George Osborne's surprise announcement to the Tory party conference that the Government is to lend directly to business was a stark admission that the Project Merlin deal with the banks is dead.
Announced in February, Merlin was a grand bargain between banks and state: banks would provide more loans to companies and, in return, the Government would allow them to return to business as usual.
As recently as May, when questioned by MPs about disappointing lending figures, David Cameron's warning to banks was stark: "The other side of Project Merlin is that the Government has promised that we will not introduce further bank levies, taxes, bonus taxes and all the rest of it – as long as this lending is forthcoming. That's the point of Project Merlin. So if they don't fulfil their side of the deal, the Government wouldn't have to fulfil its side."
So now that banks have reneged, and with public services suffering severe cuts, will the PM follow through on his threat? A few days before ministers arrived in Manchester, the European Commission published a proposal for an EU-wide tax on financial transactions involving shares, bonds and derivatives (popularly known as a Robin Hood tax). Yet rather than welcome the move, the Chancellor threatened a UK veto. A financial transactions tax (FTT) would have to be global to work, we were told, otherwise the City of London and, by extension, the UK's economy would suffer.
This is a U-turn on a grand scale: less than five months after the PM was threatening the banks, his Chancellor is sounding like a spokesperson for City vested interests, hiding behind US opposition, which prevents a global agreement. It is also economic nonsense: the fact is that unilateral taxes of this kind can and do work and there are plenty of them to prove it.
The most obvious example for Messrs Cameron and Osborne to study would be the UK's own stamp duty on share transactions. At 0.5 per cent, the rate is five times higher than the commission's proposed rate for shares and bonds and 50 times higher than that for derivatives. It nets about £4bn a year. Yet far from sinking into obscurity, London remains among the most successful stock exchanges in the world. The United States, Hong Kong, Switzerland, India and Brazil also have unilateral FTTs.
Any negative impact of extending the UK's existing transaction tax to bonds and derivatives would fall disproportionately on the kind of automated, high-frequency trades which rely on tiny margins and were described as "socially useless" by Lord Turner, chair of the Financial Services Authority. The International Monetary Fund has warned that the global financial sector as a whole is "undertaxed" because financial services, unlike, for example, building or catering, are exempt from sales taxes such as VAT. Unlike VAT, it would be borne mainly by the richest in society.
If the economic case is sound, then the moral and political arguments for a transactions tax are strengthening daily. Health, education and support for the vulnerable face multi-billion pound cuts in rich and poor countries alike. In the UK, it is the poorest who will bear the brunt of the cuts, according to the Institute for Fiscal Studies. In poor countries, despite the UK government's brave decision to protect aid spending, a population the size of the UK's has been pushed below the extreme poverty line of $1.25 (80p) a day, the World Bank estimates. Tonight, almost a billion people will go to bed hungry.
Yet bankers continue to receive multimillion-pound bonuses for betting on financial markets, safe in the knowledge the taxpayer will pick up the tab when things go wrong. Surely there is no more perfect example of the something-for-nothing culture that both Cameron and Ed Miliband have promised to end.
The public certainly seems to think so. A recent Eurobarometer poll found almost two-thirds of people in the UK and across Europe in favour of taxing financial transactions. Since the launch of the Robin Hood tax campaign 20 months ago,it has attracted a quarter of a million Facebook fans and more than a thousand economists, including Nobel Prize winners. The campaign – of which Oxfam is a member, along with 114 other organisations as diverse as the TUC, the Salvation Army and Greenpeace – is pressing for a tax on transactions and for revenue to be split evenly, between protecting people overseas from poverty and climate change, and helping poor people in the UK.
Many of the opponents of the tax are trying to paint it as a de facto tax for Brussels, as they know that if there is one thing that the UK public dislikes more than bankers, it is probably Brussels bureaucrats. Perhaps more importantly though, the idea that revenues would go only to the EU was immediately rejected by Germany and France, as well as the UK, so it clearly is a non-starter.
There are signs that Ed Miliband is beginning to understand that his new bargain for Britain should include a better deal from the banks. During his Q&A session in Liverpool, he shifted ground, saying publicly for the first time that his party would support a European as well as a global transactions tax.
There is still time for David Cameron to show that his words in March were more than just bluster. As chair of the G20, France – supported by Germany, Argentina, South Africa, Brazil and most eurozone countries – has made agreement on a Robin Hood tax one of its top three priorities for next month's summit in Cannes. The proposal has also won the backing of Bill Gates, one of the richest men on earth, as a way to provide additional funds for poor countries suffering reductions in aid, trade and investment. Given UK leadership on aid, Cameron should back the tax, but challenge Germany and others to use the revenues to match Britain in honouring aid commitments and in the fight to address climate change.
It will require real leadership for David Cameron to support a Robin Hood tax. But facing down the vested interests in the City would send a clear message that those who did so much to cause the economic crisis will contribute their fair share to putting us back on track for recovery.
Max Lawson is head of policy at OxfamReuse content