Today Britain hosts the major advanced economies at a meeting of the G7 Finance Ministers and central bank govenors. Our task is to nurture the recovery. Our challenge is not to falter in the difficult steps we need to take to make that recovery sustainable and lasting.
Our meeting takes place at a time of greater economic stability, thanks to policy action taken. Markets have calmed, and there are signs that this is feeding through into greater confidence. But we cannot take the global recovery for granted.
We must guard against weakening our resolve to confront the collective challenges we face.
The G20, which includes both the advanced and emerging economies, is rightly the primary economic forum for setting the global rules of the game. But the G7 still represents around half of the world’s economy and constitutes major economic firepower.
I want to use our chairmanship to return the G7 to its roots: a forum for the advanced economies to come together for informal discussions, with less focus on lengthy pre-prepared communiqués and read out statements.
I see three priorities for the G7 – focussed on the three pillars of monetary activism, fiscal responsibility, and structural reform.
Most urgently, to nurture a global recovery we are seeing increasing monetary activism. Recovery from the financial crisis has required central banks to develop more powerful tools to support demand. The US Federal Reserve and the Bank of Canada have used forward guidance – and the updated remit I set at the Budget for the Bank of England made clear that the MPC may similarly wish to issue explicit forward guidance.
The Federal Reserve, the Bank of England, and the Bank of Japan have all undertaken Quantitative Easing – and the Bank of Japan recently announced it would double its QE programme. The ECB has recently cut rates and raised the prospect of unconventional measures should conditions deteriorate further.
The G7 is an opportunity to consider what more monetary activism can do to support the recovery, while ensuring medium-term inflation expectations remain anchored. This may involve targeted interventions to support lending in weak sectors – much like the UK’s recently expanded Funding for Lending scheme. Mario Draghi has said that the ECB will consult on initiatives to promote SME lending, particularly in the periphery.
Of course, government deficit and debt levels are too high in a number of G7 economies – including the UK. We should reaffirm our resolve to deal with these and there are more areas of agreement than is commonly assumed.
We all agree on the importance of medium-term consolidation; on targeting the structural deficit, as acknowledged by the European Commission last week; and that the pace of consolidation should reflect national economic conditions.
Restoring the public finances and monetary policy are important responses to our economic environment. But fundamentally, we need structural reform if we are to improve living standards in the long-term.
We should use the G7 to strengthen the political will to undertake necessary reforms. There is a defeatist myth that there is little scope for coordinated international action – that after the failure of trade talks and problems in the EU, industrial nations have been left to their own devices. I reject that.
There is an ambitious, international economic plan ready to be seized – if we have the political will. This plan would make our economies more productive, increase investment, and create jobs. Here are some of its components.
First, free trade. The stalling of the World Trade Organisation talks have been a disappointment – let’s hope a new Director General will provide new impetus. But we don’t have to wait for that. Free Trade agreements with the EU and India and Canada could be completed this year. A Transatlantic Trade and Investment Partnership between the US and Europe is a huge opportunity, representing a third of world trade. And the Trans-Pacific Partnership negotiations this month provide an opportunity for agreement after 4 years of talks.
These are huge prizes. The EU Free Trade deals alone would add £200 billion to EU GDP and create 2 million jobs. No country knows more than Britain the role of trade as an engine for global growth, and the G7 represents an opportunity to build momentum ahead of the G8 leaders meeting in London next month.
Second, we need to maintain momentum in addressing the structural weaknesses in our banking system. If the banking system remains impaired, financial instability will persist, and it will continue to hinder the lending so vital to the wider economy.
So we must strengthen the capital position of banks. We must fulfil our commitment to end “too big to fail” - and do this consistently so that countries don’t face a competitive disadvantage if they do the right thing.
Third, a tax system that supports global investment. We all have national tax systems, and want to keep it that way. But companies trade internationally, and the internet and new technology have removed barriers to economic activity. This has been a boost to jobs and productivity, but have left our twentieth century corporate tax rules struggling to keep up.
Britain has reduced its corporate tax rate to 20 per cent. This is attracting global companies to the UK. But Britain has also been clear that low as these taxes are, they do need to be paid.
OECD research shows that some corporates can use, perfectly legally, loopholes in the global tax rules to avoid almost any tax in any jurisdiction. Working with the US and Europe, we’ve already adopted tough tax transparency rules that should now be adopted as a new global standard.
We’re now seeing what collectively we can do to improve the international corporate tax rules, including better global reporting to tax authorities in both the developed and developing world.
The world’s most advanced economies should show leadership – and ensure it is on the agenda of the G20 this year and next.
Countries can do much together to improve our economies. We are not powerless victims of global forces – but can be masters of our own destiny. We have shown political will to tackle problems at home – and I believe the UK is further along that road than many.
Now we can together show the political will to nurture global economic recovery. We have more in common than separates us. The G7 can be a catalyst for collective action to the benefit of all.