(Updates with Conservative comment)
By Laurence Norman and Joe Parkinson
Of DOW JONES NEWSWIRES
ST ANDREWS, Scotland -(Dow Jones)- The Group of 20 leading economies should consider applying a global financial transactions tax to pay for the cost of future banking crises, Prime Minister Gordon Brown said Saturday.
Brown said G20 members should discuss whether they need some kind of "insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transactions levy."
However he conditioned his proposal with warnings that agreeing a levy would be difficult.
Indeed, U.S. Treasury Secretary Timothy Geithner said his government wouldn't support that approach.
"A day-by-day financial transaction tax is not something we're prepared to support," he said in aninterview with Sky News.
The U.S. is not alone, finding an ally in the Russian government.
"I'm quite skeptical about such taxes," Russian Finance Minister Alexei Kudrin said. "Gordon Brown is well known as the person who has been raising taxes all the time."
And Canadian Finance Minister James Flaherty was slightly more diplomatic, saying a transactions tax was "not particularly attractive."
In the past, the U.K. has leaned against the idea of a Tobin tax, which would use the proceeds of a financial transactions tax to provide funds to developing nations.
However, Brown's proposal more closely resembles a deposit insurance scheme, in that the fees gathered from the levy would be placed in a ring-fenced fund that would be drawn on should banks once again need state support to survive. The G20 governments said at the leaders summit in Pittsburgh in September they would look at this area, tasking the International Monetary Fund with preparing a report for options on "how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."
Brown said that report would come in April and any action on a possible tax is unlikely to come for some time after that, U.K. officials signaled. Brown himself faces a tough battle for reelection by June 2010.
Brown said there needs to be a "better social contract" between banks and the rest of society.
"It cannot be acceptable that the benefits of success are reaped by the few, while the costs of failure are borne by all of us," Brown told finance ministers and central bank heads from the G20. "We need to consider if we need to go further in terms of mitigating costs to the rest of society."
Brown said Britain would not adopt such a plan "unless others move with us together."
He also said the tax would have to be "non-distortionary to avoid damaging reductions in liquidity, inefficient allocation of capital and the temptation of avoidance."
And any tax must not undermine efforts to stabilize the financial system and that the contribution from the financial sector must be "fair" and "measured."
"I do not in any way underestimate the enormous and difficult practical and technical issues that will need to be overcome," Brown said.
The Bank of England estimates that in the U.S., the U.K. and the euro zone, state support for the banking systems has totaled $14 trillion, or a quarter of global economic output.
France has been among the most prominent supporters of a financial transactions tax, with French Foreign Minister Bernard Kouchner recently proposing a levy of 0.005% on transactions. He said such a tax could raise around EUR30 billion.
French Finance Minister Christine Lagarde Saturday repeated her government's support for a tax on transactions.
Over the last century, bank failures have become increasingly expensive for taxpayers, and short of war pose the greatest threat to the solvency of governments.
If it could be enforced, a levy on transactions would help build up resources to pay for future crises, the cost of which could threaten to bankrupt some governments.
"A global ... tax could make a useful contribution to reducing the risk of future financial crises, and sharing the costs more fairly," said Julian Jessop, an economist at Capital Economics.
But bankers said a transaction tax wouldn't be enforceable.
"You would have to get every country in the world to agree to it," said Angela Knight, chief executive of the British Bankers Association. "It assumes that financial transactions will stay the same, that there will be no innovations or changes. Practically, it wouldn't operate."
And the U.K.'s main opposition party accused Brown of "chasing headlines."
"Instead of empty headline grabbing announcements, Gordon Brown should focus on the crisis we are living through now which he helped to create, which means businesses are folding and insolvencies rising at record rates," said a spokesman for the Conservative Party.
-By Laurence Norman and Joe Parkinson, Dow Jones Newswires; 44-207-842-9270; laurence.norman@dowjones.com
(END) Dow Jones Newswires
November 07, 2009 12:38 ET (17:38 GMT)