OECD urges shift away from austerity in favour of public investment

18 Feb 16

The OECD has urged its members to move away from austerity towards a “new strategy” of exploiting cheap borrowing and increasing public investments, particularly in infrastructure.

 

The call came as the think-tank further downgraded its forecasts for global growth for 2016 in its Interim Economic Outlook to 3% . This is a 0.3% reduction that leaves growth no higher than it was in 2015 and at its slowest pace in the past five years.

Catherine Mann, OECD chief economist, said financial volatility coupled with stagnant global growth meant “a stronger collective policy approach is urgently needed”. This should focus on greater use of fiscal and pro-growth structural policies.

The OECD cautioned against an over-reliance on monetary policy, such as maintaining low interest rates and quantitative easing, and stressed that a more balanced approach is needed.

“Current policies will yield a low-growth equilibrium characterised by low demand, low investment, low inflation, unsatisfactory labour market outcomes, and weak productivity growth,” it said.

“In this context, desired improvements in living standards and in distribution of income are unlikely.”

According to the OECD, many countries’ deficit reduction programmes deficits will be hard to realise while growth remains low, suggesting a need to boost demand, productivity and growth.

Governments should take advantage of ultra-low interest rates to borrow money and commit to collectively raising public investment, it stated.

It noted that investment spending has a high multiplier, and that quality infrastructure projects would help to support future growth and make up for the shortfall in investment following the cuts imposed across advanced economies in recent years.

“These effects need to be undertaken in conjunction with structural reforms that would allow the private sector to benefit from the additional infrastructure,” it added.

“The slowing pace of reform is particularly troubling for long-term growth prospects, with signs of weaker productivity growth and slower diffusion of productivity gains.

“Collective public investment action combined with structural reforms would lead to a stronger GDP gain, thereby reducing the debt-to-GDP ratio in the near term.”

The OECD forecast sluggish growth across both emerging and advanced economies, with the exception of India. Growth projections for China remained unchanged at 6.5% and fell to 2% for the US, 2.1% for the UK and 1.4% for Canada, while Brazil’s economy is set to shrink by 4% ‒ a 2.8% reduction on November’s forecast.

A slow recovery of 1.4% growth in the euro area in particular is a drag on the global recovery and is leaving Europe vulnerable to shocks, it added.

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