Britain’s economic strategies have been dogged for many years by an elusive concept called “competitiveness”. Back in January Philip Hammond even tried to use it as threat in the Brexit negotiations. “If Britain were to leave the European Union without an agreement on market access,” he said, “we could be forced to change our economic model... to regain competitiveness.” Labour’s Jeremy Corbyn last week pledged to repudiate the model.
Some European leaders know that, with its loose regulations, and its network of semi-British offshore jurisdictions such as the Caymans or Jersey, Britain already is a tax haven. But they also knew Hammond’s threat was hollow – because sending Britain further offshore would damage the UK most of all.
The word “competitiveness” sounds moderate, but in reality it is a code word for corporate tax-cutting and financial deregulation, routinely used by every tax haven in the world to defend questionable policies. It deliberately raises the spectre that the rich, banks and multinationals will flee – so as to justify handing them ever more goodies.
Some Brexiteers fantasise about London as a prosperous Singapore-on-Thames. They brandish lists such as the CIA’s World Factbook, whose ranking of the 10 territories with the top GDPs per capita includes the major tax havens of Liechtenstein, Luxembourg, Singapore, Bermuda and the Isle of Man.
But these rankings tell us nothing useful. First, these small havens spread wealth among tiny populations: for Britain to repeat Liechtenstein’s or Luxembourg’s trick, the City would need to be big enough to service all of Earth and several other populated planets.
Second, the measure of GDP per capita includes accounting and financial schemes that provide few local benefits. Better measures such as gross national income are less flattering – yet even then, huge concentrations of wealth at the top skew the picture.
In small havens, offshore income tends to flow mostly to expatriates: for instance, over 70% of the economically active population of Luxembourg are foreigners. Other countries’ taxpayers stump up to educate those people and to pay for most of their health and pensions, while Luxembourg creams off their most productive years. Britain couldn’t match that either.
A “competitive” tax haven model also inflicts damage that can’t be measured, such as more corruption and criminality, and that harms democracy. Last week’s murder of Panama Papers journalist Daphne Caruana Galizia in the tax haven of Malta is just the latest violent reminder of this.
To lure the world’s hot money, tax havens face a contradiction. On the one hand they want to appear clean, trustworthy, reliable, safe, helpful, flexible, unpolitical: the nice things. On the other, they hanker after those global oceans of dirty and abusive money: the bad stuff. Tax havens square this apparent paradox with an offering to the world’s wealthy hot-money owners along these lines: “We won’t steal your assets – but we’ll turn a blind eye if you want to steal someone else’s.”
It’s no coincidence that Switzerland, that paragon of cleanliness, reliability, neutrality and safety, has historically been a gigantic dirty-money centre. The formula does bring in money, but you can’t ringfence the clean from the dirty – the rottenness leaks into wider society.
Calls to clean up the City are stonewalled with the “competitive” spectre that if we stop dodgy practices, jobs will flee to Dubai or Singapore. Britain is going steadily down this route: last week MP Margaret Hodge described the UK, once famed for its sense of fair play and incorruptible judges, as “the country of choice for every kleptocrat, crook and despot in the world”. The Italian anti-Mafia journalist Roberto Saviano echoed her words: Britain’s existing offshore financial model makes it “the most corrupt place on Earth”. Does Hammond want to double down on this?
All havens are “captured” by offshore finance: local democracy mustn’t be allowed to get in the way of making money. Indeed, people send their money offshore, to these places, precisely to escape laws and democratic accountability. In 2014 the “big four” accountancy firms, key architects of the global offshore system, advertised in Hong Kong newspapers urging democracy demonstrators to pipe down, saying the protests would scare away their financial and multinational clients, with “a long-term impact on Hong Kong’s status as a global financial centre”.
The “competition” between countries that Hammond describes bears no relation to competition between firms in a market. The latter can be beneficial but the former is always harmful. Think of the difference between a failed company and a failed state.
Offering tax loopholes or financial laxity brings in, at best, exactly the wrong kind of investment – flighty, profit-shifting, wealth-extracting nonsense that hardly touches the sides – not the wealth-creating stuff Britain needs, rooted in its economy with local jobs and supply chains. If it’s well-embedded, a whiff of tax won’t scare it off. That good stuff needs infrastructure and a healthy and educated workforce – which means sufficient levels of tax.
EU negotiators always knew Hammond’s tax haven threat was hollow: like saying, “Give us what we want – or we’ll shoot ourselves in the foot.” It’s no negotiating position. In fact, Britain can unilaterally step out of the offshore race to the bottom – and would be more prosperous for doing so.