In today’s podcast I discuss two articles:
- The news coming out of the UK regarding the public finances
- Eric Schmidt, the former CEO of Google, who has acquired citizenship in Cyprus.
For your convenience, and to give credit to the original writers, I have included links to the articles I referred to and copied them below.
The “economic emergency” caused by Covid-19 has only just begun, according to chancellor Rishi Sunak, as he warned the pandemic would deal lasting damage to growth and jobs.
Official forecasts now predict the biggest economic decline in 300 years.
The UK economy is expected to shrink by 11.3% this year and not return to its pre-crisis size until the end of 2022.
Government borrowing will rise to its highest outside of wartime to deal with the economic impact.
The government’s independent forecaster, the Office for Budget Responsibility (OBR) expects the number of unemployed people to surge to 2.6 million by the middle of next year.
It means the unemployment rate will hit 7.5%, its highest level since the financial crisis in 2009.
However, fewer jobs are expected to be lost than predicted this summer.
Setting out his Spending Review detailing how much would be spent on public services, Mr Sunak said the government was dealing with an “economic emergency”.
He added: “That’s why we have taken, and continue to take, extraordinary measures to protect people’s jobs and incomes.”
The government has subsidised the wages of employees unable to work due to the pandemic, in an effort to protect jobs.
It said extending these schemes to next March meant 300,000 fewer people would be out of work.
What about public sector pay?
Mr Sunak confirmed that around 1.3 million public sector workers – excluding some NHS staff and those earning less than £24,000 – will have their pay frozen next year.
The chancellor said he could not justify an across-the-board increase when many in the private sector had seen their pay and hours cut in the crisis.
But Mr Sunak said lower-paid public sector workers would be guaranteed at least a £250 pay rise next year.
The shadow chancellor, Anneliese Dodds, criticised the pay freeze.
She said: “Earlier this year the chancellor stood on his doorstep and clapped for key workers. Today, his government institutes a pay freeze for many of them. This takes a sledgehammer to consumer confidence.”
Robert, a 25-year-old civil servant and representative for the PCS Union, said he was “deeply disappointed”.
“[Civil servants] have spearheaded the response to the pandemic and worked tirelessly to deliver Brexit. We’ve stepped up and delivered… and I’d like to be recognised for that.”
Having worked for various government departments since graduating from university a few years ago, he says he feels “let down”.
What else was announced?
The minimum wage – which has been rebranded as the National Living Wage – will increase by 2.2% – or 19p – to £8.91 an hour, with the rate extended to those aged 23 and over.
Other rates were also increased. From next April, 16 and 17 year-olds will see their pay go up to £4.62 per hour, from £4.55 today.
The UK also ditched its policy of spending 0.7% of national income on overseas aid to help deal with the coronavirus crisis at home.
Mr Sunak said the new 0.5% target – which adds up to about £4bn in savings – will be “temporary”.
And millions of retirees will see the future value of their pension cut owing to a planned change in the way payments are calculated from 2030.
How much will this cost?
Mr Sunak said the government had already spent £280bn to help support the economy through the coronavirus.
It will spend a further £55bn next year as part of a package of measures to support the recovery. This includes billions of pounds to help people find jobs.
The UK is expected to borrow £393.5bn this financial year to help pay for economic relief measures.
Borrowing is also forecast by the OBR to remain above £100bn-a-year – or 4% of the size of the UK economy – in five years time.
In recent years, the government has been able to borrow easily at very low interest rates, which makes its debt more affordable.
At the moment it pays just 0.32% interest to borrow for ten years.
However, Mr Sunak said long-term scarring meant the economy would be 3% smaller in 2025 than expected in the March budget.
How will the UK get debt under control?
The OBR said the coronavirus pandemic had “delivered the largest peacetime shock to the global economy on record”, while recent restrictions across the UK had taken “the wind out of an already flagging recovery”.
It said the UK’s later and longer lockdown this spring meant it had experienced “a deeper fall and slower recovery in economic activity” than some of its European neighbours.
The independent forecaster also warned that tax rises or spending cuts would be needed in future years to stabilise the UK’s growing debt pile.
Richard Hughes, the OBR’s chairman said: “The chancellor will need to find £20bn to £30bn in spending cuts or tax rises if he wants to balance revenues and day-to-day spending, and stop debt rising by the end of this parliament.”
Is this the end of government support?
Is that the end of it? The official forecasts assume that 2 December spells the end of lockdown, that we remain in the equivalent of Tier 3 restrictions until the spring – and then the vaccine becomes widely adopted in the second half of 2021. Too cautious – or optimistic? If anything, 2020 has taught us that assumptions can last as long as a disposable face covering.
But it’ll take longer for economic life to spring back to rude health. Reviving job prospects, investment and consumption will take TLC. Even when the official crystal ball gets misty, in 2025, output is still 3% lower than it was previously expected to be.
And that’s without the risk of a no-deal; the OBR says that could mean that output is a further 1.5% by 2025. Some economists think the hit could be greater (indeed, the Governor of the Bank of England says the long term impact of a no- deal could exceed that of a virus).
Rishi Sunak has to decide when to turn off the support to the convalescing economy – and when to start patching up the public finances by firing up tax rises. The extreme uncertainty underlines how fraught – and costly – that decision could be.
What’s will happen to house prices?
House prices are expected to fall in 2021 and 2022.
The OBR expects a recent revival in the market to end next year when a stamp duty holiday stops in March and more people lose their jobs as government support schemes are pared back.
However, the end of the tax break is expected to contribute to a 3.5% fall in house prices next year and a further 2.6% drop in 2022.
The OBR added: “Despite a steady recovery from 2022 onwards, the level of house prices remains around 17% lower (in 2025) compared to our March forecast.”
What about Brexit?
The OBR said the “unresolved nature” of the negotiations between the UK and EU over a Brexit deal had “further clouded” the economic outlook.
It said failure to secure a deal would reduce the size of the UK economy by a further 2% in 2021, with permanent damage to growth and living standards in future years.
Under this no-deal scenario, the economy would not return to the size it was before the pandemic hit until the second half of 2023, while unemployment would peak at a higher rate of 8.3%.
The former CEO of Google, Eric Schmidt, is finalizing a plan to become a citizen of the island of Cyprus, Recode has learned, becoming one of the highest-profile Americans to take advantage of one of the world’s most controversial “passport-for-sale” programs.
Schmidt, one of America’s wealthiest people, and his family have won approval to become citizens of the Mediterranean nation, according to a previously unreported notice in a Cypriot publication in October. While it is not clear why exactly Schmidt has pursued this foreign citizenship, the new passport gives him the ability to travel to the European Union, along with a potentially favorable personal tax regime.
The move is a window into how the world’s billionaires can maximize their freedoms and finances by relying on the permissive laws of countries where they do not live. Schmidt’s decision in some ways mirrors that of another famous tech billionaire, Peter Thiel, who in 2011 controversially managed to secure citizenship in New Zealand.
Interest from Americans in non-American citizenship has been spiking during the coronavirus pandemic, which has sharply limited Americans’ ability to travel overseas. Experts say some of that increase is also due to concerns about political instability in the United States.
But it is still uncommon to see Americans apply to the Cyprus program, according to published data and citizenship advisers who work with the country. The program is far more popular with oligarchs from the former Soviet Union and the Middle East, and it has become mired in so many scandals that the Cypriot government announced last month that it was to be shut down.
A representative for Schmidt declined to comment on the move or Schmidt’s thinking.
The Cyprus program is one of about a half-dozen programs in the world where foreigners can effectively purchase citizenship rights, skirting residency requirements or lengthy lines by making a payment or an investment in the host country. They have become the latest way for billionaires around the world to go “borderless” and take advantage of foreign countries’ laws, moving themselves offshore just like they might move their assets offshore, a phenomenon documented by the journalist Oliver Bullough in the recent book Moneyland.
Small, financially struggling countries — beginning with St. Kitts and Nevis in the Caribbean — have embraced the idea over the last few decades, raking in money that they would otherwise never see in exchange for citizenship papers. But what can be good for one country can be bad for the world: Anti-corruption activists have grown deeply worried about a race to the bottom with these programs, concerned that criminals can purchase foreign citizenship to escape prosecution in their home countries, or to funnel drugs through friendly borders, or to hide their assets from tax authorities.
The Cyprus program in particular — despite helping save the country after its 2013 bankruptcy by bringing in $8 billion since then — has become notorious.
The lion’s share of the 4,000 Cypriot citizenship recipients since 2013 have been wealthy individuals from Russia, according to people who advise these individuals on obtaining Cypriot citizenship. It has historically not even been marketed to Americans, whose passports usually allow them to travel freely in Europe. It is not unheard of, however, for Americans to take advantage of the program, and advisers say it has been happening more frequently over the last few months.
An Al Jazeera investigation discovered the identities of 2,500 people who had bought Cypriot citizenship between 2017 and 2019 — and only 32, or about 1 percent, were Americans.
That investigation helped spell the end of the program, which had drawn scrutiny for years. Undercover journalists found that Cyprus government officials were saying they could arrange a passport for someone despite being told that the person was a criminal, a scandal that ended up leading to the officials’ resignations. Cyprus announced in mid-October that due to “abusive exploitation,” it was shutting the program down. (Which is also, coincidentally, around when Schmidt’s approval was published.)
“European values are not for sale,” a European Union official said.
It isn’t known what role the coronavirus and new travel restrictions might have played in Schmidt’s decision to apply to Cyprus. Schmidt likely applied between six months ago, when the pandemic was raging, and about a year ago, when it had yet to begin, according to advisers. Schmidt’s wife, the philanthropist Wendy Schmidt, and his daughter, the media executive Sophie Schmidt, have also applied and been approved, according to the listing in the Cypriot publication, Alithia.
Theo Andreou, who heads the Cyprus program for Astons, an “investment immigration firm,” said that 90 percent of the firm’s clients seek Cyprus citizenship either as a backup plan or an insurance policy due to concerns in their home country, such as the coronavirus, or for financial reasons. Andreou speculated that Schmidt could be making the move for two possible reasons.
“One reason is to have a Plan B during Covid. The other reason is that they are expanding their business in Europe,” he said.
Nuri Katz, the founder of Apex Capital Partners and who has advised the Cypriot government on immigration matters, guessed that Schmidt “feels the need to diversify his citizenship.”https://cc3675c89aadf809b0dc6ff9bd247f93.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html
“Eric Schmidt cannot travel to Europe,” Katz noted. “He’s like everybody else — like a lot of other high-net-worth people who want to have options.”
Individuals who claim Cyprus citizenship can also be attracted by a reduction in their tax burden, especially if they’re willing to renounce their US citizenship. Immigration attorney Andy Semotiuk said that his only American client who had claimed Cypriot citizenship did so to avoid paying US income tax.
The way the program works is that once a foreigner lays down between $2 million and $3 million worth of investment in Cyprus, typically through a real estate purchase, they can apply to what is technically called the “Citizenship by Investment” program. After the government reviews the applicant’s background, conducts a security check, and hosts a visit from the foreigner, their application can be approved.
Schmidt, with a net worth of $15 billion and many homes around the US, is a titan of the technology industry: The longtime CEO of Google helped make the company into an international powerhouse and served as the tip of the spear of the company’s US lobbying program.
While he stepped down as CEO in 2011 and left the board last year, he still serves as a technical adviser to the company and is one of its largest shareholders. These days, he spends most of his time as a philanthropist, investor, and Democratic political donor at Schmidt Futures, the organization that gives away his and his wife’s money, and speaking out on issues like competition with China and how Silicon Valley can cooperate with the US military.
At Google, Schmidt was a proponent for the company paying as little in taxes as possible, even if that meant capitalizing on foreign countries’ tax rules. The company has long been dogged by allegations that it was not paying its fair share of American taxes by utilizing foreign tax rules in places like Bermuda or the United Kingdom.
“I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate,” Schmidt told one interviewer in 2012. “It’s called capitalism.”