Nov. 8 (Bloomberg) -- Group of 20 governments split on whether to tax financial trading as part of a broader strategy to ensure the global economy’s expansion is less crisis-prone.

U.K. Prime Minister Gordon Brown told a meeting of finance chiefs in St. Andrews, Scotland yesterday that such a levy could prevent excessive risk taking and fund future bank rescues, adding momentum to a debate begun by France. U.S. Treasury Secretary Timothy Geithner said a “day-by-day” tax on speculation is “not something we’re prepared to support.”

The dispute over a so-called Tobin tax suggests that the unity the G-20 showed in battling the worst financial crisis since the Great Depression is unraveling as its focus intensifies on how far to rein in the banking system. The outcome may determine the strength of markets as the recovery builds as well as the scope for banks to profit from them.

“The initial market reaction to talk of a Tobin tax is likely to be negative,” said Julian Jessop, a former U.K. Treasury official and now chief international economist at Capital Economics Ltd. in London.

A day after U.S. data showed the unemployment rate rose more than economists forecast to a 26-year high, the G-20 also agreed to keep stimulating their economies until recoveries take hold. They mapped out a time plan to show how they will make growth across the world more even and less reliant on Chinese savings and U.S. domestic demand.

Chinese Currency

Tensions flared over China’s currency policy and how to fund the fight against climate change.

Brown, who has resisted pushes for Tobin tax in the past, said it “cannot be acceptable” that banks enjoy the rewards of their successful trades yet leave taxpayers to pick up the cost of their failures. Governments spent more than $500 billion in the past year bailing out banks from Citigroup Inc. to Royal Bank of Scotland Plc.

The U.K. call to explore a levy on trades was welcomed by French Finance Minister Christine Lagarde, and rebuffed by Canadian Finance Minister Jim Flaherty.

Geithner’s opposition potentially kills off the proposal even before the IMF reports on its feasibility in April. He says the U.S. would prefer to cover the cost of bailouts by forcing banks to repay rescue funds once the crisis is over.

Bailout Pool

Brown listed alternatives to the tax which European Central Bank President Jean-Claude Trichet said may be more acceptable. Banks could pay an insurance fee that reflects their risk, a pool could be established by companies to finance future bailouts or an arrangement formed in which they pay an upfront amount in return for being able to raise money if they run into trouble.

On the transaction tax “I am personally not convinced,” Trichet told reporters. “But there are other options.”

Brown, who didn’t say whether he’d ultimately endorse any levy, said whatever policy was picked would need to be implemented by all financial centers and countries to work.

For Brown, who is trailing in polls less than seven months before the next U.K. election, the comments are also designed to open a divide with the Conservative opposition. While the Conservatives say the biggest risk to the economy is the government’s record budget deficit, Brown has stepped up his attacks on banks.

Economists say the risk is that any levy would eventually be circumnavigated by investors and do more harm than good.

Populist Measures

“The idea of trying to tax transactions is a populist measure that may appeal to those upset with banks, but would be short-sighted,” said Bill Witherell, chief global economist at Cumberland Advisors Inc. in Vineland, New Jersey, which oversees $1 billion in assets.

G-20 ministers did agree to maintain stimulus measures to cement the recovery from the worst recession in six decades.

“A credible medium-term plan to cut deficits is needed to tackle shortfalls in public finances,” Brown said. For now, “a self-sustaining global recovery hangs in the balance.”

Concerns are mounting that emergency measures are already fueling more imbalances. The IMF said traders are probably using the dollar to fund “carry trades” across the world and the currency may still be overvalued after its slide this year.

Undervalued Yuan

Some G-20 officials say China should do more to allow the yuan to appreciate. Japanese Vice Finance Minister Yoshihiko Noda said a more flexible currency would be “desirable” and the IMF said the yuan is “significantly undervalued. Governor Zhou Xiaochuan batted away those calls by saying he doesn’t think his country is facing too much foreign pressure.

To ensure the next expansion is more balanced, the G-20 signed up to a plan in which they will acknowledge the weaknesses in their economies, lay out plans to fix them and subject themselves to an IMF-led examination by counterparts.

They agreed to a timetable in which they will submit reports on their own economies by the end of January, receive a response from the IMF in April and refine their programs for a summit of leaders in South Korea next November.

The G-20 failed to reach agreement on how to fund policies tackling climate change, which may cost as much as 100 billion euros ($148 billion) a year in developing countries alone. Doubts are growing whether an accord can be reached at a United Nations summit in Copenhagen next month.

German Finance Minister Wolfgang Schaeuble said the officials “didn’t get quite as far” as they’d hoped.

“The meeting turned out to be a mostly irrelevant sideshow on the way to the Copenhagen talks,” said Richard Dixon, a director of WWF Scotland, an environmental pressure group.

The policy differences expose how the G-20, anointed by leaders as the leading forum for economic cooperation in September, may find it easier to manage a crisis than a recovery.

“Each day the crisis recedes, the old battle-lines reemerge and it gets tougher to find common conclusions,” said Tim Adams, a former U.S. Treasury official who is now managing director at the Lindsey Group in Fairfax, Virginia.

To contact the reporters on this story: Emma Ross-Thomas in St. Andrews at at erossthomas@bloomberg.net; Simon Kennedy in St. Andrews at skennedy4@bloomberg.net.

Last Updated: November 8, 2009 03:24 EST