How a Great Power Falls Apart
Decline Is Invisible From the Inside
Last week’s release of leaked offshore banking documents, known as the Panama Papers, has dealt a blow to British Prime Minister David Cameron. Last Thursday, he finally admitted that he had personally profited from an offshore trust established by his now-deceased father, Ian Cameron, in the 1980s. After several days of stalling, the prime minister acknowledged that he held shares in an account call the Blairmore Investment Trust from 1997 to January 2010, shortly before he entered Downing Street.
Cameron’s statement on Thursday marked the fifth separate explanation of his financial affairs in only four days. He hopes that his latest pronouncement, along with the unprecedented decision for a UK prime minister to publicly release key details of his tax returns on Saturday, will satisfy public curiosity about his financial affairs. Cameron will also make an announcement in front of Parliament today, in which is expected to announce a new task force that will investigate the financial affairs of UK companies implicated in the Panama Papers, to be led by Her Majesty’s Revenue & Customs and the National Crime Agency.
But even though Cameron appears to have done nothing illegal, scrutiny over his involvement may intensify. He might not be alone, either: inquiries into the tax affairs of other members of the Cabinet, especially Chancellor of the Exchequer George Osborne, could be next. And with the British Parliament returning from Easter recess this week, the Cameron must manage this issue while also addressing a series of wider challenges, including the June 23 EU referendum and a crisis in the UK steel industry. In other words, Cameron is in for probably the biggest fight of his political career—one that may get the better of him as early as June given that he will probably be forced to resign if Britain votes to leave the European Union against his wishes.
The release of the Panama Papers comes during some of the most difficult weeks of Cameron’s six-year term in office. The troubled time began when the Conservative government released its annual budget in March, only for British Secretary of State for Work and Pensions, Iain Duncan Smith, to resign a few days later. Duncan Smith, a former British conservative party leader, excoriated the government in his resignation letter. He asserted that the announced cuts to welfare and funding for the disabled were “[…] not defensible in the way they were placed within a Budget that benefits higher earning taxpayers.” The resignation was unexpected, prompting a government reversal on the disability cuts, and led to days of headlines that hinted at a civil war within the party fueled, at least in part, by its divisions on the upcoming Brexit referendum.
Cameron faces another challenge from the decision of Tata steel to sell its plants throughout England and Wales. The India-headquartered company employs some 15,000 UK workers, and it remains unclear whether buyers can be found for the all the sites, especially Port Talbot in Wales. If a buyer does not come forward, it is expected that many of those workers could soon be without jobs.
The government has come under pressure for its handling of the latest blow to the British steel industry, which has seen its market share erode from global oversupply, cheap Chinese imports, falling prices, and relatively high domestic energy costs. Business Secretary Sajid Javid, for instance, admitted that he was caught unaware by Tata’s announcement, which was made while he was on a trip to Australia. Javid has acknowledged that Tata’s decision to close its plants had advanced “much further than we expected.”
The government has attempted to seize back the initiative on this issue in recent days. Javid met with Tata officials last week in Mumbai, and both UK and Welsh officials have looked at ways in which they could support any would-be purchasers of the plants. Cameron’s team remains vulnerable on this issue, however, especially as he pressed the European Union to undermine tariff measures that would have helped keep Chinese steel from flooding the European market.
But Cameron’s biggest forthcoming challenge is June’s Brexit referendum, which could be his political unraveling. A survey done earlier this month gave the Brexit camp a 43 percent lead over the stay campaign (which received 39 percent of the survey’s tally). Another survey, conducted only a few days later, found that the Brexit campaign was trailing its pro-EU opponents by seven percentage points. Given that the contest could go either way, any significant political disturbance could tilt the balance of debate. A key danger for the prime minister is that the Panama Papers will continue to generate negative headlines for some significant time to come.
Cameron has staked his personal reputation on keeping the United Kingdom in the European Union, and his doing so has aggravated existing fissures within the Conservative party on Europe. London Mayor Boris Johnson and around a quarter of the prime minister’s cabinet have opposed his stance, and there is growing dissatisfaction with Cameron’s leadership of the party. The prime minister may face a formal intra-party leadership challenge after the referendum, even if Britain votes to remain in the European Union.
Further, a post-Panama Papers poll released last week showed that Cameron’s approval rating has fallen to its lowest point since July 2013, and may slip further. Before the leak, Cameron had been the UK’s most influential politician according to on public opinion. Dents to his personal credibility could therefore significantly undermine the campaign to keep the United Kingdom in the European Union.
AN OLD PROBLEM
The role of tax havens in the British economy is not a new issue. London held on to a global network of islands after de-colonialization, which resulted in 14 overseas territories (as well as three dependencies) remaining within the United Kingdom. A number of these territories feature prominently in the Panama Papers, including the British Virgin Islands which is named at least 113,000 times in the leaked documents.
The British government has tried to improve the tax systems of its overseas territories, but this has been a work in progress. London has, in the past, even imposed direct rule to crack down on corruption in the past. In 2009, for example, local officials in the Turks and Caicos were accused of selling government land for personal gain, leading to direct rule from London for three years while Westminster forced the local government to pass tax reform measures. Labour party leader Jeremy Corbyn has also proposed that Britain enforce direct rule on territories implicated in the Panama papers.
For now, however, British territories have been asked to abide by three main requirements: the automatic exchange of tax information, common reporting standards for multinational firms, and central registries to provide better transparency over who owns companies registered in these countries. Each of the territories have delivered on the first two items, but not the third. Cameron is pushing for as much progress as possible for central registries ahead of an anti-corruption summit next month in London, in which tax transparency will be at the fore.
It’s unclear at this stage whether the British government will take the step to impose home rule on territories implicated in the leak, but international and domestic pressure is mounting. Almost 200,000 people have signed an online petition demanding the government to “shut down British tax havens” since the Panama Papers were leaked. Imposing direct rule is a relatively straightforward process, but critics have suggested that this may only force tax avoiders to move from one country to another without ending the practice outright. In fact, such a measure could make firms move to countries with even fewer tax regulations and less transparency. Instead, some argue that there needs to be a broader international effort to improve tax transparency. And here, Cameron’s government has been at the forefront of debate. During the 2013 G-8 summit in Northern Ireland, Cameron commented on the meeting’s efforts to end tax avoidance. He said, “You have to collect the taxes that are owed. That is only fair for companies and for people who play by the rules.” The meeting resulted in the Lough Erne Declaration, which urged countries to “fight the scourge of tax evasion.” Leaders agreed to measures that would combat the illegal evasion of taxes, as well as the use of tax havens and loopholes. That same year, however, Cameron lobbied the European Commission to exclude offshore trusts from being included in an EU-wide crackdown on tax dodging financial instruments, arguing that companies were the real issue and that trusts should not be subject to the same rules.
The Panama Papers are unlikely to cause Cameron to resign, but the leaks have exacerbated the problems plaguing the British government at a time when it can ill afford bad headlines. The prime minister now faces what could be the most difficult period of his political career: inquiries into his own finances demonstrate a hypocrisy that could undercut his political credibility on other issues—the most vital of which being the upcoming Brexit vote. As much as Cameron hopes that the Panama Papers leaks will fade from the news cycle, scrutiny over his leadership is only likely to intensify. And if they don’t, Cameron’s tenure at 10 Downing Street could be over before the end of the summer.