Aurelia Butler

The writer, an FT contributing editor, is chief executive of the Royal Society of ArtsLast month, I discussed the negative feedback loop between stalling economic growth and expanding safety nets. How do countries break free from this “doom loop”? One important element is to rethink the fiscal rules shaping government investment decisions. The idea of fiscal rules, which place limits on governments’ borrowing, is a sound one. Governments should abide by a “good ancestor” principle, endowing future generations with assets and income, not encumbering them with debt and taxes. In this way, fiscal rules can help ensure intergenerational equity — they are the everyday equivalent of aiming to leave your children the house rather than the mortgage.After a sequence of pandemic-related splurges in government spending, fiscal rules are now at serious risk of being breached. The US is facing a cliff-edge next month due to the debt limits imposed by Congress. In the EU, calibration of the Stability and Growth Pact’s limits on countries’ debt is proving acrimonious. And in the UK, fiscal rules requiring a falling debt ratio within five years are restricting the government’s ability to put in place long-term growth-enhancing policies.Are these rules exerting useful fiscal discipline or constraining investment and growth? I believe the latter. They are typically based on the stock of government debt relative to income. We would expect this ratio to vary over time. The greater the challenges facing a nation state, the stronger the case for debt-financed investment in the public goods needed to rise to them.Take the UK. Since the industrial revolution, ratios of debt to gross domestic product in the UK have, on average, doubled every century. This was an explicit societal choice to invest in the new sets of public goods necessary to support economic and social progress — from schools to housing to health. Other countries’ debt ratios have also tended to trend higher over time.We should not necessarily expect this pattern to repeat itself in the 21st century. But nor should we expect debt ratios to flatline or fall. Many advanced economies are facing challenges no less severe than those our ancestors faced. And the case for a new set of public goods to meet them is just as compelling.This highlights a second defect with existing fiscal rules: they are typically based on net financial debt. They do not recognise the non-financial assets created by public investment, whether tangible (roads, hospitals, schools) or intangible (intellectual property, data, code). Nor do they recognise investment in natural assets, such as clean water, air and a thriving biosphere. Recognising those assets would give us a measure of the true net worth of the government. Just as a company or household would look at their net worth when making investment choices, so too should government. Countries with high net assets have been found to have lower borrowing costs. Bond market vigilantes target poor ancestors, not borrowers. That’s why real government borrowing costs have trended downwards over the centuries, despite government debt ratios trending upwards. Financial markets know it is the value of the house, not the mortgage, that matters.Countries with higher net worth also tend to exhibit greater macroeconomic resilience. This then reduces the burden on the state when adverse shocks strike. Our current debt-based fiscal rules, by constraining public investment, have contributed to a reduction in macroeconomic resilience and a bulging of the safety net following shocks. That has been the story of the past few decades when public investment by G7 countries has been flat or falling, despite global real rates of interest being close to zero. Here was an opportunity to invest in economic and environmental regeneration and boost growth and macroeconomic resilience. Misguided fiscal rules meant it was wasted and the doom loop perpetuated.Global real yields have since risen across the world. But with real rates still under 1 per cent globally, the cost/benefit calculus would overwhelmingly favour public investment today to support growth and resilience tomorrow. Recent skirmishes over debt limits in advanced economies mean this opportunity is at risk, once again, of being squandered.Adhering to existing fiscal rules risks underinvesting today in tomorrow’s economic and environmental health. As the evidence of the past few decades demonstrates, debt-based fiscal rules dent growth, weaken macroeconomic resilience and amplify the doom loop. Future generations will rightly consider us bad ancestors if we stick with them. More

The US and EU are boosting efforts to share information and co-ordinate sanctions policies, in a bid to make joint western economic and financial punishments more effective against Russia and other countries.Washington and Brussels are expected on Tuesday to announce they are “committed to working more closely on sanctions as a key tool to address shared foreign policy goals”, according to a prepared statement by the US Treasury seen by the Financial Times.The announcement comes after a meeting last month in Brussels, in which officials from the Treasury’s Office of Foreign Assets Control and the EU’s external action service and financial services directorate sought to “align the implementation of sanctions, promote compliance, strengthen enforcement, and address shared foreign policy challenges”, the statement said.The EU and the US have worked together closely to impose and implement sanctions on Russia since its full-blown invasion of Ukraine was launched last year, and are now in a new stage of their crackdown as they try to limit sanctions evasion and the sale of weapons or dual-use technologies to Moscow.The decision to increase technical co-ordination on sanctions reflects a recognition in Washington and Brussels that they need a better system in place permanently in case they need to deploy similar economic weapons in the future. The US and UK last year moved to bolster their own bilateral co-ordination on sanctions implementation and enforcement, and Brussels has been considering setting up its own version of Ofac.

In a nod to the collateral damage that can be inflicted by western sanctions, the Treasury statement said officials had also been exploring “methods to ensure that sanctions do not prevent humanitarian trade and assistance from reaching those in need and that persons in sanctioned jurisdictions preserve their internet freedom”.It added: “Multilateral implementation maximises effectiveness of sanctions and minimises unintended costs and eases the compliance burden for the general public.”As well as imposing sweeping sanctions on Russia’s central bank, top officials, banks, state-owned entities, oligarchs and defence companies, the EU and the US also co-ordinated the G7-led cap on the price of Russian oil and have sought to speak with a single voice to press other countries not to help Moscow economically and militarily.But there have been some splits over how far to go in isolating Russia. While the US was pushing for a full G7 export ban on Russia, European allies along with Japan have resisted, the FT reported last month. More

Egyptian entrepreneurs have warned that uncertainty over the exchange rate is suffocating business and impeding their ability to plan and invest, as the country endures its worst foreign currency crisis in years. A series of devaluations since March last year has halved the value of the Egyptian pound against the dollar but failed to boost foreign exchange inflows. A new devaluation is expected, economists and business leaders say. Meanwhile, the dollar shortage has led to a black market in foreign currency. The crisis began when foreign bond investors pulled about $20bn out of Egyptian debt following Russia’s February 2022 invasion of Ukraine, in a flight to havens. Gulf states stepped in with $13bn in deposits and another $3.3bn in asset purchases, but portfolio investors have mostly stayed away and the private sector has struggled to fund imports.Adham Nadim, who heads his family’s company Nadim Group, which makes furniture for hotels and corporate clients, said he was having problems importing crucial inputs such as hinges, accessories and paints.“Everyone gives me speculative prices based on what they think the price of the dollar on the black market will be if I plan to purchase in two months,” he said. “It is a bigger problem if the project extends to six or 10 months.”Samih Sawiris, a leading Egyptian tourism and real estate investor, told Saudi Arabia’s Al Arabiya television this month that the foreign exchange situation had deterred him from further investments in Egypt. “Everyone is waiting for clarity on the exchange rate,” he said, describing the issue as “hurdle number one, two and three” for investors. “How can I know if a project would make profits or losses?” he said. “Which rate should I use — the international [forward] rate, the black market rate or the official rate?”Central Bank of Egypt figures this month show imports dropped in the second half of 2022 to $37bn compared with $42bn in the same period the year before. Remittances by Egyptians working abroad, an important source of foreign currency, also declined, from $15.5bn in the second half of 2021 to $12bn in the same period last year. Bankers attribute the drop to people selling their foreign exchange on the black market or holding on to it in the expectation of a devaluation of the pound. The currency crisis has added to the pressure on a private sector already contending with soaring inflation, which reached 31.5 per cent in April, and a 19 per cent interest rate. A senior Egyptian banker told the Financial Times that there was significant foreign currency in the country, raised from tourism and other sources, but that people were holding on to dollars in the expectation of getting more for them after a further devaluation. As part of a $3bn loan package agreed with the IMF in October — its fourth since 2016 — Cairo agreed to move to a flexible exchange rate regime and reduce the footprint of the state in the economy. The fund said recently Egypt was “serious” about making the change.Egyptian governments have traditionally been reluctant to allow market forces to determine the value of the pound, preferring to deploy foreign currency resources to prop up its value and maintain its stability against the dollar. The aim is to avoid inflation shocks caused by sharp falls in the local currency. A Goldman Sachs report this month acknowledged Cairo’s dilemma. It argued that the near-term benefits of a depreciation in terms of increased exports and capital inflows “were not clear” and would depend on further economic reforms, while there was a risk of “exacerbating already high inflationary pressures”. But it said the large parallel market foreign currency premium would result “in unsustainable economic distortions that make periodic devaluations of the pound highly likely in the medium term, regardless of whether the authorities move to a fully flexible exchange rate regime”.Economists say the central bank wanted to build a foreign currency buffer before moving to a flexible exchange rate. In February the government unveiled a list of 32 state-owned companies it planned to open to private-sector participation by selling mainly minority stakes. Oil-rich Gulf states are the main target market for the privatisations.

However, the programme remains stalled amid reported differences over the exchange rate to be used to value Egyptian assets, as well as the small size of many of the stakes being offered, which would not give buyers management control.Nonetheless, Mostafa Madbouly, prime minister, said this month the government would raise $2bn in asset sales before the end of June. The main way to resolve the crisis in the longer term is to increase exports, economists say. “The country needs to move to an export-driven model to have sustained foreign currency revenue,” said Heike Harmgart, managing director for the southern and eastern Mediterranean region at the European Bank for Reconstruction and Development. “For this to happen . . . the private sector should get more room to breathe and grow.”Nadim agreed the focus should be on industry to boost exports and create jobs. “Industry has not been a priority,” he said. “We are having our most difficult time in 45 years of operation. Today we are looking into a deep fog.” More

The Westpac-Melbourne Institute index of consumer sentiment out on Tuesday slid 7.9% in May from April, with the index falling to just above the levels seen in March, which recorded the lowest monthly reading since the COVID-19 outbreak in 2020.”The two key developments over the last month have been the surprise decision by the Reserve Bank Board to lift the cash rate by a further 0.25% in May and the Federal Budget,” Westpac chief economist Bill Evans said.The index reading of 79.0 for May meant pessimists far outnumbered optimists.The RBA earlier this month stunned markets with a rate rise rather than an extended pause as was widely expected by traders, saying inflation – sitting at near 30-year highs – was way too high and even higher rates might be needed to bring it to heel.But Evans expects the RBA to leave rates on hold in June as it awaits more data on inflation and the economy.”Our central view is that the weakness in the economy coupled with clear progress towards the (RBA’s) inflation target will see the current level of the cash rate hold as the peak, but the risks remain evenly balanced,” Evans said.Australia’s Labor government last week boasted the first budget surplus in 15 years, as strong jobs growth and bumper mining profits swelled its coffers, but it also announced billions in cost-of-living relief.Some consumers may have had “unrealistic expectations” going into the budget with many expecting more support, Evans said.Higher living costs meant consumers were holding off on buying a major household item, with the index dipping 0.4%.Confidence in the outlook for house prices has surged, with the index up 10.7%, hitting the highest level since February 2022, while 70% of consumers expect mortgage rates to rise over the next 12 months. More

Leaders of the G7 gather in Japan this weekend amid global fears of a US debt default, deepening division over energy policy and no end in sight for the war in Ukraine.But for Japanese prime minister Fumio Kishida, the top challenge for the annual summit of advanced economies will be whether it can project a unified G7 response to China’s military ambitions and its use of “economic coercion” as US Treasury secretary Janet Yellen described it last week.Since Russia’s invasion of Ukraine in February 2022, Kishida has tried to align with G7 counterparts in the US, UK, France, Italy, Germany and Canada by rolling out tough sanctions against Moscow and forging closer ties with the Nato alliance. He has also approved a significant increase in Japan’s military spending to counter the threat from China.When he hosts the summit in his family’s home city of Hiroshima, Kishida — who has repeatedly warned that “Ukraine might be east Asia tomorrow” — will want similarly strong support from Europe over how the G7 should tackle China and the risk of a conflict over Taiwan.“It is crucial for the G7 to confirm that any unilateral attempt to change the status quo by force or coercion is unacceptable in any part of the world,” Kishida said last month. “I believe this will lead to a unified response by the international community when something similar to Ukraine happens outside of Europe.”Japanese prime minister Fumio Kishida, left, with US president Joe Biden, German chancellor Olaf Scholz and other leaders at a Nato summit in March © Henry Nicholls/Pool/AFP via Getty ImagesThe issue has been divisive for the west. French president Emmanuel Macron sparked an international outcry last month when he warned during a trip to China that Europe should not get “caught up in crises that are not ours”.“The G7 rose to the moment in the Ukraine crisis . . . But the Indo-Pacific presents its own challenges in the aftermath of Macron’s comments,” said Mireya Solís, a Japan expert at the Brookings Institution. “Tokyo would like to see a strong statement that the grouping of democracies stands aligned in the face of the China challenge.”The US is also pushing for as united a front as possible. President Joe Biden’s administration has started emphasising that its China policy is focused on “de-risking” and not “decoupling”. US officials adopted the phrase from European Commission president Ursula von der Leyen in an effort to reassure G7 allies the US was not pushing for a more draconian approach to Beijing.A big focus of the Hiroshima summit will be how far the member countries can outline a concerted response to Beijing’s raids of foreign companies and detention of corporate executives.The G7 plans to issue for the first time a separate statement on economic security alongside the main summit communiqué. The statement will include a commitment to “collectively deter, respond to and counter economic coercion”, according to documents seen by the Financial Times.People familiar with the discussions say, however, that China will not be named in the statement and the G7 is unlikely to reach an agreement on specific new economic security tools beyond co-operation on supply chains to reduce their reliance on China.China has argued that it is “the victim of US economic coercion” rather than a perpetrator, saying Washington has overstretched the concept of national security and “abused” the use of export controls.“If the G7 summit is to discuss response to economic coercion, perhaps it should first discuss what the US has done,” Chinese foreign ministry spokesperson Wang Wenbin said on Friday. “As the G7 host, would Japan express some of those concerns to the US on behalf of the rest of the group who have been bullied by the US? Or at least speak a few words of the truth?”The US last year introduced sweeping export controls that would severely complicate efforts by Chinese companies to develop cutting-edge technologies with military applications. Washington is now seeking the support of its allies as it finalises a new outbound investment-screening mechanism aimed at China.“It is possible to reach an agreement that economic security is important, but there is still a large gap between the US, EU and Japan when it comes to rolling out offensive measures such as export controls,” said Kazuto Suzuki, professor at the University of Tokyo. In March, Japan unveiled curbs on the export of 23 different kinds of technology as part of a deal reached with the US and the Netherlands, but officials in Tokyo have stressed the measures are not targeted against a single country.Deep economic ties to China also make the EU reluctant to follow Washington’s hardline approach. European capitals fear a return to a Cold War situation, with China in place of the USSR, leaving Europe at best a US satellite and at worst a battleground between the two.European officials have stressed that the G7 should increase outreach to other countries, particularly developing economies in Asia, Africa and South America. “[Our] purpose is to not transform the G7 into an anti-China club,” said a senior EU official involved in G7 preparation.The G7 has invited the leaders of non-member nations such as India, Indonesia, Brazil and Vietnam to the Hiroshima summit.“We would like to strengthen G7’s outreach to international partners through . . . calls for co-operation in addressing the challenges facing the international community . . . such as energy and food security, climate change, health and development,” Yoshimasa Hayashi, Japan’s foreign minister, said in a written interview with the Financial Times. “We would like to affirm G7’s unity in these regards.”

These comments come even as the G7 remains divided on energy policy, including Japan’s promotion of ammonia as a low-carbon energy source and Germany’s push for G7 endorsement of public investment in the gas sector.Christopher Johnstone, Japan chair at US think-tank CSIS, said Tokyo was still keen to engage with non-G7 countries because Russia’s membership of the G20 had fractured that broader grouping.“Tokyo is concerned that has opened the door to expanded Chinese influence across the developing world, where criticism of western hypocrisy finds resonance,” Johnstone said. “Kishida is attempting to mitigate the fact by bringing more voices to the table at the G7.” More

The meeting was previously scheduled for last Friday, but was postponed.Aides from both sides have been discussing ways to limit federal spending, as talks on raising the government’s $31.4 trillion debt ceiling to avoid a catastrophic default creep forward. More