London economists warn of financial transaction tax's potential impact on UK savings and pensions

The authors of the report, consultancy London Economics, considered the impact of the proposed financial transaction tax (FTT) on household savings in four EU member states that planned to participate and two that did not. Although the likely impact of the proposed tax was likely to be much higher in participating member states with sizable capital markets, the economists concluded that non-participating states including the UK and Luxembourg would be affected as a result of the "extraterritorial reach" of the proposals.

Although the FTT will not directly affect the value of savings, it will have a substantial impact on the value of the equity and debt holdings that underpin them. The proposed tax, which is backed by 11 EU member states, would apply to transactions in financial instruments involving financial institutions where at least one party to the transaction is established in a participating member state (the 'residence principle') or where the transaction involves financial instruments issued in a participating state (the 'issuance principle').

"Across Europe, financial assets form an important part of European household savings, providing them with access to emergency funds and allowing them to build future retirement income, through direct investment and life insurance and pension funds," the authors of the report said.

"Households hold various types of financial assets. In the UK for instance, life insurance and pension funds are highly important instruments for savings, as they make up over half of total financial savings. Meanwhile, in Italy, there is a high level of direct investment in financial markets, with 40% of household savings being held directly in the form of equity or debt; this figure is 23% in Spain," the report said.

The European Commission announced its plans for an EU-wide FTT in 2011, but had to abandon them after there was insufficient support for the proposals. However, under the 'enhanced cooperation' procedure a minimum of nine member states can take their own plans for an FTT forward and 11 countries plan to proceed with this process. They are Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.

The UK Government opposes the introduction of an EU FTT on the basis that any such tax would have to be global to stop traders simply routing their deals to financial centres outside the EU. It has begun a legal challenge to the plans in the Court of Justice of the European Union (CJEU).

According to the report, countries planning to introduce the FTT are likely to suffer significant losses across different types of household savings due to the broad range of financial instruments that would be caught by the tax. In Germany and Italy in particular, losses could amount to as much as €150bn or €205bn due to the extent to which household savings are exposed to the capital markets. Although transactions are expected to be taxed at 0.1% for shares and bonds and 0.01% for derivatives, the report warns that the "effective tax rate" would be closer to 1% due to the "cascade effect" of levying the FTT at multiple stages in the chain of settlement, and on associated transactions such as those taking place for hedging purposes.

The report's authors also warned that it would "hold back household consumption and slow economic growth" if the tax was borne by the end users of financial services, rather than by financial institutions.

"Previous research has examined the conflicts between the FTT and other aspects of European financial regulation, particularly the potentially destabilising impact of the tax on financial markets, and the increase in the cost of capital for businesses and governments across the EU," they said. "Taken together, the studies illustrate how the tax could serve to dampen the economic recovery across Europe, slowing investment, consumption, job creation and growth, especially in participating member states such as Germany and Italy."

Finance ministers from the 11 countries taking part in the FTT are due to meet to discuss the proposals this week, according to Reuters. However, the agency said that it was unlikely that any definitive decisions would emerge from the negotiations.