In an outburst of exuberance, the International Monetary Fund (IMF) upgraded its view on global economic prospects, raising its 2021 estimate to 6%, moderating to 4.4% in 2022 and compared with a 3.3% contraction in 2020. The US economy, already a quarter of total global GDP, is expected to grow by 6.4% in 2021; arguably the IMF is playing catch-up with independent economists whose consensus estimates for the US have been accelerating to north of 6% since the day in January when the Democrats took the two remaining Senate seats in the Georgia state election to give President Biden a clean sweep of the White House, the House of Representatives and, with the casting vote of Vice-President Kamala Harris, the Senate itself. Nevertheless, what is more remarkable is that with US GDP ‘only’ having shrunk by 3.5 % in 2020, in nominal terms by the end of this year the American economy is now expected to be bigger than it was at the end of 2019. Few western developed market economies will emulate that.
Similarly, for the UK, IMF estimates have risen by 0.8 of a percent to 5.3% for 2021 followed by 5.1% next year; these compare with the recent UK Office for Budget Responsibility (OBR) estimates of 4.6% and 7.2% respectively. Whichever of the IMF or the OBR is correct is largely irrelevant: in the context of normal trend growth of 1.5% these are extraordinary numbers. However, such rates of growth (as distinct from recovery) are not only unsustainable but are not wanted to be sustained: prolonged mid-single digit growth rates for a mature, developed economy are a sure sign of overheating leading to the risks of both a boom-bust cycle and the potential for runaway inflation. While the period 2023-25 is still some way off, only last month the OBR was forecasting UK growth rates normalising for the final three years of its five-year outlook to 2025 at around 1.6-1.7% pa, a Goldilocks rate, not too hot, not too cold (though something nearer 2% would be just right).
Although both the US and the UK have got there by different routes (the US largely eschewed the European-style “extend-and-pretend” employment and business support schemes, on the other hand for better or worse amid the chaos of Trump’s response, lockdowns were shorter and less draconian), the springboard for recovery has been won at a price: the accumulation of significant sums of national debt now exceeding the size of their respective economies; neither government is inclined to rein in expenditure, indeed in the US, Treasury Secretary Janet Yellen’s foot is pressing the economic accelerator to the boards. Remember the prevailing sentiment in the US is to “Go Big!”. The trick for the central banks is to ensure that such foot-to-the-floor policies do not precipitate the car spinning off the road to land in a ditch.
But what remains clear is that, however resilient economies are proving, and however positive the direction of travel, forecasts need to be treated as estimates rather than absolutes. Wretched Covid-19 is still making waves as continental Europeans, Indians, Brazilians, Chileans and many more will tell you as cases, hospitalisations and deaths spike again. While the development of global vaccines is literally a shot in the arm, it is noticeable that nagging doubts about viral mutation, vaccine efficacy and safety, efficiency of administration, the risk-aversion of politicians and the willingness among scientists to pour copious buckets of cold water on any prospective joy have the combined potential to chip away at confidence. The new, post-Covid ‘normal’ may well not be the same as the old, pre-Covid ‘normal’ however well we adjust to it; in microcosm in the UK it is neatly encapsulated in two arguments: one about face masks in schools; the other about Covid passports, the risk of a two-tiered system and potentially a significant minority being increasingly marginalised from society. This is not a debate confined to the UK. At its most basic, as we have said on many occasions, economic prospects are as much determined by confidence; confidence remains as ephemeral as it is intangible.
An interesting development this week is the nearing of an international tax agreement spear-headed by Janet Yellen as French and German finance ministers give it their blessing in principle. Corporation tax is an immensely complex issue when international companies are trading in and operating from multiple jurisdictions; tax rates reflect a myriad of national interests ranging from needing income to pay the bills, to offering incentives to attract inward investment; implementing economic and political ideology and encouraging competitiveness and exercising the levers of control or freedom; to name but a few.
Over the past few years however, it has become clear that the growing power and influence of the big global ‘tech’ companies, their increasing market dominance when seen in the light of how much (or, more likely, how little) tax they pay under which jurisdiction and their ability to find loopholes through which to mitigate tax liabilities, has become a political hot potato. It is fuelled by a certain amount of jealousy that so many of these corporate successes eating everyone else’s lunch are American. How to tackle it has been as close to unravelling a taxation Gordian Knot as is imaginable.
Yellen’s proposal therefore is an internationally agreed minimum corporate tax rate in the context of Joe Biden’s explicit aim of un-reforming Donald Trump’s 2018 reforms of US taxes including his target of pushing the US headline corporate rate back up from 21% to 28%. The new harmonised level has not yet been agreed. However, one can safely bet the minimum is not going to be set at Singapore’s 17% let alone Ireland’s 12.5%. Whatever the political ideology of the new Democrat administration and its aims for redistribution of wealth and sharing the burden, the need to pay the bills while the Treasury is “going big” on fiscal expenditure is a strongly motivating factor. But self-interestedly, Americans do not want the rest of the world to take advantage of them. Dan Neidle, tax partner in the law firm Clifford Chance, summed it up succinctly in the FT: “People mustn’t mistake Biden’s desire to get more tax from US corporates with a desire to let other countries get more tax from US corporates.” Nevertheless, one to watch, notably for big, international companies with unusually low tax charges, potentially about to see their wings clipped.
With so much global trade denominated in dollars, the world’s principal reserve currency, the Americans can to an extent force the argument simply by excluding or impeding those who choose to be non-compliant from the global dollar clearing system. However, waving the big stick, America should be careful of playing the game of unintended consequences. As we have written about before, actively led by China colluding with countries such as Russia and Saudi Arabia in oil markets, a long-term orchestrated programme to disintermediate the US Dollar, to dilute its influence, is under way. Tip in the additional spice of crypto currencies as a yet small but potentially interesting further destabilising factor and messing about with international tax rates for domestic political ends could have unintended longer-term economic and competitive consequences for the US.
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