The US used to fear federal spending, but Biden knows the mood has changed

Figcaption The US Used To Fear Federal Spending But Biden Knows The Mood Has Changed
Posted at: Author: Rain TV UK

F rom a European perspective, Joe Biden’s plans for a $2 trillion boost to spending on infrastructure is not a radical statement of intent. The money will be spread over eight years and raise the federal budget on capital projects by about 1 percentage point a year.

And the US is starting from a very low base. Congress levies federal taxes that amounted to a little more than 16% as a proportion of national income (GDP) in 2019 and the total level of taxes, taking into account state and local charges, is 24.5% of GDP. By way of comparison, the UK’s share of tax levied as a percentage of GDP is around 37% and in France it is 46%.

One reason for the disparity is set out in the White House document – the American Jobs Plan – which hammers home how “public domestic investment as a share of the economy has fallen by more than 40% since the 1960s”.

And some of the projects are so basic, so fundamental to the running of a modern economy, that it is difficult to see why anyone would protest at a little more being spent to turn something that does not function into something that does.

One example is the modernisation of US water and electricity systems, eliminating lead from water supplies and reducing power cuts, which recently brought Texas to a standstill during a winter freeze.

But according to business lobby groups this is off-the-scale radical, though their objections are not so much to Biden’s “mission upgrade” as to the way he’s planning to pay for it – through an increase in corporation tax.

In effect, Biden will unwind a large portion of Donald Trump’s legacy by increasing that tax from 21% to 28%. This is still shy of the 35% levied under Barack Obama, but will be more painful than it seems because Trump, in a quid pro quo with business, also eliminated some tax reliefs that will not be reinstated.

Biden’s officials want the legislation to go through Congress in the autumn and until then are open to hearing how else the infrastructure plan – which will also upgrade broadband networks and increase research and development spending – can be paid for.

Some business leaders have said they expected a broader tax levy, and for some of the cost to be passed on to consumers. There is also concern for companies damaged by the pandemic and how they will pay off debt accumulated over the past year.

Most likely, there will be some compromises that involve an increase in some of the reliefs that, say, allow manufacturers to offset investment costs.

Yet the link between more modern infrastructure and the benefits to business are clear. While businesses might bleat about the extra burden on them, the White House can point out that only profitable firms will pay a higher levy and debt repayments can, as always, be written off against revenues.

And Biden is planning a tax increase on better-off Americans, possibly in a bill to run alongside the jobs plan, which will tackle health and welfare inequalities.

It all adds up to a radical shock for a conservative country that has spent the past 40 years in thrall to a neoliberal agenda that places its faith in private sector businesses to drive growth while government sits on the sidelines.

Climate change and the pandemic have weighted the scales back in the government’s favour, and the public have recognised that. The polls show widespread support for major and consistent government action, especially among those who have suffered personally, have lost a loved one or know of someone who died during the pandemic.

Biden is grabbing his moment. The Democrats have the votes in Congress. The US, for the first time in many years, is shining a light for the world.

Easing foreign travel rules will give airlines and airports a break too

The last time Britons were permitted to take an Easter holiday abroad, some 2 million fled the country. This year, the drawbridge is up. The return of colder weather for the Easter weekend may be focusing the minds of politicians. Boris Johnson has indicated that there will be an update on international travel rules on Monday, a week earlier than planned.

The reassessment cannot come quickly enough for Britain’s airlines and airports: most are semi-mothballed, but still incurring costs and uncertain of their future. Heathrow has urged the government to rejig quarantine rules to make more safe destinations accessible. Others are questioning the science behind repeated testing – which seems designed to simply deter travel rather than prevent transmission.

Many hope the early announcement heralds a change to the rules, with the government, this time, deciding to give ample notice. As scientists have signalled, the battle against Covid may never end: this is a virus that now can only be kept at bay, rather than vanquished. Better, then, to manage the risks at a Mediterranean taverna, or sunkissed beach, than lurk in the British chill.

Granting the right to go away on holiday can surely only play well with the public, and will also let the government wriggle off an uncomfortable hook. Rishi Sunak’s equivocation over special financial assistance is bitterly remembered in the aviation industry, a sector whose Covid downturn was, according to the Office for National Statistics, worse than any other’s. Yet ministers had valid reasons to hesitate.

Talk of a green recovery for aviation bears little scrutiny, and it’s hard to make a case for taxpayer subsidies, given the viability and ownership of some businesses. Most have been hit hard, but survive. Once travel is allowed, they can once again bank on holidaymakers instead.

Timidity on sub-prime lenders cast poorer borrowers adrift

The financial watchdog has rightly been criticised by campaign groups for its approach to regulating sub-prime lending since it took over the oversight of consumer credit in 2014.

Officials at the Financial Conduct Authority (FCA) spent two years considering whether to bring consumer credit inside the financial compensation scheme – which is funded through an industry levy – before deciding against it in 2016.

The fact that the likes of Wonga are outside the compensation scheme meant the firms themselves – their shareholders and bondholders – and not the financial services industry at large, would be liable for mis-selling claims.

This conclusion was accepted by Andrew Bailey, who was chief executive of the FCA between 2016 and March 2020, before becoming governor of the Bank of England.

There were concerns at the time that the major banks and insurers – viewing sub-prime lenders as akin to loan sharks, bound to be constantly found mis-selling loans – had leaned on the FCA to deny those lenders access to the scheme’s funds.

Bailey brought in a 50% cap on interest rates that was supposed to bring sub-prime lenders to heel. The financial services sector can be accused of many things, but not of lacking entrepreneurial innovation. A company called Amigo Loans crept in under that interest-rate ceiling with guarantor products that share the risk with the borrower’s friends and family. Soon, though, Amigo was submerged under thousands of complaints, and last week told a court it would file for administration unless it was allowed to escape around 90% of the claims against it.

If the compensation scheme had been in place as a backstop, the FCA might have stepped in at the first whiff of claims against Amigo for mis-selling. As it is, there are potentially thousands, from almost a million Amigo customers. Many of them are among the UK’s poorest households, and they could be denied meaningful redress.

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