Run hotter for longer
There was no lack of ambition in the communique by finance ministers and central bankers after the G7 meeting. They want the world economy to run hotter for a bit to ensure a well-entrenched recovery. "We commit to sustain policy support as long as necessary and invest to promote growth, create high-quality jobs and address climate change and inequalities," it said.
US Treasury Secretary Janet Yellen reinforced the message in her press conference that more needs to be done to promote growth. Now is not the time to cut back. Only "once the recovery is firmly established” would the Fed need to “ensure the long-term stability of public finances,” she said.
The sole genuflection to the central bank governors as co-signatories to this bullish manifesto lay in the neatly-balanced statement: "Monetary policy will continue to support the economic recovery from the pandemic and ensure price stability".
Tackling climate change and environmental issues
The core of the statement was a long and detailed approach to tackling climate change and biodiversity loss. They wish to price carbon to cut its use. They seek to mobilise "the trillions of dollars of private finance needed". They want much better climate change and sustainability financial reporting, which should rank alongside traditional profit and loss reporting.
They will also set up an International Standards Board prior to the United Nations COP26 climate change conference in November to set out and police the transparency needed. There will also be a report from the Taskforce on Nature related financial disclosures to complement the climate change work. Banks will be expected to take all this new data into account when determining credit policies and advising companies.
Helping low-income countries and IMF Special Drawing Rights
The G7 offers more financial support to low-income countries. The main initiative is the putative $650bn of new special-drawing rights (SDRs) to be issued by IMF. They want to see this created by the end of August. That part of it which goes directly to the lower-income countries will help them with poverty relief and economic recovery. The larger sums that will be allocated to the richer countries can be brought to bear on some of these world problems. The G7 is looking at ways the new SDRs can help finance the vaccine programmes and provide global support for climate change measures. It will be a useful addition to world liquidity and increases spending power by governments.
Towards a world corporate-tax system
The G7 announced a breakthrough in moving to a world system of corporate taxation. The scheme sketched relies on twin pillars. Pillar 1 requires all participating countries to charge a minimum 15% tax rate, well below the initial 21% Biden proposal and above the rates charged by all major countries.
Pillar 2 seeks to redirect some profits of the largest and most profitable companies from taxation in low tax or tax haven locations to taxation in the countries where the activity takes place.
The formula says that 20% of profits over a threshold of a 10% return can be redirected. There is, as yet, no agreed detailed text, and these proposals will anyway need to be considered by the G20 for by in and ultimately by the OECD and wider world community.
Were they to emerge in a clear legal way, countries such as the UK that have imposed their own digital services tax would be expected to repeal and replace. The low minimum rate and the remaining issues of how to define the profits to reallocate make this a watered-down proposal. It is not going to have nearly so much effect on the net profits of leading companies as the original idea.
A dislike of private-sector stablecoins
The G7 reaffirmed its dislike of private stablecoins and said no such project should be allowed until legal, regulatory and oversight issues had been sorted out. Meanwhile, G7 members continue to work together on determining what a Central Bank Digital currency might look like – and what it might do.
The nature of Biden’s leadership and collaboration in the Big 7
The significance of all this rests in the way the USA has emerged under President Biden as not merely a collaborator but as a leader of the G7 allies. His main aims are to promote faster recoveries, purge the world of Covid-19 and accelerate the green transition. All this takes a lot of dollars and will generate some inflation as well. The leaders have work to do discussing just how far their spending on vaccinating the world and “building back greener” can go.
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What is the G7 Summit trying to achieve?
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