Fair and Substantial Contribution by the Financial Sector’. It is an interim report because the IMF was asked to report back to the G20 leaders’ meeting which takes place in Toronto in June – so there will be more work to do before the IMF produces its final report.

Soon after the IMF was first given this mandate, the G20 finance ministers meeting took place in St Andrews, and British Prime Minister Gordon Brown seized the initiative by expressing support for a financial transactions tax (FTT) – an idea floated previously by President Sarkozy in France, Chancellor Merkel in Germany and President Lula of Brazil, as well as by Lord (Adair) Turner, who chairs Britain’s regulator, the Financial Services Authority.

The IMF’s Director General, French socialist Dominique Strauss-Kahn, immediately dismissed the idea of an FTT, as did US Treasury Secretary Tim Geithner. But the cat was out of the bag, and civil society organisations began planning a major campaign on the issue – launched first in Germany as the tax against poverty and then in the new year in Britain as the Robin Hood Tax campaign.

Influencing the IMF report was always a major objective for campaigners, and for the last six months documents have been shared, meetings held and people mobilised to persuade the IMF to give the FTT a fair hearing. Initially, the message seemed to be getting through – IMF officials were polite, engaged and willing to listen seriously. But then politicians began to falter, and earlier this week it looked certain that the IMF would produce a report proposing no more than a global bank levy, paying for the direct costs of bailing out the banks, but nothing more. Campaigners recognised that a bank levy (originally proposed by US President Obama) would be positive, but limited – a sort of compulsory insurance fund that would see banks pay governments sufficient money so that governments could give it back to the banks when disaster struck.

Campaigners had wanted more – sufficient revenue raised from the financial sector to pay for tackling climate change, achieving the Millennium Development Goals by 2015, and preventing swingeing cuts in public services to plug the government deficits left by the crisis. We calculated that a Robin Hood Tax could yield about $400 billion a year globally for good causes.

The report

So what does the report actually say? First, it’s easy to read, so do – I am only quoting parts of the report here.

Second, the introduction sets out how much the crisis has cost the global economy: 4-5 per cent of GDP across most of the developed world. The report makes clear that the banks need to repay the costs of government bailouts (the Financial Stability Contribution), but it goes further than most expected in suggesting that this levy should cover not just banks but all major financial institutions, such as hedge funds too.

And then it suggests that, since the costs to the global economy were far higher than simply the cost of bailing out the banks, the finance sector should make some contribution at least to those extra costs – the stimulus packages that governments introduced to reduce job losses or minimise the length people spent out of work, which have left governments facing debts about 40 per cent of GDP bigger in 2015 than 2007. To meet some of those costs, the IMF propose a further Financial Activities Tax which would tax profits and excessive remuneration packages: the elements of finance sector funding that the public find unacceptable and indefensible. We can’t resist calling this the FAT tax.

The IMF also suggests examining the tax regime that encouraged banks to bet on debt financing – arguably, the source of the crisis in the first place.

After exploring the measures already taken by governments, and the principles that should underpin any future measures, the IMF report sets out how its bank levy would work and then turns to the extra costs. As the report puts it: “the large fiscal, economic and social costs of financial crises suggest a contribution of the financial sector to general revenues beyond covering the fiscal costs of direct support.”

Only two proposals are examined – a Financial Transactions Tax on the one hand and the FAT tax on the other. It is remarkable that the FTT is given such weight and importance in the IMF report given Strauss-Kahn’s initial dismissal, and it is testament to the campaigning done to get and keep the Robin Hood Tax on the global and domestic agenda – which in turn encouraged politicians to press the IMF to treat the proposal with respect.

But the IMF report does more. It explicitly states that “the FTT should not be dismissed on grounds of administrative practicality. Most G-20 countries already tax some financial transactions”, which is precisely what FTT campaigners have been saying against those who claim these taxes can’t be implemented. The IMF does say that “some important practical issues are not yet fully resolved” but as it says, “implementation difficulties are not unique to the FTT”. The section concludes by saying that “sufficient basis exists for practical implementation of at least some form of FTT to focus on the central question of whether such a tax would be desirable in principle” – that is: an FTT could be implemented, so we next ask, do we want it to be?

As the advocacy of a FAT tax shows, the IMF decides that it doesn’t support a Robin Hood Tax, but even there the issue is not clear cut. The reason given for not promoting an FTT is simply that “there may indeed be a case to supplement a levy of the kind described above with some other form of taxation, but an FTT does not appear well suited to the specific purposes set out in the mandate from G-20 leaders”. In other words, the IMF is not necessarily against an FTT per se – it just doesn’t meet the criteria set out by the G20 leaders’ summit in Pittsburgh, and the IMF are quite right about that (they are also right about an issue called incidence – see below). The FTT is, instead, the answer to a different but very pressing question: how are governments going to pay for their commitments on climate change, international development and public sector deficits?

And while the FAT tax as proposed by the IMF may meet some very limited costs of the crisis, it doesn’t – and possibly can’t – go far enough. The report says that in the UK, the only place where it gives an indicative figure, a FAT tax set at 2 per cent would raise just 0.1-0.2 per cent of GDP – or about £1.75-£3.5 billion. The Robin Hood Tax would not have raised enough to pay for everything, but it could have raised a substantial chunk - possibly an order of magnitude more than the FAT tax, ie as much as £30 billion.

To raise the same as the Robin Hood Tax, the FAT tax would therefore need to be of the order of 20-40 per cent, which would have a substantial impact on the economics of the finance sector (big banks will probably argue that even a 2 per cent rate would do so, but that would be hyperbole – as the British bonus tax indicates, bankers are not quite so ready to give up the opera and everything else major financial centres have to offer in return for slightly lower taxation in offshore centres).

The IMF is, however, right about one thing with regard to comparing the FAT with the Robin Hood Tax – and it’s called incidence. There is a section of the report’s consideration of FTTs which seems to reek of annoyance on the part of the authors – they make clear that an FTT would be much easier to pass on to ordinary consumers than a FAT tax would be. They are right about this, and we might as well admit it (although bizarrely wrong to claim that sales taxes like VAT are less easily passed on to ordinary consumers than an FTT would be – VAT falls directly on those consumers, and is far less progressive a tax than FTTs).

I don’t accept the argument that ordinary consumers will lose a lot under a financial transactions tax – even if the full cost of the expected revenues of $400 billion a year globally fell on consumers in the developed world, and in practice nothing like that much would be passed on, it would not be a huge burden individually. But in reality, competition, legislative ring-fencing and so on would ensure that a fair amount would come out of the finance sector’s trillion dollar annual profit and the huge bonus and remuneration pots of the people who run the sector – much more than the FAT tax would take out of those same sums.


The main advantage an FTT has over the FAT tax is that it would raise far, far more money for global public goods like the environment, health and education, and job creation/protection.

And that is going to be the issue that we will be taking from the G20 finance ministers’ meeting to the G20 leaders’ meeting in two months time. We need more money than the FAT tax can provide, and G20 leaders need to face up to the costs of creating a better world.


© Owen Tudor is Head of European Union and International Relations ( at the Trades Union Congress (TUC). He contributes to the ToUChstone TUC blog on public policy here:

The Robin Hood Tax campaign, backed by the TUC, Ekklesia and many NGOs and development agencies, can be found here:

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