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Sunak agrees to tie own hands and stick with Tory ‘triple tax lock’

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Chancellor Rishi Sunak has agreed to tie his own hands at next month’s Budget by sticking with the Conservatives’ “triple tax lock”, which stops him raising the rates of income tax, national insurance or value added tax.

Treasury officials had hoped Mr Sunak would ditch the Tories’ 2019 election manifesto commitment, which stops him using the three biggest tax levers to start curbing a deficit that is expected to top £400bn in 2020-21 because of the coronavirus crisis.

Instead, Mr Sunak has agreed with Boris Johnson that the triple tax lock must be maintained, according to government insiders — a move that could force him to seek increases in other taxes, including corporation tax and possibly capital gains tax.

“To go back on the manifesto pledge would be a betrayal of trust — pandemic or no pandemic,” said one aide to the chancellor. “It was a very significant pledge at the last election.”

One cabinet minister added: “Boris feels he owes it to our core voters and we can’t go back on our core promises, even with the pandemic.”

Some Treasury officials had thought Mr Sunak might abandon the triple tax lock, given the chancellor has spent about £280bn fighting the Covid-19 pandemic. “There is a very good case for saying that Covid-19 has changed everything,” said one.

Mr Sunak showed he was willing to ditch Conservative manifesto commitments in last November’s spending review, when he abandoned a Tory pledge to devote 0.7 per cent of gross domestic product to overseas aid and dropped the party’s promise to lower the burden of public debt.

Given that income tax, national insurance and VAT accounted for 64 per cent of all tax revenues in 2019-20, Mr Sunak will have to look at large increases in taxes that raise smaller amounts in order to secure the money needed to stabilise the public finances.

“Rishi does want to get back to dealing with the deficit and cutting the debt-to-GDP ratio,” said one close colleague of the chancellor. “The levers he has to pull in terms of money coming into the exchequer are limited.”

Although Mr Sunak is expected to announce only limited tax increases in his March 3 Budget — because he wants the economy to emerge from its virus-induced emergency first — bigger ones could follow. He is due to hold another Budget in November.

The corporation tax rate, currently 19 per cent, could initially rise in the March Budget and ultimately reach 23 or 24 per cent over the parliament but still remain competitive with other advanced economies — Mr Sunak’s stated goal.

Senior Conservatives claimed there had been tensions between the prime minister and Mr Sunak over a possible rise in capital gains tax, which many Tory MPs believe would be “a tax on entrepreneurs”.

Mr Sunak is eyeing an increase in capital gains tax after an advisory body last year recommended reform, while Mr Johnson is seen in the Treasury as an instinctive opponent of tax rises.

One government insider told colleagues on a conference call last week that “not for the first or last time, the tensions are real” between 10 and 11 Downing Street.

The Treasury declined to comment on capital gains tax. But allies of Mr Sunak insisted there was no disagreement between the chancellor and Mr Johnson on the issue.

David Gauke, a former Conservative Treasury chief secretary, said: “Rishi is serious and wants to sort out the public finances. I would be very surprised if that was the priority of the prime minister.”

Mr Gauke said Mr Sunak could raise considerable sums by freezing personal tax thresholds — the Tory manifesto commitment only applies to tax rates — as “a sort of stealth tax”.

Other tax-raising options for the November Budget — such as reform of the costly system of pension tax relief or a new property tax — would incur the wrath of many Conservative MPs.

Former Treasury permanent secretary Nick Macpherson has outlined a break with his old department’s opposition to hypothecated taxes by proposing a dedicated “social solidarity charge” to fund the NHS and social care.

Mr Sunak’s interest in future tax rises is a warning to some Tory MPs to rein in their demands for higher spending. He has told colleagues in private meetings that extra spending will have to be paid for.

In a sign of Mr Sunak’s pursuit of fiscal discipline, Conservative chief whip Mark Spencer last week told Tory MPs that there would be serious consequences if they opposed any measures contained in the Budget.



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Analysis

Biden hopes to revive long march of women back into US workforce

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When the pandemic arrived in Levittown, Pennsylvania last year, Nicole Heary hurried to readjust her work schedule as a front-end manager at a grocery store so that she could also look after her children.

The 46-year-old single mother of six, including three kids still in school, signed up for a 4am-to-8am shift so that she could be home in time for their remote learning. In the evenings she returned for another four-hour shift. And every weekend she worked, to keep at least two weekdays free to better monitor her children’s virtual classrooms.

Heary did not lose her job because of the coronavirus crisis, unlike 20m other Americans. But she said the experience revealed just how much her career was yoked to the needs of her children — and had been stifled by a lack of support for working parents in the world’s largest economy. 

“Even though I advanced, I would always have to come back, because as moms, we take the hit,” Heary said. “Whenever something happens, when childcare fails, or whatever happens, it’s always Mom,” she added. 

Heary’s travails — and those of millions of struggling households — are what pushed Joe Biden last week to introduce a $1.8tn scheme to pour government funds into childcare, education and healthcare. He calls it the American Families Plan.

As the US economy roars back from the depths of the coronavirus crisis, with expectations that new payroll data will show almost 1m jobs added last month, Biden is making the strongest effort of any recent president to boost female participation in the labour market and improve conditions for women already in the workforce through direct government spending. 

His plan would expand a tax credit for children, offer subsidies for childcare expenses and childcare providers, fund universal pre-kindergarten education, and guarantee paid family and medical leave — social spending where the US has lagged behind many advanced economies. 

“The challenge is that in the United States, we have a labour force where the majority of women are breadwinners or co-breadwinners for their families. And yet, we don’t have the infrastructure to support families that no longer have a full-time stay-at-home caregiver,” said Heather Boushey, a member of the White House Council of Economic Advisers. “We underwent this massive economic transition, but we didn’t adjust the environment [and] the landscape in which families are engaging in the economy.”

Line chart of CPI for urban wage earners and clerical workers (1990=100) showing US childcare costs have climbed

A bitter and intense political fight is expected over the measures and it is far from clear that Biden will prevail, even if polls show the package is popular.

Republicans are criticising the plan for excessive spending, taxing the wealthy to pay for it and even for ruining the social fabric by encouraging parents — and especially women — to leave their children in the care of others. Josh Hawley, the junior Republican senator from Missouri, has blasted the plan as “lefty social engineering”.

“Our public policies should promote the family rather than hurt it, and we can start by giving parents the power to raise their children as they see fit,” he wrote in an article for Fox News last month. “Democrats . . . try to make family life more affordable by pushing both parents into the full-time workforce while subsidising commercial childcare.”

The argument has echoes of the 1970s, when, under pressure from conservative Republicans, president Richard Nixon vetoed legislation that would have created a national child care network on the grounds that it encouraged Soviet-style “communal” child-rearing.

Conservative economists argue the plans will also be counterproductive. “We know the recipe of what is needed to get women back into the workforce, and that is a strong economy, and we had a strong economy not long ago. The policies that contributed to that were lower taxes, less regulations and less government spending,” said Kelsey Bolar of the Independent Women’s Forum, a conservative policy group. 

Line chart of Labour force participation rate (%) showing US women’s participation in the workforce has stagnated

Yet there is little doubt that the long march of American women into the workplace ground to a halt in recent decades. After rising sharply during the 1970s, 1980s and 1990s, female labour force participation hit a peak in April 2000 at 60.3 per cent and has never reached those heights again.

To Biden administration officials, the shortcomings of the US way have been glaring. “Right now families rely on an ad hoc system, there are different standards across states, millions of families live in what are called ‘child care deserts’ where there isn’t even a slot available or sufficient funds available,” Boushey said. “The quality is not good enough for American children.”

Bar chart of % of GDP showing US lags G7 nations in public spending on family benefits

The international comparisons are particularly troubling for the US. According to the OECD, it spends far less than the average of advanced economies on family benefits, while net child care costs as a share of women’s earnings are much higher than average for developed economies. Meanwhile, the US is the only OECD country without any national paid leave benefit. 

“Every woman that wants to be working should have the ability to do that. I think that’s good for our society,” says Beth Bengtson, founder of Working for Women, a charity. “Everybody that’s worked in trying to help women get into the workforce knows these have been tough issues all along. But no one’s actually put something out there and said, ‘Hey, we’re actually going to address this and here’s a way that we could start tackling it’.”

Nicole Heary

In Levittown, Heary’s younger children — aged 7, 8 and 13 — are now back in school five days a week as the economy reopens. She is not naturally drawn to Democratic policies — in fact, she said she is a life-long Republican who voted for Donald Trump in 2016 and for a third-party candidate in last year’s election.

But she backs Biden on this.

“This act does give me a little hope not only for my children’s future, but also for the future of other women in the workforce,” she said. “You know that there may be things in place that would not necessarily require them to gear their careers towards their children, and have to constantly stop and start.” 



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Pharma industry fears Biden’s patent move sets precedent

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Profits in the pharmaceutical industry are protected by a fortress of patents that guarantee drugmakers a stream of income until they expire. On Wednesday, Joe Biden broke with decades of US orthodoxy and made a crack in the wall.

His administration’s decision to support a temporary waiver of Covid-19 vaccine patents prompted instant outrage in the pharmaceutical sector, which argues that the move rides roughshod over their intellectual property rights and will discourage US innovation while sending jobs abroad.

“Intellectual property is the lifeblood of biotech, it’s like oxygen to our industry,” said Brad Loncar, a biotech investor. “If you take it away, you don’t have a biotech sector.”

Biden’s top trade adviser Katherine Tai said that while the US government still “believes strongly” in intellectual property protections, it supported waiving patents for Covid-19 vaccines to help boost global production of jabs.

The move comes as some countries, including India, struggle to tackle further waves of the virus even as others have rolled out successful vaccination campaigns that are driving down infections, hospitalisations and deaths.

The waiver proposal was put forward at the World Trade Organization in October and has since been supported by more than 60 countries who say worldwide vaccine production must increase dramatically. Washington’s support marks a pivotal step in making the proposal a reality and Tai said the US would engage in negotiations to hammer out the details at the WTO.

Tedros Adhanom Ghebreyesus, the WHO’s director-general, told the Financial Times the decision was a “monumental moment” in the fight against Covid-19. “I am not surprised by this announcement. This is what I expected from the administration of President Biden.”

However, the pharma industry did not expect it; the US has tended to fiercely protect domestic companies’ intellectual property rights in trade disputes. Industry leaders described the decision as a heavy blow for innovation that would do little to boost global production because there is a shortage of manufacturing facilities and skilled employees.

In an earnings call Thursday, Stéphane Bancel, chief executive of Moderna, said a patent waiver “will not help supply more mRNA vaccines to the world any faster in 2021 and 2022, which is the most critical time of the pandemic”.

“There is no idle mRNA manufacturing capacity in the world,” he said.

“The administration’s steps here are very unnecessary and damaging,” said Jeremy Levin, chair of biotech trade association Bio. “Securing vaccines rapidly will not be the result, and worse yet, it sets a principle that companies who invested in new tech will stand the risk of having that taken away.”

Shares in the big makers of Covid-19 vaccines were hit by the announcement. Frankfurt-listed shares in BioNTech closed down 12 per cent on Thursday while Moderna and Novavax pared losses after tanking on Wednesday in New York, trading 2.4 per cent lower and 1 per cent lower, respectively. CanSino Biologics, a Chinese private company that developed a single-shot adenovirus-vectored vaccine with Chinese military researchers, fell 14 per cent on Thursday. Fosun Pharma, which has a deal to supply BioNTech vaccines in China, lost 9 per cent.

Sven Borho, a managing partner at OrbiMed Advisors, a healthcare investment company, said pharma executives feared the administration’s move set a precedent that would make it easier to suspend patents in the future.

“They are worried in the long term that this is a foot in the door — ‘OK, we did it with Covid-19, let’s do it with the next crisis, and the next one’,” he said. “And then suddenly it’s a cancer drug patent that needs to be invalidated. They fear it is a mechanism that sets the stage for actions in the future.”

Peter Bach, director of Memorial Sloan Kettering’s Center for Health Policy and Outcomes, said there was a potential trade-off that pitted the imminent need to contain the pandemic against the risk that drugmakers would be more cautious when investing in pioneering therapies in the future.

“If this action allows for more access and more people to have their lives saved today in 2021 and the consequence is down the road we may not have some new gene therapy for 100 kids, then that’s the trade-off worth discussing,” Bach said.

The battle over intellectual property rights is the first big international patent dispute since a clash over expensive HIV treatments between drugmakers and several countries including Brazil and South Africa in the late 1990s.

Countries struggling to contain the epidemic wanted to make their own generic versions of HIV drugs but the companies who developed them interpreted the moves as a breach of patent agreements, spawning a welter of litigation that frustrated efforts to generate a supply of cheap pills.

Members of the pharmaceutical industry argue that suspending Covid-19 vaccine patents in an effort to boost production abroad will harm jobs in the US biotech sector. Donald Trump’s administration firmly opposed the waiver last year. 

Levin said that US technology “could generate jobs in America but by transferring it abroad there’ll be significant detriment to creating very high quality jobs [here]”.

The mRNA technology used in BioNTech/Pfizer and Moderna’s vaccines is being trialled to treat other illnesses such as cancer and heart disease, and pharma lobbyists have claimed suspending their patents would allow other countries to piggyback on US research breakthroughs.

The long-term consequences are unclear. Umer Raffat, an analyst at Evercore ISI, noted the waiver was not permanent, and that other influential players, including the EU and UK, had not yet supported the Biden administration’s move.

OrbiMed’s Borho said: “This is a unique circumstance. I think this will ultimately be narrow and just on the Covid-19 vaccines. I don’t think the Biden administration wants to undermine broad patents for biotech or the pharma industry.”

Backers of the waiver applauded the US government’s decision as an important step towards boosting the global supply of Covid-19 vaccines.

“The pharmaceutical industry has said the pandemic is no time for business as usual,” said Zain Rizvi, access to medicines specialist at Public Citizen. “Funded by billions in taxpayer dollars, [vaccine makers] have a moral imperative to stop opposing efforts aimed at expanding . . . production.”



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Covid paralyses Asia as western economies prepare for blast-off

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Throughout 2020, Asia’s success in controlling Covid-19 made it the champion of the world economy. While Europe and the US were mired in deep recessions, much of Asia escaped with a shallower downturn or even kept growing.

But as western economies gear up for a vaccine-induced rebound which is set to take their output back to its pre-pandemic scale by the end of this year, parts of Asia are still paralysed by coronavirus. As a result, although the region’s output is already above its pre-pandemic level, slower growth is expected in the coming months.

As it launched its new regional outlook last week, the Asian Development Bank said that the region’s economies were diverging and that more Covid-19 waves were a big risk.

“New outbreaks continue, in part due to new variants, and many Asian economies face challenges in procuring and administering vaccines,” said Yasuyuki Sawada, the ADB’s chief economist.

The ADB projected growth of 5.6 per cent across developing Asian economies in 2021, led by growth of 8.1 per cent in China and 11 per cent in India. But the continued threat of coronavirus means risks to that outlook are skewed to the downside.

“Six months ago, or eight months ago, I would have said Asia is going to be ahead of the game because Asia can control Covid,” said Steve Cochrane, chief Apac economist at Moody’s Analytics in Singapore.

But the picture has changed, with India suffering a severe wave of the virus, and cases still high in countries such as Indonesia, the Philippines and Thailand. Thailand is unable to reopen its crucial tourist industry.

More subtly, countries such as Japan are only controlling the virus with restrictions that keep parts of the economy in hibernation. “Some countries need vaccines to control Covid,” said Cochrane. “Others need it so they can open up to international travel and tourism.”

The promise of more than 6 per cent growth in the US this year, as a result of President Joe Biden’s fiscal stimulus, would normally have Asian exporters licking their lips.

Line chart of GDP rebased (2019 = 100) showing Asian economies were less affected by the early stages of the pandemic

The outlook, however, is more subdued than record US growth would usually imply: Americans already bought plenty of goods during the pandemic, while higher US interest rates would mean tighter financial conditions in Asia.

“Adding stimulus at this stage, from the goods perspective, is a real test of whether wants are insatiable,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics. As the economy opens up, US consumers will probably pay for the services they were denied during lockdown — such as meals out and haircuts — rather than replacing their television again.

There will still be some spillover from the US stimulus, said Beamish, noting that service providers needed equipment, too. “We suspect that people will find new goods to buy and that Asia will benefit from that.” But she added: “We suspect that China will benefit proportionately less from the services recovery than from the manufacturing recovery.”

Whether the extra US demand for goods turns out to be large or small, it is clearly positive. By contrast, higher US interest rates and a stronger dollar would threaten many emerging Asian economies with a repeat of the 2013 “taper tantrum”.

Increased financial integration and foreign currency borrowing mean that the pain of rising US interest rates is quickly felt on the other side of the Pacific.

“A stronger dollar is no longer an unalloyed blessing for Asia,” said Frederic Neumann, co-head of Asia economics at HSBC in Hong Kong. “It helps exports but tightens financial conditions.”

However, inflation is subdued across most of emerging Asia, and the ADB said the risk of a US-induced shock to financial conditions “remains manageable at present”. It said economies such as Sri Lanka and Laos would be vulnerable if such a shock occurred.

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Some Asian economies are well-placed for the next few years, especially Taiwan and South Korea, which are exposed to the semiconductor cycle. “Judging from semiconductor shortages, it doesn’t look like the electronics cycle will break down in the next two or three quarters. That tides them over this rough patch,” said Neumann.

But other Asian economies will find themselves in the less familiar position of relying on domestic demand to grow. One of the biggest question marks is China itself, where first quarter numbers suggest the economy has lost a little momentum.

“Chinese domestic demand still has a way to go,” said Cochrane. “Our forecast right now is for 8 per cent growth in China in 2021, but it depends a lot on policymakers and how quickly they pull back on stimulus and introduce frictions in areas like construction.”



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