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How to spend it: EU recovery plan faces bottleneck, economists warn

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Italy and Spain, the two largest recipients of Brussels’ €750bn Covid-19 recovery fund, face administrative bottlenecks in spending unprecedented EU financial support over the coming years, experts and economists have warned.

Proposed grants for EU member states to counter Covid-19 recession, top 10 (€bn)

From mid-2021, the European Commission will begin disbursing borrowed cash from its landmark Next Generation EU recovery fund to member states aiming to jump-start their economies after pandemic-induced lockdowns. Italy and Spain, which are among the EU’s biggest and worst-hit countries, will be the top two recipients of the aid which is designed to fund long-term investment projects and encourage growth.

Map showing How to spend it, EU countries absorption rates based on payments between 2009 and 2015

But the two countries also have a historically poor record in spending EU money — a process known as “absorption” — leading to concerns that the cash from Brussels may not be spent because of bureaucratic and administrative hurdles. Spain has the worst absorption rate of EU structural investment funds from 2014 to 2020 at 39 per cent, while Italy’s is 40 per cent, according to figures from the European Commission. In 2019 alone, Italy had the slowest absorption rate in the EU with only 30.7 per cent of funds being paid out, according to the European Court of Auditors.

Marcello Messori, an economist at Luiss University in Rome, said Italy’s earmarked €208bn of EU recovery money, a combination of grants and loans, was a “colossal opportunity but also an unprecedented administrative and managerial commitment for Italy”.

All EU member states must submit detailed reform plans to Brussels by April, laying out how they plan to use the loans and grants which are designed to boost innovation, digitalisation and facilitate the green transition. Brussels will then scrutinise the reforms and disperse money from the second half of 2021 and until the end of 2023.

“There is still much ambiguity concerning the state of the preparation of the Italian plan and in many cases the scope is too wide,” said Mr Messori. “With over 50 undetailed projects proposed, Italy still hasn’t narrowed down the proposals, but above all has not yet solved the problem of who has to supervise project implementation.”

Spain’s socialist-led government plans to use about 70 per cent of the €72bn of grants due from the recovery funds between 2021 and 2023 on green investment and digital transformation. (It could receive up to €140bn in grants and loans between now and 2026.)

The country’s socialist-led government has also passed a decree designed to help Spain overcome its difficulties absorbing and spending EU funds efficiently. The measure aims to help modernise public administration, increase public-private sector collaboration and allow more to be spent under urgent contracting rules.

Manuel Hidalgo, a senior fellow at the Esade Centre for Economic Policy, said Spain’s large and compartmentalised bureaucracy — with 8,000 entities spread over national, regional and local levels — combined with a complicated public contracting law cause an average lag of a year to adjudicate a contract. “We need to reform the public administration,” said Mr Hidalgo.

As Spain has already made big infrastructure investments in highways and high-speed trains, the government will have to design and oversee many smaller and more complicated investments in digitalisation, low-carbon technologies, and business development, said Juan Viesca, the former general director of European Funds and Projects for the region of Valencia, and current European Funds Director at the Brussels-based Finnova foundation. He points out that poorer countries like Poland have earmarked money for projects like “highways, hospitals, and ports which you absorb faster”.

In addition to receiving money from the emergency Covid-19 relief plan, EU governments will also have to spend a €1.1tn new common budget that begins this year and includes hundreds of billions in cohesion money to fund catch-up growth in the poorest member states. Henning Fahland, head of the Recovery and Resilience Task Force at the German Ministry of Finance who negotiated the budget package, has described absorption as a “challenge to everyone”.

Enzo Moavero Milanesi, former Italian foreign minister and Europe minister, said the country “had never been given the chance to spend a sum of this kind in recent years” but warned Rome’s national recovery plan had yet to “get off the ground”.

“We have not yet turned to the business side, to companies, to firms, so that the concrete projects come directly from the ground. It is difficult to think that everything can be worked out at an administrative level,” said Mr Milanesi. He said the country has suffered from an “endless number of rules and administrative constraints that complicate the market” and also been historically hampered from public spending by having the second highest public debt-to-gross domestic product ratio in the EU.

“In theory, the problem of public debt could be overcome by drawing on European funds. The opportunity is incredible, but if we delay everything these resources may not produce the desired effects”, said Mr Milanesi. 



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Analysis

China’s leaders focus on post-Covid economy at annual meeting

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China’s National People’s Congress, the country’s annual rubber-stamp parliament session, will convene on Friday for a meeting set to focus on a problem many other countries wished they had: how to rein in an economy that has rebounded from the coronavirus pandemic.

“There have been intense discussions about monetary and fiscal policy,” said Wang Jun at the China Center for International Economic Exchange, a government think-tank in Beijing. “The primary goal is to stabilise leverage, but if policy [tightening] goes too far too quickly it may have a negative impact on financial markets as well as the real economy.”

The NPC will run for about a week and is typically a forum where previously agreed measures and policy objectives are formally approved. Last year’s session, however, was dominated by Chinese president Xi Jinping’s surprise announcement of a stringent national security law for Hong Kong after the city was rocked by anti-government protests in 2019.

The gathering also provides the biggest stage of the year for Xi to project his unchallenged grip on both the government and the Chinese Communist party as he prepares for an unprecedented third term in power in late 2022.

China’s post-Covid recovery contrasts starkly with the situation in the US, where the pandemic has claimed the lives of more than 500,000 Americans and President Joe Biden is pushing Congress to pass a $1.9tn economic stimulus package.

China annual GDP growth rate 2018-2020

Guo Shuqing, one of China’s most powerful financial regulators, warned this week about the dangers of “extremely loose monetary policies” in the US and other pandemic-wracked economies, saying the measures could cause “too much fluctuation” in Chinese financial markets.

He added that China’s property market was still afflicted by “relatively large bubbles” and suggested lending rates would “rebound” this year. Guo, who heads the banking regulator and is also the most senior party official at China’s central bank, pronounced late last year that the real estate sector was the country’s “greatest grey rhino in terms of financial risk”.

Guo’s comments sparked a sell-off on regional markets, illustrating the difficult balance he and other financial officials must attempt to strike. Stimulus measures rolled out by Chinese president Xi Jinping’s administration early last year helped spur investment but also propelled debt levels in the world’s second-largest economy to about 270 per cent of GDP.

“While the leadership feels confident about the economy’s trajectory, there is still a lot of uncertainty,” said Andrew Polk at Trivium, a Beijing-based consultancy. “Authorities need to find a way to unleash consumption and pick up slack from industrial production and real estate investment.”

Shuang Ding, chief China economist at Standard Chartered in Hong Kong, said Beijing was likely to reduce its budget deficit to 3 per cent of GDP, down from 3.6 per cent last year. But he also forecast the Chinese economy would grow at least 6 per cent year on year, with “substantial room for outperformance”, and create 11m jobs.

“The most pressing economic issues are how to withdraw from last year’s expansionary fiscal policy and how to increase consumption,” said Jia Jinjing, an economics professor at Renmin University in Beijing. “The central deficit budget will be lower than last year but still above 3 per cent. We cannot rely too much on increased debt to spur consumption.”

China retail sales growth

NPC delegates will also formally pass the party’s 14th five-year economic plan, which is focused on achieving “self-reliance” in a number of critical technology sectors as well as ambitious environmental goals, including reaching peak carbon dioxide emissions by 2030 and net-zero emissions by 2060.

The NPC session in 2020 was delayed for almost three months by the pandemic and fixated on the imposition of the national security law on Hong Kong.

This year, it is likely to approve measures that will further reduce the pro-democracy camp’s representation in the city’s legislature. It is also expected to unveil rules consolidating Beijing’s hold on an already pro-establishment “election committee” that chooses Hong Kong’s chief executive.

Dozens of Hong Kong democracy activists, including publisher Jimmy Lai and jailed student leader Joshua Wong, have been charged with alleged offences of the security law. In a speech last month, Xia Baolong, head of the Chinese government office responsible for Hong Kong, singled out Lai and Wong as “extremely vile anti-China elements”.

“There doesn’t seem to be any end to the crackdown,” said Willy Lam, a China politics expert at the Chinese University of Hong Kong. “Xi has made up his mind to snuff out Hong Kong’s opposition movement altogether. For ordinary people, Beijing will insist on ‘patriotic education’ in the schools and media.”

A Chinese academic who advises Beijing on Hong Kong issues said the territory had been “too unbridled” prior to last year’s passage of the national security law. “The central government had no other option,” said the academic, who asked not to be identified. “The Hong Kong opposition overestimated its power.”

Additional reporting by Xinning Liu in Beijing



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Analysis

Sunak goes big and bold to try to repair the public finances

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Chancellor Rishi Sunak’s Budget was big, bold and broke many longstanding records for the public finances.

At an estimated £355bn, the level of UK government borrowing forecast for 2020-21 is due to be the highest since the second world war, reflecting the severity of the coronavirus crisis. It highlights the sheer scale of emergency state support for companies and households during the Covid-19 pandemic.

The tax rises announced on Wednesday by the Conservative chancellor for the middle of the decade — affecting businesses and individuals — will be the largest since 1993. The increases will raise the UK tax burden to its highest level since Roy Jenkins was the Labour party chancellor in the late 1960s.

Justifying his approach, Sunak told the House of Commons: “Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

As far as the public finances are concerned, the March 3 Budget will become known as a “give then take” affair that will reshape the relationship between the state and the private sector for many years ahead.

And the figures in the Budget documents confirm the coronavirus crisis has utterly transformed the public finances for the worse.

At the March 2020 Budget, when the UK had little clue about the enormity of the pandemic, the Office for Budget Responsibility thought the government would borrow £55bn in 2020-21.

Sunak, who unveiled a £12bn support plan for the economy in what was his first Budget, has since had to add huge amounts of public spending in 16 major announcements.

On Wednesday, he outlined another £40bn of support, bringing total spending to £344bn, according to the OBR: roughly 16 per cent of gross domestic product, and well above the average of 13.3 per cent among advanced economies.

Chart showing the 16 major announcements since the last Budget have increased coronavirus support

It is this spending, alongside a loss of £90bn of expected tax revenues, that is set to raise the level of government borrowing to the highest level in peacetime.

In 2021-22, the government is still planning to spend £93bn on virus related support, mostly going to the NHS, but with large sums also for continued support for companies and households.

Karen Ward, strategist at JPMorgan Asset Management and a former adviser to Philip Hammond when he was chancellor, said Sunak was wise to keep splashing the cash in the next financial year. “The chancellor has rightly erred on the side of an extension that is potentially too long, rather than one that is too short,” she added.

With the colossal borrowing, underlying UK public debt, excluding temporary Bank of England schemes, is set to jump from a pre-pandemic forecast of 73 per cent of GDP by the middle of this decade to 97 per cent in the latest OBR prediction.

The 24 percentage point rise in the core debt burden is the second large jump in a little over a decade following the fiscal shock associated with the 2007-08 financial crisis. At about 100 per cent of GDP, UK public debt is now at its highest level since the early 1960s, when it was gradually coming down following the second world war.

Chart showing that public debt is set to rise to levels not seen since the early 1960s

This Budget was not just about fiscal support in 2021-22, but also stimulus to power the recovery, according to Richard Hughes, OBR chair. He said Sunak’s £25bn “super-deduction” in corporation tax would “stoke the recovery” and “encourage businesses to bring forward future investment into the next two years”.

But after 2021-22, the giveaways stop, and Sunak becomes the revenue raising chancellor, with very large increases planned in corporation and income taxes.

The moves risk damaging the UK’s international standing. In 2018, the OECD said the UK taxed corporate profits below the rich country average. Britain collected 2.6 per cent of national income through the levy, compared with the OECD average of 3.1 per cent.

By 2025-26, the OBR projections suggest UK corporate taxes will generate revenues above the OECD average, although Hughes said this level was “one [the UK] seldom sustained for very long in the postwar period”.

Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said Sunak’s corporation tax rise was a significant risk. “For all the rhetoric about it leaving the headline rate here below that in other G7 countries, our effective tax rate will be relatively high,” he added.

The tax rises will tackle the high level of borrowing, however, according to the OBR.

It projects the increases will lower the current budget deficit in 2025-26 from £37bn, had Sunak done nothing, to £1bn, almost balancing the government’s books excluding public investment. This is a core ambition of ministers.

Chart showing Rishi Sunak’s spend then tax Budget to balance the books

Some economists thought Sunak should have been more explicit in setting new targets for the public finances.

Hande Kucuk, deputy director of the National Institute of Economic and Social Research, a research organisation, said the Budget needed “a comprehensive fiscal framework to build confidence in a sustained recovery given the significant uncertainty regarding the long-term effects of Covid-19 and Brexit”.

Other economists were more forgiving since there are huge uncertainties hanging over the public finances. The path of the pandemic is perhaps the largest, but Sunak also has to worry about the possibility of increased debt servicing bills if interest rates rise, and whether he can cut spending as he plans when the virus subsides.

Torsten Bell, director of the Resolution Foundation, another think-tank, was sceptical the chancellor would be able to reduce departmental spending.

The Budget documents showed a stealthy £4bn a year cut in spending alongside the tax rises. “He’ll end up spending more than that,” said Bell, adding this would add to pressure to proceed with additional tax rises.

But Sunak is an optimist, and hopes the uncertainty will go in his favour. If the economic recovery is sufficiently rapid, the chancellor will be looking to the OBR to cut its estimate of a 3 per cent long term hit to the economy from coronavirus.

And if that happens in a future Budget, Sunak can look forward to the possibility of tax cuts before the next general election.



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Analysis

A pivotal moment for Scotland’s independence champion

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Nicola Sturgeon, Scotland’s first minister, has credited her former mentor and predecessor Alex Salmond with making her career.

Sturgeon’s appearance on Wednesday morning before a parliamentary inquiry into her Scottish National party government’s handling of harassment complaints against Salmond will be a potentially pivotal moment for her, and her dream of leading Scotland to independence from the UK.

At an extraordinary appearance before the parliament committee on Friday lasting almost six hours, Salmond accused Sturgeon’s closest associates of maliciously colluding to drive him from public life and his former protégée of breaching the ministerial code by intentionally misleading parliament — potentially a resignation matter.

Sturgeon denies the allegations. But the televised session must have made difficult viewing for the formerly shy working-class girl from Ayrshire in south-west Scotland who has, in recent years, helped bring her nation closer to independence than at any time since the 1707 union with England that created Great Britain.

When Sturgeon succeeded Salmond as first minister in 2014 — in the aftermath of a referendum in which Scottish voters backed staying in the union by 55-45 per cent — she was fulsome in praise of her predecessor. “Without the guidance and support that Alex has given me over more than 20 years, it is unlikely that I would be standing here,” she told the Scottish parliament.

But Salmond was hardly the first figure in the SNP to spot Sturgeon’s talent. Aged just 16, Sturgeon in 1987 timidly rang the bell of then SNP general election candidate Kay Ullrich to offer her support. Four years later Sturgeon was a veteran student campaigner and, according to biographer David Torrance, Ullrich was presciently describing her to party comrades as the future “first female leader of the SNP”.

Sturgeon, who describes her nationalism as more “utilitarian” than “existentialist”, has said her early interest in politics was driven by anger at the social cost and deindustrialising impact of the policies of late UK prime minister Margaret Thatcher and the powerlessness of Scottish voters to resist them.

After studying law at Glasgow university, she became a community lawyer and a rising SNP star. In 1999, she was elected to the new devolved Scottish parliament and by 2004 she was a contender for the party leadership. But she accepted the junior place on a joint ticket after Salmond, who had already led the SNP from 1990 to 2000, entered the race.

Sturgeon, right, with Kay Ullrich in May 1999 © Mirrorpix/Alamy

Robert Johns, politics professor at Essex university and author of a book on the SNP’s rise, said Sturgeon was a big factor in the party’s fortunes as deputy leader from 2004 and as deputy first minister of Scotland after it won power in Edinburgh in 2007.

“She’s got better and better at being seen as a normal human being and becoming likeable, while at the same time not losing that reputation for competence,” Johns said.

After playing a central role in the 2014 referendum, which the pro-independence Yes campaign lost by a much smaller margin than expected, Sturgeon took over an SNP energised rather than dispirited by defeat.

Today, the first minister enjoys approval ratings unmatched by any other UK party leader despite 14 years in government and a patchy record on key policies.

Voting with her husband Peter Murrell in Glasgow in 2019 © Jeff J Mitchell/Getty Images

An international education survey in 2019 found Scotland’s progress in narrowing the attainment gap between advantaged and disadvantaged pupils had actually slowed since Sturgeon made the issue her top priority four years earlier. And the SNP’s reputation for governing competence has been dented by serious problems with construction and equipment at flagship hospitals in Edinburgh and Glasgow. 

Sturgeon’s instinctive caution and mastery of detail — on display at near-daily televised briefings — appears to have served her well during the coronavirus pandemic. Most voters think she has handled the crisis better than UK prime minister Boris Johnson. While Covid-19 deaths in Scotland are high by international standards, they have been somewhat lower than in England.

But Sturgeon’s determination to keep a tight rein on the SNP and her reliance on a small inner circle of confidants, which includes her husband and SNP chief executive Peter Murrell, has fuelled discontent among some party colleagues. Formidable self-discipline was an ingredient in the once anarchic SNP’s rise, Johns said, but now the party felt “over-professionalised”. “It’s more top-down than it ever used to be,” he added.

‘The Alex Salmond Show’ on RT © Russia Today

Some in the SNP also believe that Sturgeon has been too cautious to take full advantage of a rise in support for independence since the UK in 2016 voted for Brexit despite 62 per cent of Scottish voters backing staying in the EU. Tensions in the party have also grown over her plans to make it easier for trans people to receive official recognition for the gender they identify as.

But it is the rift with Salmond that now threatens Sturgeon’s hopes for a renewed push for a second independence poll.

Relations between the two had already been tested by Salmond’s decision to host a chat show on Kremlin-backed Russian broadcaster RT when in 2018 two civil servants made formal complaints against the former first minister dating to his time of office.

In 2019, the Scottish government accepted that its investigation into the complaints had been “tainted by apparent bias”. At a criminal trial last year, Salmond was acquitted of all of the 13 sexual offences charges against him.

Salmond has accused Murrell and Sturgeon’s chief of staff Liz Lloyd of involvement in a “concerted” effort to damage his reputation “to the extent of having me imprisoned”. They deny the allegations.

Salmond and Sturgeon present the white paper for Scottish independence in 2013 © Jeff J Mitchell/Getty Images

Salmond has also accused Sturgeon of breaching the ministerial code by misleading parliament about when she learned of the complaints against him and by failing to report meetings between the two. And he says she has presided over a broad failure of “national leadership”.

They are charges that, if proven, could prove politically fatal, but Sturgeon — a formidable debater — says she is “relishing” the opportunity to set the record straight on Wednesday.

With crucial elections for the Scottish parliament just nine weeks away, her committee appearance could have a major impact on the UK’s constitutional debate, said Mark Diffley, a consultant on Scottish public opinion.

Polls suggest the SNP has been on course to go from minority to majority government, removing its need to rely on the pro-independence Scottish Greens for support on constitutional matters and providing a strong mandate to demand UK approval for a second referendum.

But securing a majority in the proportionally representative Scottish parliament is a difficult feat that would be made harder if Sturgeon was not seen to effectively rebut Salmond’s allegations, Diffley said. “She can, with a good performance, recover some of the damage,” he added. “It’s a huge deal for her — and she knows it.”



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