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Biden faces first foreign policy test with Russian balancing act

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On only its first full day in office, the Biden administration was facing its first big foreign policy test in the same place that hung over its predecessor for four years: Russia. 

Living up to a campaign commitment, the White House said on Thursday it wanted a straight extension of a nuclear arms control agreement with the Kremlin that faces imminent expiry, an overture former president Donald Trump long resisted.

But the invitation from President Joe Biden to extend the so-called New Start agreement for five years was offered even as incoming officials have condemned what analysts view as some of the Kremlin’s most aggressive anti-western actions in years.

In the days leading up to Mr Biden’s inauguration, US security services uncovered a massive cyber-espionage attack on US government computers they have blamed on Russia, and Moscow at the weekend arrested Alexei Navalny, the opposition leader who has accused Russian spies of nearly killing him in August.

“We are seven years into a US-Russia crisis where Washington has been on the back foot,” said Andrew Weiss, a Russia expert at the Carnegie Endowment for International Peace, dating the start of current tensions between the two countries to Moscow’s 2014 annexation of Crimea.

For Mr Biden, who is committed to restoring American multilateralism, extending the nuclear weapons treaty would mark a sharp break from Mr Trump, who pulled out of most remaining bilateral agreements with Moscow over the course of his presidency.

“New Start is the only remaining treaty constraining Russian nuclear forces and is an anchor of strategic stability between our two countries,” Jen Psaki, the White House press secretary, said on Thursday. 

Despite condemnation of Mr Navalny’s arrest and the so-called SolarWinds cyber attack, the White House has thus far stopped short of any action to punish the Kremlin.

Instead, Ms Psaki said the president had tasked the US intelligence community for its “full assessment” of both incidents — as well as over allegations of Russian interference in US elections and reports that Moscow paid local fighters to kill American soldiers in Afghanistan.

Biden aides have signalled they would prefer to take a harder line with Moscow than either Mr Trump or Barack Obama, who started his presidency with a “reset” policy aimed at warming relations that had iced over after Russian troops invaded parts of Georgia.

Antony Blinken, Mr Biden’s pick for US secretary of state, told his Senate confirmation hearing this week that he supported providing lethal weapons to Ukraine to defend itself against Russia and inviting Georgia, a former Soviet republic, to join Nato — assertive policies that Mr Obama resisted.

Mr Blinken joined incoming national security adviser Jake Sullivan in condemning the treatment of Mr Navalny. Mr Sullivan has called for the immediate release of Mr Navalny, who was arrested on his return to Moscow on Sunday following his recovery from nerve agent poisoning.

“[T]he perpetrators of the outrageous attack on his life must be held accountable,” Mr Sullivan wrote on Twitter.

The new administration faces a difficult balancing act, attempting to both resurrect the cold war-era security architecture Mr Trump cast aside but also hold Vladimir Putin, Russian president, responsible for his increasingly bold anti-western actions.

The risk facing Mr Biden, Mr Weiss said, was that Russia would become “more dangerous and unpredictable” in the face of new American pressure, and the best the new president could hope for was to try to keep things from “spinning out of control”.

But Mr Putin has only made it more difficult to find a way back to normalised relations, Mr Weiss argued, by latching on to Mr Trump’s attempts to undermine Mr Biden’s presidency from inception, adding the Kremlin kept “banging the drum” for the idea that Mr Biden’s presidency was illegitimate. 

New Start may be Mr Biden’s best hope at finding a way to engage Mr Putin. Neither side needs to make any concessions to agree to a clean five-year extension of the 10-year treaty, which is due to expire on February 5. 

The Trump administration repeatedly failed in its bid for a shorter extension, which it sought in order to extract concessions from Russia and enlist China’s inclusion in the deal, which remains unlikely. 

“Extending the treaty’s limitations on stockpiles of strategic nuclear weapons until 2026 allows time and space for our two nations to explore new verifiable arms control arrangements that could further reduce risks to Americans,” said John Kirby, the new Pentagon spokesman.

He added the US needed New Start’s intrusive inspection and notification regime, arguing that its loss would risk weakening America’s understanding of Russia’s long-range nuclear forces.

The Kremlin has already said it was ready to extend New Start. Last year, Mr Putin offered Mr Trump a one-year extension with no new conditions.

“Russia and its president are in favour of preserving this agreement,” Mr Putin’s spokesman Dmitry Peskov told reporters on Wednesday. “If our American colleagues will demonstrate the political will to preserve this pact by extending it, this can only be welcomed.”

Additional reporting by Henry Foy in Moscow and Lauren Fedor in Washington



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Analysis

Investors lambast Sunak’s plans to raise corporation tax

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Shareholders have hit out at the British government’s plans to raise the UK corporation tax rate and warned it could make the country a less attractive place for investment.

Chancellor Rishi Sunak on Wednesday set out plans to increase the corporation tax rate from 19 to 25 per cent for larger businesses in 2023 — the first time it will have been raised since 1974.

The Treasury estimates the move will raise £17bn in 2025-26, but investors expressed concern because of how it could reduce dividend payments by companies.

Richard Buxton, fund manager at Jupiter, an investment group, said Sunak’s proposed increase in the corporation tax rate amounted to a “sizeable bite” out of businesses’ profits.

“When looking at potential profits over a three to five year time horizon investors will have to factor this in, and it will erode earnings and potential dividend growth,” he added.

“In turn, this may at the margin reduce the attraction of UK equities to both domestic and international investors.”

The UK is one of the world’s most popular financial markets for income-seeking investors.

Tom Stevenson, investment director at Fidelity International, a fund manager, said Sunak’s increase in the corporation tax rate would leave the UK just about competitive “but shareholders in the largest, listed companies that will bear the brunt of the measure will not welcome this”.

David Page, head of macro research at Axa Investment Managers, another investment group, said he expected more countries to raise corporation tax rates like the UK, but added: “Does this make the UK less attractive? At the margins yes.”

Nigel Green, chief executive of deVere Group, a financial adviser, said Sunak’s move “will reduce profit after tax and slash the profit available for dividends. This will not go unnoticed by those looking to invest in the UK”.

Sunak said in his Budget speech in the House of Commons that even after his corporation tax reform, the UK’s headline rate would still be the lowest among G7 nations.

But experts said the UK does not look as competitive internationally on other measures, because it is much less generous than other countries — including France and Germany — in the share of capital spending that companies are allowed to set against taxable profits.

An OECD measure of the effective marginal corporate tax rate — the amount of tax a hypothetical company pays on an extra pound of profit — shows the UK is close to the average among developed economies now, but could have one of the toughest regimes among the international organisation’s member nations after 2023.

“The headline rate is not the only thing that matters . . . Mr Sunak is taking a gamble that raising corporate taxes further up the international pecking order won’t have too terrible an effect on investment,” said Paul Johnson, director of the Institute for Fiscal Studies.

Corporation tax rise will give UK relatively high effective rate. Chart showing Effective marginal corporate tax rate, 2019 (%). With the increase in UK's corporation tax in 2023 it will be behind only Australia, Spain and New Zealand in the OECD with the Effective marginal corporate tax rate

The IFS said the extra revenue stemming from the higher rate of corporation tax would in the long run be less than the government’s £17bn a year estimate.

A higher rate would reduce incentives for companies to make investments that would increase profits in later years, it added.

Sunak said on Wednesday the majority of businesses would avoid the corporation tax reform given a rate of 19 per cent would apply to businesses making profits of less than £50,000 each year.

He added the rise in the corporation tax rate to 25 per cent for larger companies in 2023 will be preceded by a new allowance for capital spending, providing a “super-deduction” of 130 per cent on new plant and machinery. 

Dan Neidle, a partner at the law firm Clifford Chance, said the two year tax break would be a strong incentive for companies to accelerate investments that were in the works, although it was not long enough to generate new capital spending that took time to plan.

Tax campaigners TaxWatch UK also criticised the move, saying it would give a tax break to companies that have thrived during the pandemic, including Amazon.

Analysis by TaxWatch found Amazon Services UK, an entity that provides warehousing and delivery services, would have its corporation tax bill wiped out based on its last reported spending on plant and machinery. Amazon declined to comment.

Several smaller companies announced they would bring forward investments as a result of Sunak’s proposed tax break, although larger businesses including defence manufacturer Meggitt said that it would be more difficult to change long term plans.

Tony Wood, chief executive of Meggitt, said the company made “decisions on where to do [the] engineering effort based on what is right for the decade rather than what is right for the two year timeframe”.

But Gavin Cordwell-Smith, chief executive of Hellens group, which owns a paving slab manufacturer in Sunak’s Richmond constituency, said that “as a direct consequence of the [chancellor’s super deduction] announcement, we have already decided to accelerate our growth plans, including a new production line”.

Chemicals maker Christeyns will also bring forward investment plans — and likely increase them — in three factories, said director Nick Garthwaite. 

Some business leaders expressed concern at how Sunak’s planned tax break would only last two years, and be immediately followed by the increase in the corporation tax rate to 25 per cent.

“The chancellor wants a two year investment boom, but we will then go from feast to famine at a time when the consumer recovery might be tailing off,” said one executive.

Additional reporting by Sylvia Pfeifer in London



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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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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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