St. Andrews Hotel, Scotland.

Finance officials from the Group of 20 (G-20) industrialised and emerging market economies, pledged at a weekend meeting in St. Andrews, Scotland, to maintain economic stimulus measures until recovery from the global crisis is assured and asked the IMF (International Monetary Fund) to assess whether countries were on track for delivering strong, sustainable, and balanced growth to avoid future problems. However, the UK retreated from a proposal for a financial transactions' levy known as a "Tobin tax."

"Economic and financial conditions have improved following our coordinated response to the crisis," the G-20 officials said in a statement."However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern. To restore the global economic and financial system to health, we agree to maintain support for the recovery until it is assured."

Mutual assessment timetable

G-20 finance ministers and central bankers committed to a timetable for a new system of keeping an eye on each others' economies, under which countries would present national and regional plans by the end of January to support sustainable recovery and job creation.

At their last meeting in Pittsburgh in September, G-20 leaders agreed a framework for peer review, assisted by the International Monetary Fund, that is designed to ensure that national economic policies are consistent with promoting balance in the global economy.

Officials want to avoid derailing the recovery by withdrawing the stimulus too soon or by leaving it so long that the resulting debt encourages investors to push up market interest rates. The IMF says the debt ratio of the advanced G-20 nations could be 40 percentage points above the pre-crisis level by 2014, threatening to drive up borrowing costs as much as 2 percentage points. The IMF outlined in a note to the G-20 leaders a series of seven principles to consider for unwinding the stimulus when appropriate.

The fragility of the rebound was highlighted by a report last Friday showing the US unemployment rate climbed to a 26-year high of 10.2 percent in October. The broad measure of unemployment surged to 17.5 percent.

Financial sector tax

The G-20 officials - - representing around 90 percent of the world's wealth, 80 percent of world trade, and two-thirds of the world's population - - emphasised the need for quick implementation of banking industry reform, saying that stronger standards should be developed by the end of 2010, with the aim of implementation by the end of 2012 as financial conditions improve.

British Prime Minister Gordon Brown said on Saturday that it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a "resolution fund" as a buffer against future bailouts. Banks needed "a better economic and social contract," that reflected their responsibilities to society. Any measures must be implemented by all major financial centres, Brown noted.

In 1978, the late James Tobin, Yale economist and Nobel laureate, first proposed the idea of a tax on foreign exchange transactions that would be applied uniformly by all major countries. A tiny amount (less than 0.5%) would be levied on all foreign currency exchange transactions to deter speculation on currency fluctuations.

The hedge fund billionaire George Soros, told the FT that Gordon Brown’s proposals “fit in with everything I’m saying needs to be done ... the banks should, when they can, be a source of taxation, having been a drain on taxpayers”. Some form of transaction tax was “in principle a very good idea.”

Following the Pittsburgh summit, the IMF has been working on suggestions for a levy and plans to have some initial ideas by its Spring 2010 Meetings in April, to be held in Washington.

However, Brown's preferred mechanism out of four options he had raised, which included insurance levies and funds to finance future bail-outs, was opposed by the US, Canada, Russia, the IMF and the European Central Bank.

Tim Geithner, US Treasury secretary, said: “A day-by-day financial transactions tax is not something we are prepared to support.”

Several options

IMF Managing Director Dominique Strauss-Kahn told reporters the IMF was considering several options for the G-20 to look at. "We can't go on with a system where some individuals take risks that finally all taxpayers, like you and me, have to pay for. The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else."

He made it clear that there was no consideration of a currency transactions tax.

Strauss-Kahn, a former French finance minister, said: the "Tobin tax" was “a very old idea that is not really possible today.”

He added that there were two possibilities for a financial sector tax, including a "possible windfall tax for 2009, a one shot thing." The other would be a more long-term tax. Some trade off between regulation and taxation could be made: the more regulated a country, the less taxation would be needed. For example, European countries may need to tax the financial sector less because their banks were more regulated, while the less-regulated United States may want to impose a higher levy.

He said he was personally in favour of such a levy, that he referred to as “an IMF tax,” but countries could follow their own approach.“We don’t want an extra-simplistic solution that will not be effective. I am very pragmatic: I would prefer a second best solution we can all implement."

"Think of it as a two-fold objective: (i) incentive for markets to take less risk; (ii) provide resources to an insurance fund if risk materialises."

IMF First Deputy Managing Director John Lipsky is leading the group within the IMF to prepare a report for the G-20 on the issue. “It is widely accepted that deposit insurance should be funded by a tax on the banking system,” said Lipsky last month. “This can be viewed as a mandatory insurance plan. In the wake of the current crisis, it is appropriate to consider the same issues more broadly across the financial system.” The IMF’s report would cover how potential mitigation costs could be borne and whether it was right to think about specifically charging the financial sector.

Preventing the next crisis

Strauss-Kahn said the IMF was engaged with the G-20 in its deliberations on how the mutual assessment can be conducted and how the Fund could support and assist the G-20 efforts.“We will ask countries to provide the overview of their policies for the next 2-3 years, and will check whether they add up - - if they don't we will provide scenarios and advice."

G-20 leaders expect members to have completed their mutual assessment by April, with the aim of providing options to discuss when they meet in June. By November, they intend to refine those policy options "and develop more specific policy recommendations."

"This will be the main job of the G-20 after this crisis: to prevent the next crisis,” Strauss-Kahn said. “We need to see how policies are consistent together or not."

Asked by reporters what will happen if policies are not consistent, Strauss-Kahn said he did not expect to find that all G-20 countries’ policies were consistent with each other at present. “We need to provide advice to bridge the gap. It’s in the interest of all countries to avoid crises. If that's true, they will work on this framework."

Climate change

G-20 leaders also committed to take action to tackle the threat of climate change and work towards "an ambitious outcome" at a major UN conference in Copenhagen next month.

Officials are considering a finance package to help poorer nations develop green industries and adapt to climate change.

The G-20 comprises 19 countries: Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States - - and the rotating EU presidency.