Economic outlook, analysis and forecasts

Using the fiscal levers to escape the low-growth trap

 

See the presentation with commentary by Catherine L. Mann, OECD Chief Economist

In the context where public debt has reached high levels in most OECD countries, it is important to assess the extent of countries' fiscal space and the temporary deficit increase they can afford to run.  A rethink is needed for how the fiscal policy stance should be evaluated, particularly in the context where very low sovereign interest rates provide more fiscal space.

 

Using the fiscal levers to escape the low-growth trap, Chapter 2 from the Economic Outlook, November 2016

 

Quicklinks to background papers:

 

Blogpost:  Time to deploy the fiscal levers actively and wisely!

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This Economic Outlook special chapter is closely linked to The effect of the size and mix of public spending on growth and inequality

Background papers

Can an increase in public investment sustainably lift economic growth?

by Annabelle Mourougane, Jarmila Botev, Jean-Marc Fournier, Nigel Pain and Elena Rusticelli

This paper seeks to identify the conditions under which raising public investment can sustainably lift growth without deteriorating public finances. To do so, it relies on a range of simulations using three different macro-structural models. According to the simulations, OECD governments could finance a ½ percentage point of GDP investment-led stimulus for three to four years on average in OECD countries without raising the debt-to-GDP ratio in the medium term, provided projects are sound. After one year, the average output gains for the large advanced economies of such a stimulus amount to 0.4-0.6%. However, the gains are particularly uncertain for Japan. Reprioritising spending in later years would lead to average long-term output gains of between 0.5 to 2% in the large advanced economies. Those gains depend on the assumptions made on the rate of return. Hysteresis reinforces the case for an investment-led stimulus. Output gains will also be higher if the stimulus is combined with structural reforms and if countries act collectively.

 

A reassessment of fiscal space in OECD countries

by Jarmila Botev, Jean-Marc Fournier and Annabelle Mourougane

To what extent can public deficits increase without putting fiscal sustainability at risk, given the specific current macroeconomic situation of protracted low growth and low interest rates, combined with relatively high government debt levels? The answer depends on many factors, such as the state of the economy, the fiscal track record and projections of population ageing and their effect on government spending. .

 

Further reading

The effect of the size and mix of public spending on growth and inequality

 

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