The most recent development in the Eurozone financial crisis is possibly the most concerning yet for the UK. 

It may seem somewhat counter-logical to deduce that the decision made by the EU and the IMF to seek a levy of up to 10% on all deposits in Cypriot banks could have a marked impact on the UK - but it could well do so. 

In addition, the decision signposts the direction of EU-wide fiscal policy in years to come. This is particularly interesting, coming as it does shortly after the suggestion by Paul Tucker, the Deputy Governor of the Bank of England, to consider further reducing UK interest rates from their current historic low of 0.5%. He suggested setting negative interest rates, and therefore charging banks for the privilege of 'depositing' funds with them. This would then encourage banks to lend, thereby stimulating the economy and injecting some much-needed additional liquidity into the economy. In particular, the private 'SME' sector.

UK Budget Day 2013 is this Wednesday, and there is no doubt that the Chancellor will continue to hold firm his commitment to 'Austerity' - regardless of the socio-economic impact of the policy. There is also little doubt that George Osborne will focus on deficit reduction as being of primary importance. Politically, he's too tied to this objective to escape it - unless he performs an escape act of Houdini-like skill. Even for a man of his undoubted political nouse, this is highly unlikely.
The Cypriot situation may well provide Osborne with the necessary backdrop with which to frame some particularly unpalatable policy announcements. He is already expected to cut the top rate of income tax for domestic taxpayers, and this is being contrasted unfavourably with the so-called 'Bedroom Tax'. Oddly, the latter is not a tax at all - but a reduction in benefits given to those people living in properties which are under-occupied. It is a rare occasion where the usually highly effective Conservative media machine has been outflanked by their opposition counterparts. Although it does feed in to an internet meme which has included such poorly thought out policies as the 'Granny Tax', and the 'Pasty Tax', so perhaps the governing Coalition may have taken its eye off the presentation ball in recent months. 

I would not go as far as to say that this will result in a direct tax on savers' deposits in the UK. Not yet, at any rate. However, there are more subtle similarities between the Cypriot situation and the UK than we may initially realise. By implementing a 'one-off' levy on the deposits of savers, the EU and IMF can be seen to have betrayed those depositors who felt that their money was guaranteed, up to 100,000 EURO, under the EU Deposit Guarantee Scheme. The UK is in the fortunate position of not being a part of the Eurozone, but that does not mean that we are entirely insulated from it. Many policy decisions take in the Eurozone are similar to those taken in the UK - we also have a Deposit Guarantee Scheme of around 100,000 EURO equivalent, for example. If that guarantee is not sacrosanct in the EU, who is to say that it is in the UK? In an attempt to stimulate further spending to re-inflate the economy and prevent a 'Triple Dip' recession, an  deposit tax coulbwell be the next step towards encouraging us to invest our money, rather than saving it for a rainy day.

Leave a Reply.