Markets Wired

Thank you for joining us today.

I would like to thank Chancellor Sunak and Her Majesty’s government for hosting.

This was our first in-person multilateral meeting — and I can definitively say a real life G7 meeting is much more enjoyable than the Zoom version. More importantly, our meetings this weekend emphasize the power of global cooperation in addressing the most critical issues we face.

Our most immediate task is ending the pandemic and its associated economic crisis.

Fiscal policy has an important role to play in responding to crises and supporting the recovery. The IMF projects that the U.S. will be the first G7 economy to return to its pre-pandemic output level. That’s in part due to our rapid vaccine rollout, but also ambitious fiscal support in policies like the American Rescue Plan.

G7 economies have the fiscal space to speed up their recoveries to not only reach pre-COVID levels of GDP but also to support a return to pre-pandemic growth paths. This is why we continue to urge a to shift in our thinking from “let’s not withdraw support too early” to “what more can we do now.” Not just to end the pandemic, but to use fiscal policy to invest in addressing generational issues like climate change and inequality.

As the G7 economies face brighter prospects, we cannot forget that developing countries face limited access to vaccines and limited policy space to respond to the economic crisis. Our collective fear is that the pandemic leads to a lingering divergence where advanced economies rebound quickly, while developing countries lag and bear deep scars from the crisis for years to come.

The G7 discussed how to try to prevent that divergence, first, by helping developing countries vaccinate their populations. The surest way to do that is to keep supporting the COVAX Facility, which purchases and distributes doses to poorer countries. The Government of Japan hosted a successful pledging Summit for COVAX on June 2, and I thank the countries who stepped-up their contributions to this important effort. The U.S. remains committed to the success of COVAX and will continue to disburse our $4 billion pledge, the largest to the facility. The G7 also discussed how our existing tools, such as World Bank and IMF financing, can better help fund a global immunization effort and how we can enhance our coordination to prevent and better respond to future pandemics.

We also discussed ways to provide greater economic support to developing countries through the international financial institutions that would put developing countries on a path to a strong and sustainable green recovery. The G7 reiterated our support for a new allocation of IMF Special Drawing Rights to boost global reserves and provide additional liquidity as IMF members confront the crisis. We strongly support the IMF providing clear, tailored guidance to countries on how best to utilize their new SDRs, as well as proposals to increase transparency in and accountability for how SDRs are used. The G7 also exchanged ideas on how major economies might channel our SDRs to amplify support for low-income countries, potentially by co-financing IMF programs to support green recoveries and improve vaccine access.

G7 countries also redoubled our commitment to a transformative effort to tackle climate change. President Biden recently signed an Executive Order in April committing to double U.S. climate finance by 2024, while tripling U.S. finance for adaptation — signaling a return to U.S. leadership in addressing climate change. I am pleased the G7 could agree to ambitious commitments to decarbonize our economies and mobilize finance for climate action, including from public and private, domestic, and international sources. To facilitate the mobilization of private climate finance, the G7 also agreed to take action to improve the availability of consistent, comparable, and decision-useful climate-related financial information to market participants. This commitment is in line with the President’s Executive Order to enable private investment to play a complementary role in meeting our net-zero emissions target while also creating well-paying jobs. We look forward to advancing this work in the coming months with the broader G20, where Treasury is co-chairing the G20 Sustainable Finance Working Group.

Perhaps most notably this weekend, G7 economies came together to agree the post-pandemic world must be fairer, especially with regard to international taxation. We need to have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises and ensure that all citizens and corporations fairly share the burden of financing government. For too long, there has been a global race-to-the-bottom in corporate tax rates — where countries compete by lowering their tax rates instead of the well-being of their citizens and natural environments.

The G7 has taken significant steps this weekend to end the existing harmful dynamic, making commitments today that provide tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%. That global minimum tax would end the race-to-the-bottom in corporate taxation and ensure fairness for the middle class and working people in the U.S. and around the world.

The global minimum tax would also help the global economy thrive, by leveling the playing field for businesses and encouraging countries to compete on positive bases, such as educating and training our work forces and investing in research and development and infrastructure. And indeed the global minimum tax can help fund investments in those critical priorities.

Finally, by collaborating with one another on the global minimum tax, governments protect their national sovereignty to set tax policy, because the pressures that have forced the race to the bottom on corporate tax rates are alleviated.

This effort is far from over, and we look forward to engaging closely with the G20 and members of the OECD Inclusive Framework process in the coming weeks to finalize an agreement on the global minimum corporate tax as soon as possible.

At the same time, I look forward to taking the momentum we’ve achieved on a global reform at this G7 and working closely with members of Congress on this important initiative.

I look forward to taking your questions.

Q: You mentioned in your remarks that you continue to urge a shift in thinking away from “let’s not withdraw support too early,” to “what more we can be doing now.” I just wanted to ask, do you think there is a risk that other G7 countries are withdrawing support too soon? Thank you.

SECRETARY YELLEN: Well, I think all of the G7 countries have had robust responses to the pandemic and supported their economies to achieve a strong recovery and all are actively involved in vaccination programs, but there is a concern among some about fiscal sustainability, and an evident desire to begin to withdraw accommodation when things are back on track. And we think that most countries have fiscal space, and have the ability to put in place, fiscal policies that will continue promoting recovery and deal with some of the long-run challenges that all of us face when it comes to climate change and inclusive and sustainable growth, and we urge countries to do that. And that’s the course that we’re on as well.

Q: Clearly, an agreement was reached on the global minimum taxation of at least 15 percent. Your country wanted 21 percent a few weeks back. What do you say to those campaigners who say 15 percent isn’t really going to bite, isn’t going to be the transformative change that they want to see and the world might need?

SECRETARY YELLEN: Well, what we’ve proposed, the 21 percent, is what we’ve proposed to do domestically. Our domestic corporate tax proposal that’s part of the Jobs Plan is for a 28 percent corporate tax rate and a reform of our global minimum tax, to raise the level to 21 percent, and we haven’t demanded or expressed the view that it’s necessary for us to have the same level globally, but we do hope that countries will be ambitious, and the agreement is at least 15 percent. So, we’ve yet to set the final rate. There is an agreement among the G7, though, to go for at least 15 percent. And I do think that’s an historic achievement. I think we will end up with a tax system that will be much fairer and end, effectively, much tax competition in the ability of large profitable multinationals to take advantage of tax havens to lower their corporate tax liabilities. And so, 21 percent is the minimum that we’ve proposed domestically.

Q: Your statements have made no mention of the digital services taxes and the Pillar One part of the agreement. I was wondering, why did you accept a deal that does not immediately remove the digital services taxes that the U.S. thinks are discriminatory, and if it takes two to four years to enact this agreement will the U.S. move ahead with the tariffs that are already teed up?

SECRETARY YELLEN: Well, let me say that both Pillars are important in the negotiation. I didn’t mention Pillar One in my remarks, but it’s not because Pillar One is not important. The allocation of global taxing rights over the profits, the residual profits of highly profitable large corporations, is something that’s a concern in many parts of the world, and our agreement on that is also very important. We’ve agreed that we will award taxing rights on at least 20 percent of residual profit, that’s above a 10 percent margin, for the largest and most profitable multinational enterprises, and the agreement is that that will replace the system that we’ve had concerns with. The timing remains to be worked out exactly, but there is broad agreement that these two things go hand in hand.

Q: I wanted to ask, the French wanted to target Amazon and Facebook. What impact does today’s deal have on companies like those, and have you given your European counterparts any assurance that the final deal would necessarily include large tech firms?

SECRETARY YELLEN: Well, it will include large profitable firms, and those firms, I believe, will qualify by almost any definition. And essentially what we’ve agreed, is that we will reallocate taxing rights for a portion of the excess or residual profits of those companies to jurisdictions where they have market activity on the basis of the distribution of that activity. So, that is intended to replace an approach that focused on just a few U.S. digital giants, and the agreement is that this new approach will replace an approach that we found objectionable that targeted large, successful U.S. digital firms, but most of those firms are likely to be included in this new scheme, the Pillar One scheme.

Q: What do you expect will be the most, the toughest obstacle to overcome to reach the global agreement? Would it be, domestically, the U.S. states which have already lower tax rates or, internationally, countries like Ireland or China?

SECRETARY YELLEN: Well, we feel that we have strong momentum toward a global agreement that we will reach at the G20 meeting, a preliminary agreement in July with details to be finalized in the fall. And there are a number of countries that have concerns. Ireland and China are examples. This isn’t a finished agreement. There are details still to be worked out. So what we’ve tried to emphasize in the G7 statement that we put out today, is that this group of countries are very supportive of two important pieces of what needs to be an agreement, namely an agreement among all these countries to tax, to have minimum corporate tax rates that apply to their companies on a country-by-country basis of at least 15 percent, and an agreement that we will reallocate taxing rights in Pillar One and apply it to the most profitable companies. So, there remain details yet to be worked out, and we will be addressing those in the run up to Venice.

Q: Can I please just ask you, what is your assessment of what the critical mass is for this agreement to work if you’d like? How many countries need to sign up for it to be workable? How many, what sort of share of world GDP if you prefer, needs to take part to make sure that there aren’t going to be holes in this? Thank you.

SECRETARY YELLEN: So, we’re looking for endorsement of an agreement at the G20, which represents a very large share of GDP. And there are yet a large, larger number of countries that are participating in the underlying OECD process that we expect, if we’re successful with the G20, to agree. But I would point out that the agreement under Pillar Two contains an enforcement mechanism that would come into play and apply to jurisdictions that decide, “no we’re happy to be tax havens, and we don’t want to sign up to this agreement.” The so-called “under tax payment rule” would essentially put pressure on those countries to abide by a corporate minimum tax, or in essence supply it to income of companies that are headquartered there and currently booking profits in those countries. So, I think this is an agreement that when you understand all the details, you would see that it doesn’t require absolute agreement across the board. It has a way of bringing holdouts into it.

Q: Just to return to Pillar One. Could you outline how you will be trying to persuade your Congressional legislators to put this through Congress and get support for it, which is necessary for this to have? What’s the argument of why it’s in favor, why is it in the U.S. interest to have a Pillar One?

SECRETARY YELLEN: I think a Pillar One deal will really provide a level of certainty to corporations, in the United States and globally, about what the environment is that they’ll be operating in. That environment has been very unstable and saying that they look forward to working with us to make the changes in our own law that are necessary to come into compliance with Pillar Two.

Q: Could you say something about multilateralism because, obviously you know, the experience of the past four years, I think, has made a lot of people feel that some of these multilateral institutions and the principle of multilateralism may have gone forever. So, in the light of this tax agreement, what’s the lesson of that? Do you think that system can be revived or has it really changed?

SECRETARY YELLEN: I believe that what you’re seeing is a revival of multilateralism, a willingness of leading nations in the G7 and the G20 to cooperate to address the most critical challenges facing the global economy. And this international tax race to the bottom has been a problem for many, many countries for decades, and it’s led to a system in which corporate taxation plays a diminishing role in financing governments in the U.S. and around the world. And more and more of the burden has been falling on workers, and many countries have an interest in changing that dynamic. It’s complicated. This negotiation has been going on for, I believe, eight years. It stalled under the Trump Administration.

And so, I really consider this an historic achievement, and it is. It shows that multilateral collaboration can be successful. But I think multilateralism is not confined simply to the tax area. And what I’ve seen during my time at this G7 is deep collaboration and a desire to coordinate and address a much broader range of global problems, in particular, the problems that some of the poorest countries on our planet face as a consequence of the pandemic. A broad understanding and desire on the part of the G7, and I believe the same exists in the G20 and other groupings, is that we need to address that. We need to address the health situation, that it’s urgent that we promote vaccinations in poor countries that can’t afford to buy those vaccines. Although we certainly agree with patent rights in general and we have supported in the WTO, in the case of vaccines, getting rid of patent rights with these vaccines, in the interest of doing everything that we can to deal with supply chain problems that are inhibiting a buildup of production capacity in other parts of the world.

And with respect to fiscal policy, the G7 countries recognize their obligation, not only to promote recovery in their own countries, for the sake of their own people and economies, but also the obligation that we have given the fiscal space we have to promote a strong recovery that will spill over to the rest of the world, for those countries who do not have the fiscal space.

We spent a good deal of time at the G7 discussing ways to make good on our pledge to provide finance for sustainable investments in developing countries and climate change initiatives, and we talked about debt relief in other ways. The SDR allocation, which we’ve all agreed to, I also think is a historic achievement in addressing global problems. So, on many different fronts, I think you’re seeing a return of multilateralism, and a commitment on the part of countries that we need to have collaborative arrangements and to be active in and committed to addressing global challenges together.

Q: I guess some people would say seeing U.S. inflation where it is, seeing the serious sheer size of the public deficits, not just in your country but around Europe, you’re now saying go even further. This is coming from the U.S. Treasury Secretary. We’re used to the Washington consensus. This is very different America we’re experiencing right now. Are you really saying that there are no risks from the old foes of inflation, and the like? That we should, we can be relaxed about those right now?

SECRETARY YELLEN: Well, we have in recent months seen some inflation. And we, at least on a year-over- year basis will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent. But I personally believe that this represents transitory factors. And I will say that the, in the United States, there have been factors that are transitory that in past years have raised inflation without affecting the underlying inflation rate and factors that have lowered it that have also been transitory. And I genuinely believe that policy should look through transitory factors.

You know, when the pandemic struck, the prices in the most affected service sectors utterly plunged, and now we’re in the months when those drops, pronounced drops which were lowering annual inflation rates, have now dropped out of year-over-year numbers. And we’re moving into a phase where our economy is recovering and some of those prices are moving back up to normal. Airline fares would be a good example. They in April rose at a rapid rate. But that’s just a return to normal. Airline fares are still below where they were pre-pandemic. Now while that process of return to normal is taking place, you will see some high inflation rates, but remember we saw some very low inflation rates. And so that’s part of what’s going on. We also have some supply bottlenecks that are affecting sectors of the economy. The semiconductor shortage is obviously affecting vehicle prices, used vehicle prices, and you know there are a variety of supply bottlenecks.

Look, we still have over 7 million fewer jobs right now than we had pre-pandemic. There have been retirements of some people from the labor force, probably induced by the pandemic, so maybe we don’t need to regain quite that many to get back to full employment. But there remains a lot of slack in an underlying sense in the labor market.

Now, a lot of people have permanently lost jobs, and those individuals may want to move to different sectors of the economy. It may take a while to get the economy back completely on track and those individuals reabsorbed into long-term jobs. So, we shouldn’t expect this process to be complete in a month or two, but I strongly believe we’re on a recovery path. We’re making progress. You know, if we continue at this pace I believe sometime next year we’ll be back to something we could call around full employment. And while we’re seeing some inflation, I don’t believe it’s permanent. But we will watch this very carefully. I don’t want to say, “this is mind absolutely made up and closed.” We’ll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary.

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