Economic evolution
G20 Summit

Economic evolution

Interview with Mathias Cormann, secretary-general, Organisation for Economic Co-operation and Development

An inclusive approach is required if the world is to level the playing field and create an international environment that is more coherent and cohesive – to the benefit of everyone

What is the Organisation for Economic Co-operation and Development’s assessment of current global economic conditions, the recovery and the major risks ahead?

Well, the pandemic has wreaked havoc on the world economy, hitting the livelihoods of people everywhere, but the economic recovery is underway. Economic growth continues to pick up and the economic outlook continues to improve.

We are certainly in a better position today than most forecasters had feared in the first few months of the pandemic.

We have been consistently upgrading our projections for gross domestic product ever since the middle of 2020, with global economic growth now expected to reach 5.7% this year and 4.5% in 2022.

Extensive policy support, combined with the rapid development and then deployment of effective vaccines, plus the accelerating digital transformation of our economies – all contributed to this more optimistic outlook.

Yet the recovery remains uneven across countries and sectors. New outbreaks of the virus remain our biggest risk.

We need to continue to pursue an all-out effort to reach the entire world population with vaccines as quickly as possible. No country will be protected until every country is appropriately protected.

What are the policy requirements in G20 economies to consolidate the recovery and mitigate associated risks?

We need to continue working to stay on top of the public health challenge. First and foremost, that means continued efforts to get as many people as possible all around the world vaccinated as quickly as possible.

Policy support should remain flexible, adjusted to the evolving health and economic situation.

The composition of that policy support must continue to adjust and be better targeted to those who remain in genuine need of support and towards future-focused investment, particularly into our green and digital transitions.

Open markets, a strong competitive framework, a system that rewards the most productive and innovative business ideas, facilitates economic adjustment, with reallocation of capital and labour, and that encourages investment in future growth will lead to quality job creation and lift living standards.

In this context, all OECD members – in fact, all trading countries – have an interest in strengthening the rules-based multilateral trading system, with the World Trade Organization at its centre.

Recovery policies must promote equality of opportunities and foster social mobility, including by restoring and boosting opportunities for women and youth, those with low skills, those caring for children or the elderly and those who are sick.

We also need to use this opportunity to address the long-term structural global challenges – the need to get to global net zero by 2050 – and to seize the opportunities while better managing the risks associated with the accelerating digital transformation of our economies.

To what extent is the historic agreement achieved by the OECD/G20 Inclusive Framework on “a more stable and fairer international tax architecture” truly game changing?

“Game changing” is the right term. After years of intense work and negotiations, 136 out of 140 members in the OECD/G20 Inclusive Framework on BEPS [Base Erosion and Profit Shifting] agreed to a major reform of our international tax system.

The landmark deal will reallocate more than $125 billion of profit from around 100 of the largest and most profitable multinational enterprises to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.

It will also ensure that multinational enterprises will be subject to a minimum 15% corporate tax rate from 2023.

Those 136 countries and jurisdictions in this agreement represent more than 90% of global GDP.

With Estonia, Hungary and Ireland having joined the agreement, it is now supported by all OECD and G20 countries. Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined the agreement.

After being presented to the G20 finance ministers meeting in Washington in mid October, it will be presented to the G20 leaders in Rome at the end of the month.

The global minimum tax agreement does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it. It will see countries collect around $150 billion in new revenues annually.

It will make our international tax arrangements fairer and work better. It’s a major victory for effective and balanced multilateralism, a far-reaching agreement that ensures our international tax system is fit for purpose in a digitalised and globalised world economy.

We must work swiftly and diligently to ensure the effective implementation of this major reform.

The goal now is to sign a multilateral convention in 2022, with effective implementation in 2023. The convention is already under development and will be the vehicle for implementing the newly agreed taxing rights. The OECD is also developing model rules for enshrining the 15% minimum corporate tax rate into domestic legislation during 2022, to be effective in 2023.

The OECD also has an ambitious proposal for an OECD/G20 inclusive framework on carbon pricing. Can you please elaborate on it?

We must accelerate efforts to address the pressing, structural climate challenge we are facing. More and more countries have committed to net zero carbon emissions by 2050, and others are moving in that direction – this is encouraging. But we must turn those commitments into real action and real outcomes.

To facilitate a more ambitious, but also internationally more coherent, globally better coordinated approach to the pricing of emissions, we are proposing this new initiative to improve understanding of both explicit and implicit carbon pricing efforts, building on our experience with the Inclusive Framework on international tax reform.

The aim is to ensure that more ambitious action on climate change is pursued in ways that are both effective and fair. Effective in that it leads to reducing global emissions instead of just shifting emissions to other parts of the world. Fair in that every country carries a fair share of the burden.

We recognise a diversity of policy approaches to cater to a diversity of circumstances around the world, so the challenge is to ensure that a necessary lifting in ambition and effort does not lead to negative and counterproductive distortions – from competitiveness implications to carbon leakage to trade tensions.

This diversity makes it genuinely difficult to objectively compare efforts across jurisdictions. We need a more rigorous and comparable assessment of country-level mitigation policies, by measuring and reporting on the carbon price equivalence of differing policy approaches, i.e., by calculating ‘implicit carbon prices’.

Our proposal is about how best to preserve a global level playing field while lifting ambition and effort on climate to the level required through an appropriately comprehensive, coherent global approach.

To achieve this, our proposed initiative will assess and report on explicit and implicit carbon pricing efforts around the world as a way to inform such a more coherent globally coordinated way forward.

This work requires an inclusive approach, with all OECD and G20 members involved, to develop such an internationally more coherent, multilaterally agreed approach.

Hence our proposal for an OECD/G20 inclusive framework on explicit and implicit carbon pricing, to build on the success of the G20 tax agenda.