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A clock displays the time in front of posters of German Chancellor Angela Merkel and Armin Laschet in Berlin on September 27. German voters called time on Merkel’s centre-right Christian Democratic Union last month, part of a global leftward shift amid an uneven recovery from the pandemic. Photo: DPA
Opinion
Macroscope
by Tai Hui
Macroscope
by Tai Hui

Global shift towards greater equality shows China’s ‘common prosperity’ goals are not unique

  • The breadth of Beijing’s reforms have received much attention, but policy proposals elsewhere show it is far from alone in seeking to put people before profit
  • Aiming for a more equal society is a just cause, but governments also have to strike a balance between improving equality and achieving growth
Tai Hui
Tai Hui
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Which government is working to reduce income inequality, raise wages, improve welfare for workers, get companies and financial investors to pay their fair share of taxes and improve the environment? China? The United States? Japan? Britain? Germany?

The answer is all of the above. Among these, though, China has been in spotlight this year with a flurry of regulatory changes aimed at achieving “common prosperity”. These include improving income equality, controlling home prices for better affordability and creating a level playing field for small and medium-sized enterprises.
Companies are expected to provide adequate social welfare coverage for their employees and eliminate excessively long working hours. Industry leaders have been penalised for abusing their dominance to suppress competition. Internet companies are being required to improve cybersecurity and protection of customers’ personal data.

However, implementation of these well-intended policies has been seen as abrupt, and has shocked businesses and investors. The breadth of the reforms has also led investors to wonder whether other sectors could come under regulatory scrutiny. If education and housing are considered to be social goods, what about health care, for example?

It is worth noting that China is far from alone in moving in this direction. Voters around the world have signalled their frustration with uneven economic recovery from the pandemic.

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Many low- and medium-income households have not benefited from the economic rebound and are still struggling. Politicians have picked up this scent and are starting to advocate policies that transfer wealth to this group, with businesses and the rich paying for it through higher taxes.
The recent German federal elections saw voters leaning to the left. Chancellor Angela Merkel, who will step down once the new government is formed, saw her centre-right Christian Democratic Union suffer its worst defeat. The centre-left Social Democratic Party and the Green Party saw significant gains.

While the eventual coalition could see a more centrist policy stance, a higher minimum wage, a wealth tax and raising the tax rate for high-income earners are likely to be the starting point of policy negotiations.

Japan’s new Liberal Democratic Party president Fumio Kishida will lead his party to the Lower House elections on October 31. On top of better management of Covid-19, Kishida says he is considering more generous tax incentives to companies to raise wages for the middle class and other policies to redistribute income.

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In Indonesia, despite the economic challenges of the pandemic, parliament has introduced a higher income tax rate for wealthy individuals and scrapped a planned corporate tax cut.

British Prime Minister Boris Johnson painted a picture during his recent party conference of the UK moving towards a high-wage, high-skill economy instead of relying on cheap, imported workers.

In the US, Congress is debating a US$3.5 trillion budget to improve education, childcare and health care. This would be funded by higher taxes from corporations and the wealthy.

Almost 140 countries have signed up to one of the largest tax agreements in history, establishing a global minimum corporate tax rate of 15 per cent. The move is expected to raise around US$150 billion for governments each year and help eliminate tax havens.

G20 backs global minimum tax deal, pledges to sustain Covid-19 recovery

The 2008 global financial crisis and the Covid-19 pandemic have led to a surge in government debt and rising demand for equality in many economies. Policies to restore income and social equality and fiscal discipline are needed.

This implies that companies will be expected to pay more taxes and do their part to help the less privileged. As a result, shareholders and investors could see smaller profits.

Aiming for a more equal society is a just cause, but governments also have to strike a balance between improving equality and achieving growth. Companies invest for the future with retained profits or by raising capital in financial markets.

Too heavy a tax burden or unattractive returns could reduce the amount of resources or incentive to innovate. It is hard to achieve prosperity without new ideas, technology or tools.

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management

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