Our chart this week illustrates how in representing more than half of the world economy, decisions taken by the G7 can have a significant impact on the entire planet.
The G7 summit hasn’t formally started yet, but Group of Seven (G7) ministers and their guests have already started to meet ahead of the main event next month, albeit subject to quarantine restrictions.
The #icaewchartoftheweek illustrates how important this gathering is by highlighting how the seven major democratic nations and the European Union that together comprise the G7 represent more than half the global economy – and even more than that, once four invited guest nations are included.
Overall, the G7 economies are forecast by the IMF to generate £35.9tn of economic activity in 2021 at current prices, 54% of forecast global GDP of £66.8tn. This comprises the economies of seven individual member nations: the USA (£16.3tn), Japan (£3.8tn), Germany (£3.1tn), the UK (£2.2tn), France (£2.1tn), Italy (£1.5tn) and Canada (£1.3tn), together with the 24 other EU member states (£5.6tn).
The guests invited to the 47th G7 summit in Cornwall are expected to generate a further £4.9tn or 7% of global GDP in 2021, bringing the total economic activity represented at the summit to £40.8tn or 61% of the total. They are India (£2.2tn), South Korea (£1.3tn), Australia (£1.2tn) and South Africa (£0.2tn).
Not represented at the G7 are China (£12.2tn), Russia (£1.2tn) and Brazil (£1.1tn) and around 160 other nations across the globe (£11.5tn in total).
The G7 summit presents an opportunity for the 11 national leaders and 2 EU representatives involved to shape the direction for much of the world, with discussions expected to range from saving the planet through to transparency in financial and non-financial reporting.
This week’s chart looks at how the pandemic has driven government debt levels higher, a topic that will be on the agenda at the G7 summit in Cornwall in six weeks’ time.
The #icaewchartoftheweek is on the topic of government debt, looking at the indebtedness of the seven nations that comprise the G7 together with the EU.
The strength (or otherwise) of public finances will underlie many of the discussions at the upcoming G7 summit in Cornwall in June as countries decide how best to deal with the coronavirus pandemic, achieving net-zero carbon and the COP26 goals, strengthening defence and security, and economic recovery. All of these are likely to require significant public investment at a time when public finances have been hit hard from a combination of the financial crisis just over a decade ago and the coronavirus pandemic over the past year.
Perhaps best-placed amongst the G7 are Canada and Germany, with stronger public balance sheets than their peers putting them in a better position to fund public investment. Canada’s general government net debt to GDP ratio (the net debts of the federal government, provincial governments and local authorities combined compared with Canadian GDP) is forecast to increase from 23% at 31 December 2019 to 37% at 31 December 2021, while Germany’s general government net debt to GDP ratio is forecast to increase from 41% to 52% over the same period.
The UK is next with its general government net debt up from 75% of GDP to a forecast 97% of GDP, followed by France with its net debt increasing from 89% in December 2019 to a forecast 106% of GDP for the end of 2021. The USA is expected to overtake France with its major stimulus packages seeing debt rise from 83% as a proportion of GDP to 109% by the end of this year. The biggest ratios within the G7 are Italy, which is expected to increase from 122% to 144%, while Japan is expected to rise from 150% to 172% of GDP.
Not shown on the chart are G7 guest nations this year: Australia (up from 26% to a forecast 49% of GDP) and South Korea (12% to 23%) are both in relatively strong public finance positions, while India (74% to 99%) is in a more challenging fiscal situation.
Despite the differences in debt levels, there will be a commonality amongst all the nations present in needing to find money to deal with increased pressure on public services and social security systems as populations age, for public investment in achieving net zero and in infrastructure more generally, to fund defence in an increasingly unstable global security environment and in economic stimulus to restart economies as they reopen, not to mention the need to replace tax income on fossil fuels as they are eliminated over the coming decades.
The signs are that tax reform will play a larger part in discussions than it may have done previously, with the USA’s suggestion for a minimum corporation tax indicative of a move to limit tax competition between nations and work more collaboratively to capture tax receipts from increasingly mobile global corporations and individuals.
Hence while many of the headlines from the G7 summit are likely to be focused on the heads of government talking about the global response to the coronavirus pandemic, the global security situation and global plans to deliver net zero, the side room containing finance ministers discussing global taxation and global public investment may be just as consequential.
19 March 2021: The UK’s Integrated Review is the inspiration for this week’s chart, illustrating the 20 countries around the world that spend the most on their militaries.
The UK Government launched its Integrated Review of Security, Defence, Development and Foreign Policy on 16 March 2021, setting out a vision for the UK’s place in the world following its departure from the European Union and in the context of increasing international tensions and emerging security threats.
At the core of the Integrated Review is security and defence, and ICAEW’s chart of the week illustrates one aspect of that by looking at military spending around the world.
The chart shows spending by the top 20 countries, which together comprise in the order of £1.2tn of estimated total military spending of around £1.4tn to £1.5tn globally in 2019 – an almost textbook example of the 80:20 rule in action.
More than a third of the total spend is incurred by just one country – the USA – which spent in the order of £526bn in 2019 converted at current exchange rates. The next biggest were China and India at £200bn and £50bn respectively, although differences in purchasing power mean that they can afford many more soldiers, sailors and aircrew for the same amount of money. This is followed by Saudi Arabia (£45bn), Russia (£41bn), France (£38bn), the UK (£38bn), Germany (£38bn), Japan (£34bn), South Korea (£33bn), Australia (£21bn), Italy (£20bn), Canada (£17bn), Israel (£16bn), Brazil (£14bn), Spain (£13bn), Turkey (£11bn), the Netherlands (£9bn), Iran (£9bn) and Poland (£9bn).
Exchange rates affect the relative orders of many countries in the list, for example between Russia, France, the UK and Germany which can move up or down according to movements in their currencies, while there are a number of caveats over the estimates used given the different structures of armed forces around the world and a lack of transparency in what is included or excluded in defence budgets in many cases.
In addition, the use of in-year military spending does not necessarily translate directly into military strength. Military capabilities built up over many years or in some cases (such as the UK) over many centuries need to be taken into account, as do differing levels of technological development and spending on intelligence services, counter-terrorism and other aspects of security. Despite these various caveats, estimated military spending still provides a useful proxy in understanding the global security landscape and in particular highlights the UK’s position as a major second-tier military power – in the top 10 countries around the world.
Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy sets out some ambitious objectives for security and defence, which it summarises as follows: “Our diplomatic service, armed forces and security and intelligence agencies will be the most innovative and effective for their size in the world, able to keep our citizens safe at home and support our allies and partners globally. They will be characterised by agility, speed of action and digital integration – with a greater emphasis on engaging, training and assisting others. We will remain a nuclear-armed power with global reach and integrated military capabilities across all five operational domains. We will have a dynamic space programme and will be one of the world’s leading democratic cyber powers. Our diplomacy will be underwritten by the credibility of our deterrent and our ability to project power.”
