Foundations for Growth and Competitiveness 2026

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9 April 2026

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1. Overview

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Abstract

This Chapter identifies and discusses new policy priority areas where structural reforms are needed to lift growth fundamentals across OECD and partner countries. It distinguishes between three distinct sets of policies: Enabling Factors, Market Incentives, and Targeted Policies, for which priorities are identified based on a new policy prioritisation model. New OECD research on the short-term effects of structural reforms is also presented. Country specific information supporting this chapter is available in the country notes (Chapter 2).

1. Introduction

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The need for a comprehensive review of growth and competitiveness policies

The question of why some countries succeed and others do not is one of the most enduring and fundamental questions in economics (Barro, 1996[1]). Indeed, a vast literature identifies a range of prominent drivers of prosperity and growth, including a stable macroeconomic environment (Barro, 1991[2]), (Bloom, 2009[3]), efficient tax systems (Porter, 1990[4]), good governance and solid institutions (Acemoglu, Johnson and Robinson, 2005[5]; de Soto, 2000[6]), high-quality infrastructure (Aschauer, 1989[7]), productivity-enhancing human capital and labour, as well as open and competitive markets (OECD, 2015[8]). While some of these foundations for growth have been studied jointly, there has been no single attempt to bring them together in a comprehensive measurement framework, despite the potential for broad-based reform packages to yield greater economic benefits than isolated reforms. Foundations for Growth and Competitiveness (F4GC) aims to equip policy makers with the tools to identify policy priorities, harness policy complementarities and improve policy coherence.

Revisiting the foundations of growth has become increasingly relevant over the past two decades, as potential growth has declined significantly in many countries (and across the OECD), driven by a sharp slowdown in labour productivity growth. This trend has coincided with a decline in structural reform momentum, prompting repeated calls for productivity-enhancing reforms to revive growth, as well as boost living standards and wellbeing (OECD, 2015[9]; OECD, 2017[10]; OECD, 2023[11]). Most recently, these issues have been brought into closer focus by the Draghi report, which highlights the entrenched challenges that the EU faces to raise competitiveness (European Commission, 2024[12]).

The challenge: structural headwinds to growth

Given the scale of the COVID-19 and inflation shocks, it is easy to lose sight of the headwinds to growth and competitiveness that were gathering before the pandemic. Annual potential output growth slowed by about one percentage point across the OECD since the late 1990s (Figure 1, Panel A). This was driven by a marked slowdown in trend labour productivity growth, reflecting two headwinds to growth and the business environment. First, the emergence of persistently weak business investment in the aftermath of the financial crisis meant that firms were devoting fewer resources to upgrading their technologies, their modes of production and their business practices. Second, a longer-term slowdown in multi-factor productivity (MFP) growth, raising questions about whether the forces of innovation and economic dynamism were in retreat (Figure 1, Panel B).

The contribution to potential growth from employment, on the other hand, has risen since the pandemic, reflecting low unemployment and an increase in labour force participation across the OECD, in particular that of older and female workers (OECD, 2025[13]). Other structural trends such as ageing populations and labour shortages, however, will likely weigh on the contributions from employment in the future.

Figure 1. Weak labour productivity and declining business dynamism underpinned the decline in potential output in the OECD
Copy link to Figure 1. Weak labour productivity and declining business dynamism underpinned the decline in potential output in the OECD

An emerging body of micro evidence has deepened concerns about productivity and competitiveness across OECD countries (Andrews, Criscuolo and Gal, 2016[14]). The starting premise is that productivity growth is sustained by experimentation with new ideas, the broad diffusion of advanced technologies and business practices and the efficient reallocation of resources to their most productive uses. It then showed that the aggregate productivity slowdown was underpinned by a growing divergence in the productivity performance of global frontier and laggard firms. While these patterns were suggestive of winner-take-all dynamics, it was also a symptom of barriers to knowledge diffusion and a decline in creative destruction whereby new firms enter and replace less productive incumbents (Andrews, Criscuolo and Gal, 2016[14]). These trends coincided with the increasing survival of zombie firms, rising market concentration and mark-ups and declining job mobility and labour reallocation towards more productive firms.

One interpretation of these trends is that market competition and economic flexibility were in decline, partly due to rising adjustment frictions that have reined in the process of creative destruction. This hypothesis is consistent with evidence highlighting the importance of structural reforms that improve the functioning of product, labour, housing, and risk capital markets, as well as bankruptcy regimes that do not excessively penalise failure (OECD, 2015[8]). Crucially, these framework policies determine the speed at which knowledge spreads throughout the economy, how efficiently resources are reallocated to more productive firms, and how strong the incentives are for firms to innovate.

Deteriorating educational outcomes across OECD countries emerged as another headwind to productivity and competitiveness (Figure 2, Panel A). Results from the PISA 2022 assessment show an unprecedented drop in performance across the OECD since 2018, with mean performance falling by ten score points in reading and by almost 15 score points in mathematics, which is equivalent to three-quarters of a year's worth of learning (OECD, 2023[15]). These declines can only be partially attributed to the COVID-19 pandemic, as negative trends in scores were apparent well before 2018. Indeed, recent evidence suggests that the medium-term decline in PISA scores has placed considerable downward pressure on the rate of human capital accumulation and can potentially explain one-sixth of the productivity slowdown in OECD countries ( (Andrews, Égert and de la Maisonneuve, 2024[16]) and Figure 2, Panel B). Results from the 2023 Programme for the International Assessment of Adult Competencies (PIAAC) also reveal significant cross-country disparities in skill levels, with average literacy proficiency either declining or remaining stable in most participating countries and economies (OECD, 2024[17]).

Figure 2. Mathematics, reading and science performances declined significantly since PISA began
Copy link to Figure 2. Mathematics, reading and science performances declined significantly since PISA began

The opportunity: an AI-fuelled productivity revival?

While these structural headwinds stymied aggregate growth prospects in many OECD countries over the past two decades, the rapid emergence of Artificial Intelligence (AI) has the potential to catalyse productivity growth over coming decades. To be sure, there remains much uncertainty over the economic consequences of AI. However, it seems plausible that AI could boost productivity growth in the United States by at least as much as the mid-1990s information and communication technology (ICT) boom (see (Filippucci et al., 2025[18]) and Box 1), which contributed an estimated 1-1.5 percentage points to annual US TFP growth during the 1995-2004 period (Byrne, Oliner and Sichel, 2013[19]). The extent of productivity gains will depend not only on the speed and scale of AI adoption, but also on policy choices, societal attitudes toward innovation, the level of frictions in product and labour markets, and the level and adaptability of human capabilities (see Box 1).

Box 1. The growth potential of AI

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Artificial Intelligence (AI), increasingly viewed as a new General-Purpose Technology, holds significant potential to boost long-run labour productivity and economic growth. The adoption of AI could drive capital deepening by prompting investments in complementary assets such as cloud infrastructure, data systems, specialised hardware (e.g. GPUs) and advanced software, thereby expanding the productive capital stock. In addition, AI is expected to directly increase multi factor productivity by serving as a method of invention, with the potential of boosting research and innovation (Filippucci et al., 2024[20]; Cockburn, Henderson and Stern, 2018[21]) and increasing the efficiency of the use of capital and labour.

However, AI is also expected to accelerate labour reallocation towards tasks and occupations complementary to the technology, while reducing employment in roles that become more easily automated, with uncertain effects on aggregate productivity. If a large share of occupations proves substitutable, the widespread deployment of AI, and particularly generative AI, could extend automation risks beyond routine tasks to include knowledge-intensive occupations, especially at entry levels. This could accelerate labour reallocation towards lower-productivity activities that are less amenable to automation. This would slow aggregate TFP growth via the so-called Baumol effects whereby technologically stagnant sectors experience above-average cost and price increases, take a rising share of national output (Baumol and Bowen, 1965[22]; Baumol, 1967[23]; Baumol, Wolff and Batey Blackman, 1985[24]; Nordhaus, 2008[25]).

Widespread productivity gains are expected…

OECD estimates suggest that the overall impact of AI on annual labour productivity growth ranges between 0.5 and 1 percentage point across G7 economies over the next 10 years, for a central scenario (medium adoption speed, like e.g. internet and computers, and expanded AI capabilities to a broad range of tasks; see Figure 3). For reference, the annual labour productivity growth, on average, has been 0.6% across G7 economies over the last ten years (2014-23), implying a growth-dividend from AI that is close to double the rate of recent productivity growth. In the most optimistic scenario, with fast adoption (as in mobile phones) and expanded AI capabilities, labour productivity gains are estimated at up to 1.3 percentage points, while in the most conservative scenario of slow adoption, they remain significant but at 0.2 to 0.4 points.

Figure 3. Adoption pace and sectoral specialisation drive the predicted differences in AI-productivity gains across countries
Copy link to Figure 3. Adoption pace and sectoral specialisation drive the predicted differences in AI-productivity gains across countries

AI’s predicted contribution to annual labour productivity growth over the next 10-years, in percentage points

…but they will depend on policy action to materialise

To avoid the benefits of AI being confined to the largest firms (Babina et al., 2024[26]), further investments in physical and digital infrastructure and ICT/digital skills will be necessary to promote the broad diffusion of AI, particularly among SMEs. In addition, countries will need to foster healthy competition in AI platforms and prevent excessive concentration both domestically and internationally, including by lowering services trade restrictions. This is particularly important as industry concentration has increased in the United States between 2007 and 2018. In addition, reducing reallocation frictions is critical to avoid having productivity gains confined to a few sectors while others lag behind. This requires investment in education and reskilling programmes to support workers as they adapt to changing job demands.

The importance of a dynamic and mobile economy

While AI holds promise for boosting productivity, countries must not lose sight of the deeper structural reforms needed to sustain long-term growth and competitiveness. Against this backdrop, F4GC initiative aims to equip policy makers with the tools to identify policy packages conducive to growth and competitiveness and improve overall policy coherence, by drawing on the wealth of economic expertise and statistical production that the OECD has developed across many areas. While this analysis focuses on GDP per capita, recognising it as a helpful benchmark for economic performance and living standards, this is not the only measure of societal welfare (see Box 2). Nevertheless, most indicators of well‑being, such as income levels, health outcomes, and living standards, are highly correlated with GDP per capita, making it a valuable proxy in the absence of equally comprehensive cross‑country data.

Achieving robust, job-rich, and productivity-driven growth is never guaranteed. Economies can be knocked off course by unexpected shocks, such as recessions, natural disasters, or pandemics. Over the longer term, governments must also navigate major structural shifts, including demographic change, the green transition, digitalisation, and evolving patterns of globalisation, all while delivering real income gains for their citizens. If the goal is to maximise growth prospects in the face of such uncertainty and promote resilience to shocks, then the focus must be on building economies that are adaptable, dynamic, and able to reallocate resources effectively.

Box 2. GDP per capita does not equate welfare but is a helpful benchmark

Copy link to Box 2. GDP per capita does not equate welfare but is a helpful benchmark

GDP per capita is an imperfect but useful measure of societal well-being

GDP per capita is measured frequently and consistently across countries and over time, making it a useful benchmark for comparing economic performance. However, because it focuses on production (leaving aside non-market activities such as unpaid work), it can be less suited than other indicators to capture the multidimensional nature of well-being.

To circumvent those limitations, various attempts aim at providing broader measures of economic performance and societal well-being. Some rely on providing a range of indicators to assess multiple dimensions separately, i.e. a dashboard approach, which allows more granularity but prevents simple comparisons between countries at a given point in time, or for a country over time. Notably, this has been the approach retained in the OECD How’s Life reports (OECD, 2024[27]). This multidimensionality is also at the heart of the Sustainable Development Goals.

Others aggregate those dimensions into a single metric, requiring strong assumptions about how those dimensions are weighed against each other. This has been the approach taken by the OECD in the past, for example when computing Multi-Dimensional Living Standards (MDLS) to combine health, employment, inequality, and income into a single welfare measure, by estimating willingness to pay to reduce unemployment and increase longevity (Boarini et al., 2016[28]). Similarly, Jones and Klenow (2016[29]) propose a measure to compare the change in consumption necessary to render countries equivalent in terms of the well-being of a person born at random in a country, combining the role of life expectancy, inequalities, and the social cost of carbon emissions (Jones and Klenow, 2016[29]; Bannister and Mourmouras, 2017[30]).

In practice GDP per capita provides a simple and comparable measure of economic performance tightly linked to other measures of well-being

Importantly, all these measures suggest that GDP per capita is a major driver of well-being, as those indicators typically include GDP per capita, or close indicators with a stronger focus on income and consumption, like Gross National Income or final consumption per capita. Sacks, Wolfers and Stevenson (2010[31]) find a correlation of more than 70% between real GDP per capita and life satisfaction according to the World Values Survey across 70 countries. GDP per capita is indeed highly correlated with measures typically used in multidimensional indices like educational attainment, life expectancy, poverty, or environmental progress (although admittedly less with other measures of inequality). This eventually leads to a high correlation with single-valued well-being metrics. In 2023, the correlation between the Human Development Index (a composite indicator combining health, education, and standards of living) and GDP per capita was 80% across all countries in the world and 67% in the OECD. The correlation of the Jones and Klenow measure of welfare with GDP per capita was 95% in 2014 (Bannister and Mourmouras, 2017[30]), while the correlation between MDLS and GDP growth between 1995 and 2013 was 88% (Boarini et al., 2016[28]).

GDP per capita, actual individual consumption, and multi-dimensional measures of welfare, are all highly correlated

To illustrate this tight correlation, this box conducts a simple update of the summary measure of well-being by Jones and Klenow (2016[29]) and Bannister and Mourmouras (2017[30]). Given data on Actual Individual Consumption (AIC) per capita, inequalities, life expectancy at birth, hours worked per worker, and emissions per unit of consumption combined with a social cost of carbon (taken here at USD 60 in 2023 PPP), one can compute estimates of welfare across countries in relative terms. The rank correlation between this welfare measure and GDP per capita is 79% (90% with AIC) across the 29 countries with available data in 2022-2023 (Figure 4). Similarly, the OECD’s How’s Life? 2020 report (OECD, 2020[32]) also showed that GDP growth was positively correlated with changes in most measures of well-being between 2012 and 2018, in particular with life satisfaction.

Figure 4. Aggregate measures of welfare are tightly correlated with consumption and GDP per capita
Copy link to Figure 4. Aggregate measures of welfare are tightly correlated with consumption and GDP per capita

Ranks on alternative welfare measure (1 = highest)

A key tenet of the F4GC initiative is that policy frameworks must be designed to facilitate and harness change, ensuring that firms, workers and institutions can swiftly pivot to seize emerging opportunities and to manage downside risks. Lifting policy barriers to mobility and economic dynamism is at the core of F4GC, noting longer run declines in business dynamism and job mobility in many OECD countries (OECD, 2021[33]). These trends are problematic given the many channels through which economic dynamism supports an opportunity-rich growth:

Firm entry plays a vital role in boosting productivity and labour utilisation, as young firms disproportionately drive net job creation (Haltiwanger, Jarmin and Miranda, 2013[34]; Criscuolo, Gal and Menon, 2014[35]). New firms also enhance worker bargaining power by providing outside job options (Shambaugh, Nunn and Liu, 2018[36]). Moreover, because of their comparative advantage in commercialising radical innovations (Henderson, 1993[37]), start-ups are likely to be central to driving the digital and green transitions. Ensuring a level playing field is therefore essential, so that younger firms can compete on merit rather than be held back by barriers created by incumbents.
Higher rates of voluntary job-to-job transitions supports productivity by facilitating the reallocation of labour toward more innovative and dynamic firms. They also lower the risk of long-term unemployment and improve the quality of worker-job matches, especially for young workers who are more likely to face skill mismatches (Davis and Haltiwanger, 2014[38]). Finally, more flexible labour markets raise worker bargaining power by increasing their outside options (Karahan, 2017[39]), and can help lower wage inequality (Criscuolo, 2021[40]). Ultimately, greater mobility allows individuals to fulfil their potential and exploit new opportunities.

Likewise, growth is stronger in merit-based environments where individuals have both the incentive and the means to develop their talents and make the most of economic opportunities. In contrast, less mobile societies – for example, where talented individuals from disadvantaged backgrounds are unable to fulfil their potential – face adverse consequences for growth and competitiveness through at least two channels (Causa and Johansson, 2009[41]). First, less mobile societies are more likely to waste or misallocate human skills and talents, which is especially problematic given the headwinds to human capital accumulation that have been building over the past two decades. Second unequal opportunities can undermine individuals’ motivation and effort, ultimately reducing labour utilisation and productivity.

Beyond these growth implications, there is a strong rationale for identifying and removing policy barriers to mobility on equity grounds. Promoting social mobility means providing individuals with the same opportunities ex ante, even if this does not imply equal outcomes ex post. This raises a range of important questions, including the extent to which parental background influences individuals’ wages, employment and skills development, and how public policy (from education and labour markets to tax and transfer systems) can help raise intergenerational social mobility.

New OECD evidence on this issue points to a high degree of complementarity between pro-growth policies and efforts to improve intergenerational social mobility (Causa, Tanaka and Nguyen, forthcoming[42]). For instance, measures of intergenerational mobility appear to be positively correlated with various metrics of business dynamism. Similarly, removing barriers to geographical mobility can help individuals access better opportunities while strengthening overall economic performance. Thus, placing the promotion of opportunity at the centre of policymaking is not only compatible with growth objectives, it is essential to unlock the potential of talent from all socio-economic backgrounds.

Based on these considerations, the focus of F4GC is on policies that set the pre-conditions for economic growth in a broad sense, notably by considering equal opportunities and environmental depletion, as far as they can have an influence on growth outcomes. However, it must be noted that policy priorities and outcomes beyond economic growth, such as the ones just mentioned, are extensively covered in a range of other OECD publications. It is also likely that if countries have not made sufficient progress on these core framework conditions – including, but not limited to macroeconomic policy frameworks, competition, skills, labour mobility and infrastructure – then the effectiveness of policies that target other objectives will be hampered. Moreover, having in place the right settings across a wide range of growth-related policies is likely to result in a bigger pay-off for each of those policies. As such, many of the policy priorities set out in this report can be legitimately viewed as complementary to each other, but also as part of a broader policy view to tackle objectives beyond growth.

Framework and database

To conceptually link policies to performance, the framework is built on a high-level typology that distinguishes between three distinct sets of policies: Enabling Factors, Market Incentives, and Targeted Policies. The first two sets of policies are horizontal in nature, in that they typically focus on creating the framework conditions that are necessary for firms and workers to thrive from an economy-wide perspective. Targeted policies, in contrast, are designed to target and respond to specific market failures and externalities that cannot be addressed with more horizontal policies, including in the areas of innovation, energy and the environment. These different sets of policies can interact with each other, and the effectiveness of targeted policies will be heavily influenced by the horizontal policies in place.

Enabling factors provide the foundational conditions necessary for economic growth, by improving the overall business environment and human capital. These include:

Macroeconomic Stability: sound fiscal and monetary policies create a stable environment for investment and long-term growth.
Institutions and Governance: strong legal frameworks, property rights, and effective public administration ensure stability and trust in the economy.
Infrastructure: investments in transportation, energy, digital connectivity, and utilities to enable, facilitate, and improve economic activity.
Education and Skills Development: a well-educated workforce enhances innovation, adaptability, and economic competitiveness.

Market incentives influence economic activity by shaping the incentives of firms to invest and individuals to supply labour, with important implications for economy-wide resource allocation (i.e. allocative efficiency). These policies include:

Tax systems: well-designed tax systems influence investment decisions, labour supply, and consumption patterns.
Competition policies: regulations that prevent dominant market players from exploiting their position, prohibit cartels, assess mergers to avoid excessive market concentration, and encourage market efficiency and business dynamism to enhance innovation and productivity.
Product market regulations: regulations that ensure product markets work effectively without creating unnecessary barriers to the entry and growth of firms.
Trade and investment policies: open markets and foreign direct investment (FDI) regulations shape international competitiveness.
Labour market regulation: policies governing employment contracts, wages, and worker protections to balance job creation and worker mobility with adequate social protection. These policies also include activation policies and safety nets, such as unemployment benefits and income support, to mitigate economic shocks while maintaining incentives to participate in the labour market.
Housing-related policies: measures directly affecting the supply of affordable housing, including land use and spatial planning, rental regulation and the provision of social housing.

Targeted policies are policies that can actively guide economic activities by providing targeted support to specific industries, firms, or individuals. Examples include:

Subsidies and incentives: financial support for key sectors (e.g. renewable energy, R&D), to foster innovation and address market failures.
Industrial policy: strategic government involvement to develop high-potential industries and enhance technological capabilities.

Taking these drivers of growth and competitiveness into account, the F4GC framework consists of policy areas structured around the three-groups typology, and where each of the area are broken down into sub-areas (Figure 5). Each indicator included in the framework has been curated based on several criteria, including: i) consistency with the literature on the drivers of growth and competitiveness; ii) the existence of measurable policy levers; iii) comparability across countries; iv) data availability and timeliness; and iv) measurement consistency. Moreover, the inclusion of indicators that relate to concrete policy levers – i.e. that are leverageable by policy makers – is prioritised (e.g. PMR indicators that directly measure regulations). In those instances where such data are unavailable or country coverage is too narrow, careful consideration is given to including an indicator more related to policy outcomes instead (e.g. indicators on the proportion of population with access to broadband). Annex 1.C details the list of indicators included in the database.

These indicators are compiled in a comprehensive database, comprising close to 250 indicators and providing a single-entry point for policy analysts and researchers to existing OECD data on the drivers of long-term growth. The complete list of indicators is detailed in Annex 1.C. The current version of the database covers 48 countries – all 38 OECD countries in addition to Argentina, Brazil, Bulgaria, China, Croatia, India, Indonesia, Peru, Romania, and South Africa. This data base is accessible through a new datahub, that provides a single-entry point to all the OECD existing data on growth competitiveness. It allows users to visualise data in a user-friendly way, grasp the various analytical dimension of growth and competitiveness, compare the various countries’ policy settings, and download the data to support empirical work in those areas. The datahub can be accessed through the QR-code and the embedded links in each individual country note (Chapter 2).

Figure 5. The Foundations for Growth and Competitiveness Framework
Copy link to Figure 5. The Foundations for Growth and Competitiveness Framework

Policy prioritisation model

The F4GC framework provides a reasonable depiction of the current state of thinking on the forces shaping growth and competitiveness at the country level, as well as the architecture for organising the database. It is also making the most of the OECD statistical production in the policy areas covered. But policy indicators alone are insufficient to guide the identification of coherent country-specific policy priorities. Indeed, it is crucial to assess a given policy indicator in conjunction with their relevant growth performance indicator, especially given the de jure nature of many of the extant policy indicators.

Accordingly, the F4GC framework is complemented by a policy prioritisation model, where each indicator is matched with one or more relevant indicators of performance relating to the three building blocks of economic growth: MFP (and related indicators including measures of human capital, creative destruction, business investment in R&D, seed funding), capital deepening (e.g. business investment in ICT, foreign direct investment) and labour utilisation (e.g. unemployment and employment rates by age and gender, long term unemployment, NEET). Given that each policy indicator can be matched to more than one performance indicator, this model includes more than 800 of these matching relationships. For a given country, a potential policy priority emerges when both the outcome and the associated policy measures are below the OECD average, with a higher priority assigned to (policy-outcome) pairs exhibiting larger gaps. This quantitative baseline is then complemented by the qualitative expertise of OECD country desk economists to identify the top five structural reform recommendations to boost economic growth (Figure 6). This mixed approach is applied to 48 economies, including all 38 OECD countries.

Source: OECD Secretariat.

Growth-enhancing policies often exhibit complementarities, where implementing multiple reforms concurrently can lead to mutually reinforcing benefits and superior outcomes. The corollary is that policies rarely function in isolation and the economic gains of policy strength in one area can be diluted by policy weakness elsewhere. Accordingly, this model incorporates the concept of policy complementarities into country-specific policy prioritisation, by giving a higher weight to pairs of policies that are known to be complementary based on robust empirical evidence, delivering for the quantitative stage a final ranking of potential policy recommendations. For example, the policy prioritisation algorithm will give a higher weight to both innovation and education policy recommendations when a country exhibits large gaps with best practices and outcomes in both these areas, so that the policy reform packages recommended in F4GC can have a larger bang-for-the-buck by exploiting the complementarities between these two policies. Similarly, the pass-through of human capital to productivity is amplified by policies that support adaptability and reallocation in labour markets, including well-designed product market regulations, insolvency regimes and labour market policies. More details on the functioning of the model can be found in Annex 1.A.

Empirical research conducted using the new database

This new publication is strongly rooted in a range of OECD and academic empirical research on public policies and growth. Additionally, the rich F4GC database also provides a platform to generate new empirical evidence on growth-enhancing structural reforms. While the long-term benefits of structural reforms are well-documented – for example, see Égert and Gal (2017[43]) –, the evidence base on the short-term impacts of reforms is less developed, despite this being a crucial issue from a political economy perspective. Indeed, while structural reforms create long-term gains for the economy, their short-run economic impact is more uncertain and uneven. Structural reforms might even be contractionary in the short term, for instance if they increase perceived income insecurity and precautionary savings. Yet short-run expansionary effects from structural reforms may emerge via improved confidence and expectations of future income gains, or if forward-looking financial markets price longer-term economic prospects – and therefore the effects of reforms – into asset prices, thus boosting near-term activity. Thus, short-term effects can shape the reactions of voters and interest groups, influencing whether reforms are politically feasible, sustained, or reversed.

By knowing and analysing these short-term effects, policymakers can anticipate resistance, design compensatory measures, build coalitions, and overall build a better reform strategy that can increase the chances of reforms being successfully adopted and implemented. Accordingly, this first edition of F4GC features new OECD research that applies Local Projection Method (LPM) combined with Differences-in-Differences to estimate the short-run effects of structural reforms on key growth metrics such as employment rates, capital deepening and labour productivity. These new results are presented in boxes throughout this report, while the details on the econometric approach can be found in Annex 1.B.

Key policy recommendations

Based on this novel framework, further details on the priorities to be addressed across countries covered can be found in the subsequent sections of this chapter and in the individual country notes (Chapter 2). Overall, more than one-third of the recommendations formulated are in two areas (Figure 7): product market regulation and insolvency, and human capital.

In the areas of product market regulation and insolvency, key recommendations to ensure a more level playing field for firms include reducing economy-wide administrative burdens and the strengthening of competition laws and authorities and regulators. Reducing barriers to entry and competition in network sectors (energy, telecommunications, and transport), professional services (particularly in advanced economies) and retail trade are also high on the agenda.

Recommendations in the education and human capital domain typically includes measures to improve the quality of education and its responsiveness to current and future skills demand, notably in vocational training. Access to primary and higher education is also prevalent among priorities to improve the stock of human capital, which reflects a common challenge of improving university responsiveness to labour market needs. In some cases, recommendations to improve human capital will have a bigger impact on productivity if combined with those identified to boost innovation, including public R&D support, stronger collaboration between business and universities and better co-ordination of public policies.

Figure 7. Shares of F4GC priorities across main policy areas
Copy link to Figure 7. Shares of F4GC priorities across main policy areas

Share of policy recommendations (%)

Similarly, to further ensure that human capital is put to efficient use, workers need to have the incentives and the opportunity to find quality employment in a dynamic labour market. This underscores the need for reforms to the tax and benefit systems to sharpen work incentives as well as providing well-targeted activation policies to improve employability. Moreover, several policy barriers should be lifted to make labour markets more inclusive, particularly for women. Fiscal disincentives to work for second earners, such as tax allowances for non-working spouses and joint income taxation of spouses, should be removed, while high costs and poor accessibility of childcare preclude women from participating in the labour market or from moving away from involuntary part-time jobs.

The need for more growth-friendly tax systems and well-designed governance and institutional settings is also a recurring theme. Shifting the tax burden away from incomes towards revenue sources such as property and consumption can raise economic growth. A shift to taxation of property and consumption can also have the advantage of exploiting less mobile tax bases, thus generating fewer distortions, in the context of globally integrated economies. Recommendations to improve the efficiency of the tax system also include phasing out inefficient tax expenditures and improving revenue collection, including through the use of digital technologies. At the same time, several countries have recommendations to reduce government ownership in the business sector, and to improve the overall quality of regulations, governance, and institutions, notably by expanding regulatory impact assessment and stepping-up stakeholder engagement.

Finally, to address market failures, governments must intervene to catalyse private investment, as the private sector is naturally prone to under-investment in certain activities essential to the growth fabric, such as infrastructure and innovation, relative to the socially optimal level. Thus, public support for business R&D is typically warranted as a means of overcoming these market failures, and a range of policy recommendations emerge in this area. Similarly, improving the quantity and quality of infrastructure in a cost-effective way is a key challenge, to boost growth and broaden access to markets, education, and government services. Significant gaps in transport and digital infrastructure emerge as key concern and expanding public investment to support broadband internet access is especially recommended to promote digital diffusion, notably for businesses to accelerate the adoption of AI. Simultaneously, ensuring the high quality of infrastructure projects is a key consideration in the efficient use of public resources, effective delivery of social services and the minimisation of negative environmental outcomes. Expanding and improving the use of cost benefit analysis in infrastructure project selection, making greater use of public-private partnerships (PPPs), involving the private sector, and using innovative financing models for infrastructure investment, is frequently recommended in countries with infrastructure gaps.

The following sections of this Chapter provide a detailed overview of the priorities identified across the 48 countries covered and according to the policy typology outlined above. This first edition of F4GC aims at providing a complete panorama of which reforms should be at the top of the structural policy agenda to durably boost growth. However, in the current economic context, where public debt levels are already elevated in many advanced and emerging market economies, debt service costs are rising, and spending pressures are mounting in areas such as defence, structural reforms can also be a tool of choice for policy makers to alleviate those pressures. By boosting growth, these reforms can increase the tax base and reduce the debt-to-GDP ratio, requiring less discretionary fiscal tightening. By making economies more dynamic and governments more efficient, these reforms support fiscal consolidation efforts without relying solely on austerity, ultimately strengthening debt sustainability and long-term resilience. These issues are tackled in the last section of this Chapter, in light of the new empirical evidence on the short-run effects of structural reforms produced for this first edition.

2. Priorities for foundational growth conditions: enabling factors

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Sustained growth requires solid enabling conditions to allow businesses, individuals, and institutions to thrive. These conditions, encompassing macroeconomic stability, strong governance and institutions, high-quality physical and digital infrastructure, and a high level of human capital, shape the environment in which all economic activity takes place. Without progress in these foundational areas, the returns from other reforms, such as those aimed at shaping the right market incentives or supporting specific sectors, are likely to be limited.

This section sets out the key policy priorities identified in F4GC to strengthen these foundational conditions for growth. While the precise challenges differ across countries, several common themes emerge (Figure 8). Reforms to boost human capital, through improving access to, and the quality of, education and training, are among the most frequently recommended actions. Delivering more effective and transparent governance, as well as strengthening institutional capacity and public service delivery, is another prevalent area. Investment in physical infrastructure, particularly in sustainable transport and energy systems, also remains essential. Finally, countries also need to accelerate digital adoption and ensure universal access to high-quality digital infrastructure and skills.

Figure 8. Distribution of policy recommendations on enabling factors
Copy link to Figure 8. Distribution of policy recommendations on enabling factors

Share of policy recommendations on enabling factors by area (%)

Boosting human capital

The significance of human capital in driving economic performance is well-established, highlighting education’s role not only in equipping people with necessary skills and knowledge but also in nurturing innovation and creativity (Becker, 1993[44]). A robust education system enhances workforce participation, adaptability, and flexibility, which are essential for staying competitive in a fast-changing economic environment (OECD, 2023[45]). Importantly, education also plays a key role in reducing poverty, with a recent study estimating that it accounted for about 45% of global economic growth among the world’s poorest 20% from 1980 to 2019 (Gethin, 2025[46]). However, as outlined in Box 3, there remain important differences in the level and allocation of adult skills across OECD countries, which carries important implications for productivity and growth (Andrews, Egert and de la Maisonneuve, 2025[47]).

Participation in early childhood education and care is a critical foundation for developing a country’s productive capacity through its human capital stock. Children who benefit from high-quality early education programmes are more likely to perform well in school, attain higher levels of education, and develop innovative thinking and problem-solving abilities that are highly valued in the global economy (Égert, de la Maisonneuve and Turner, 2023[48]; Heckman, 2008[49]; Elango et al., 2015[50]; OECD, 2018[51]). Access to affordable and high-quality childcare also facilitates labour market participation, particularly for women, as discussed in the section on “Removing obstacles to labour utilisation.”

Building on the foundation of early education, primary and secondary education are essential stages for equipping students with core skills such as literacy, numeracy, and digital competencies. Strong school systems help reduce social inequalities, improve life chances, and provide a base for lifelong learning and employment success (OECD, 2023[45]). Investments in school quality and teacher effectiveness have large long-term returns for both individuals and economies.

Tertiary education further strengthens human capital formation by equipping individuals with specialised knowledge and skills needed for a rapidly evolving labour market. Policies that promote participation in higher education and improve attainment levels help individuals prepare for the workforce and boost national competitiveness. Moreover, promoting digital skills at the tertiary level is increasingly important for a more adaptable and productive economy, providing strong complementarities with the policies to promote innovation discussed in the section “Accelerating innovation” (Sorbe et al., 2019[52]).

It is also essential to provide opportunities for skill development across the adult life cycle, particularly in ageing societies. Access to adult learning helps preserve or enhance a nation’s human capital stock in a changing economic environment by allowing individuals to refresh their skills, adopt new technologies, and maintain their competitiveness in the workforce. While there are typically significant lags between education reform and observed economic outcomes, strengthening adult learning systems can help improve the skill levels of working-age adults in the meantime (Égert, de la Maisonneuve and Turner, 2022[53]; OECD, 2021[54]).

Finally, policies can also target low-income or low-educated households to ensure their access to educational and training opportunities. Children from low-income families are on average 18 percentage points less likely to be enrolled in early childhood education and care (OECD, 2024[55]). On average in the OECD, 15% of the variation in mathematics performance in PISA can be attributed to students’ socio-economic background. Students whose parents have not attained upper secondary education are also 17 percentage points less likely to successfully complete their studies than peers whose parents have a tertiary qualification (OECD, 2024[55]; OECD, 2023[56]).

Governments can intervene in a targeted way to foster equal opportunities and boost economic growth without excessively burdening public finances. This is the case, for example, with initiatives to broaden access to childcare, where the marginal value of public funds is particularly high (Hendren and Sprung-Keyser, 2020[57]). In primary and secondary education, in turn, countries can consider “need-based financing” measures which provide additional resources to low-achieving schools with greater needs according to socio-economic characteristics, measures to attract the best teachers to disadvantaged schools, and reductions in early tracking for example.

Box 3. Adult skills and productivity: evidence from PIAAC

Copy link to Box 3. Adult skills and productivity: evidence from PIAAC

A recent OECD study highlights the relationship between productivity and the level and allocation of skills across industries in OECD countries, leveraging data from the 2023 Programme for the International Assessment of Adult Competencies (PIAAC) survey (OECD, 2024[58]). The 2023 survey adds a unique perspective on the skills of working-age adults across member countries. The survey assesses the literacy, numeracy, and problem-solving competencies of adults aged 16–65 across 29 OECD and 2 non-OECD countries, using adaptive tablet-based tests and realistic, culturally relevant tasks. The 2023 results reveal significant cross-country disparities in skill levels: countries such as Finland, Japan, and Sweden perform approximately 10% above the OECD average and 25% above the lowest-performing countries (see Figure 9).

Figure 9. OECD 2023 PIAAC scores
Copy link to Figure 9. OECD 2023 PIAAC scores

Average PIAAC scores at the country level, in score points

PIAAC also reveals important differences in the level of adult skills across industries: skills are the highest in intangible-intensive sectors such as ICT, financial, and professional services, while they tend to be lower in the construction and hospitality sectors.

Why skills matter more than ever

These differences in skill levels have direct implications for productivity. Within any given sector, a larger share of highly skilled workers, relative to those with lower skills, not only supports the broader diffusion of existing technologies but also fosters the creation of new ideas through increased investment in R&D.

Indeed, there is a robust positive correlation between the level of labour productivity and the average level of adult skills in the non-farm business sector. This partly reflects a positive association between R&D intensity and adult skills, and this innovation channel can account for over one-third of the impact of adult skills on labour productivity. The economic magnitude is also material: if the average OECD country were to reach the skill levels of the top three performers, aggregate average OECD productivity could increase by 17% (see Figure 10). Moreover, this level of skills effect can potentially account for at least one-quarter of cross-country sector-level labour productivity gaps.

Figure 10. Country-level labour productivity gains resulting from closing the skills gap
Copy link to Figure 10. Country-level labour productivity gains resulting from closing the skills gap

Percentage

Beyond skill levels: smarter allocation unlocks productivity

But skills alone are not enough. The ways in which scarce skills are deployed to different jobs and firms also shape productivity. Labour market mismatch arises when a worker’s qualification does not match the required qualification or because the worker’s field of study is misaligned with the type of job he/she is employed in. The 2023 PIAAC data suggest that more than 10% of workers on average experience mismatch, according to this metric, across the OECD. The incidence of mismatch tends to be higher in industries such as transport, hospitality, and administrative services and lower than average in ICT, finance, and professional services.

Productivity is higher in sectors where labour market mismatch is lower. Firms also play a role: for instance, productivity is higher when high-skilled workers are deployed to growing firms, while it tends to be lower when they are trapped in declining firms. Overall, the results of the study suggest that improving match quality can materially boost productivity. For example, closing the mismatch gap would be associated with a productivity boost of almost 5% on average across OECD countries, but this figure exceeds 8% in Canada and Japan, where mismatch is high (Figure 11).

Figure 11. Country-level labour productivity gains implied by closing sector-level labour market mismatches
Copy link to Figure 11. Country-level labour productivity gains implied by closing sector-level labour market mismatches

Percentage

Moreover, closing the labour market mismatch gap of the average OECD country to the best-performing countries can potentially account for more than one-tenth of the cross-country sector-level productivity gaps to the best-performing countries.

Figure 12 shows the distribution of policy priorities in the areas of education, skills and human capital, which span the lifecycle from early childhood education to adult learning. A large share of recommendations focuses on expanding opportunities for lifelong learning and providing additional support to disadvantaged schools and at-risk students, while priorities on vocational education and training (VET) and better aligning skills provision with labour market needs also feature prominently. These policy initiatives are particularly important considering the high rates of labour market mismatch that prevail in some OECD countries, which represent a key barrier to high productivity performance (see Box 3)

Figure 12. Policies to improve human capital accumulation across the life cycle are needed to boost economic growth
Copy link to Figure 12. Policies to improve human capital accumulation across the life cycle are needed to boost economic growth

Share of policy recommendations to boost human capital (%)

Strengthening lifelong learning policies and increasing the take-up of high-quality adult training is a common recommendation across countries. For example, the Slovak Republic could benefit from establishing a one-stop shop portal providing information on skills needed in the labour market and training opportunities. In Luxembourg, improving the effectiveness and take-up of the individual training leave programme (“congé individuel de formation”), especially among women and lower-qualified workers remains a priority. In Belgium, expanding the availability of online training and supporting on-the-job learning, by assisting small firms in developing training strategies and facilitating temporary employee replacement during training, could also be beneficial. Meanwhile, strengthening quality standards for training providers and introducing a national accreditation system to build trust and outcomes are reform priorities in Germany, Greece and the Netherlands. In addition, improving access to second-chance opportunities to re-engage young adults who have recently dropped out of higher education would be beneficial in Denmark and the United States.

A number of policy priorities focus on improving outcomes in disadvantaged schools and providing additional support to at-risk students. Policies supporting the integration of vulnerable groups in educational services include targeted support programs, reforms in resource allocations, support towards integration in higher education programmes, and changes in teacher incentives and training. Targeted support to disadvantaged students in general could be provided or increased in Colombia, France, and Mexico, while Iceland could support immigrant students particularly via language training; Denmark could also provide additional targeted support to schools with a high share of disadvantaged students. The allocation of resources across schools could also consider specific needs in some countries: Austria could consider need-based financing, France should develop a more progressive allocation of resources across schools, and Romania could allocate more public resources to schools located in disadvantaged areas. Access to higher education is a particular concern in Brazil, Czechia, and South Africa, where measures such as grants or income-contingent loans to disadvantaged students, or changes in the structure of university funding, could improve access. Incentives for teachers to work in underserved areas and disadvantaged schools could be provided or enhanced in Belgium, Brazil, Peru, and the United Kingdom.

Reforming and expanding VET systems and apprenticeships is another key area of focus. Costa Rica would benefit from providing VET programmes in areas with high labour demand, such as advanced manufacturing, ICT and the semiconductor sector. In Germany, expanding opportunities for the unemployed to complete formal VET degrees and strengthening coordination between public employment services and local employers could help improve employability and address skills shortages. In Latvia, streamlining accreditation procedures for VET providers could help expand the course offer and giving more autonomy to VET institutes to tailor course content to local economic conditions would be beneficial. In turn, Denmark and France would benefit from strengthening their apprenticeship programmes.

Aligning education systems more closely with labour market needs and fostering stronger collaboration with the private sector are common reform priorities. Latvia could benefit from strengthened cooperation between firms and training providers in the design and delivery of programmes, while China could link vocational curricula more directly to industry needs through co-funded upskilling vouchers for employees of SMEs. Additional measures include aligning both vocational and university curricula with emerging skill demands in ICT and green-transition sectors, like in Costa Rica, and expanding work-based learning opportunities. Similar recommendations have been made for other countries, highlighting the importance of structured engagement with employers, strategic use of public-private partnerships, and more flexible, demand-driven education and training systems.

Finally, additional reform priorities involve improving teaching quality, for example in Bulgaria, and addressing teachers’ training needs in Mexico or Romania. Revising the education funding formula, particularly by strengthening the link between funding and performance for public universities, could help raise education quality and efficiency in Italy. Austria could benefit from expanding access to childcare and early childhood education, while raising enrolment in post-secondary education could improve educational and labour market outcomes in the United States and Brazil.

Delivering on governance and institutions

An effective functioning public sector and independent judicial system can foster growth by supporting sound policy implementation, ensuring fair competition and safeguarding property rights (Barro, 1996[1]; Acemoglu and Robinson, 2010[59]). Maintaining the rule of law is particularly important in attracting investment and fostering innovation. It ensures contract enforcement, the protection of property rights, and the efficient resolution of legal disputes, all of which are essential for creating a favourable business environment (Gupta and Abed, 2002[60]; Wei, 2000[61]; Tanzi and Davoodi, 1997[62]). Similarly, upholding integrity in the public sector helps curb corruption and ensures that the government serves the public good rather than private interests. Building public trust through integrity measures can enhance cost-efficiency and support better institutional performance. High levels of trust in government can also increase voluntary compliance with regulations, reducing enforcement costs and contributing to a healthier economic system (North, 1990[63]; Putnam, Leonardi and Nonetti, 1994[64]).

Digital government initiatives are an increasingly important driver of public sector efficiency and innovation. By adopting digital tools and processes, governments can streamline service delivery, improve public sector productivity, and improve access to services for citizens and businesses. Digital government strategies help reduce administrative burdens and operational costs by automating processes, enhancing communication and coordination across government agencies. Moreover, digitalisation enhances transparency and accountability, as digital platforms are less prone to human error and corruption, further strengthening public trust in government institutions. It also promotes innovation in the broader economy by creating a more business-friendly environment, reducing regulatory delays, and fostering greater interaction between the public and private sectors (OECD, 2019[65]).

Finally, regulations can both facilitate and impede economic growth, depending on their design and implementation. Therefore, regulatory frameworks should be developed carefully. Ex-ante evaluations, commonly carried out through Regulatory Impact Assessments (RIAs), are key for assessing the potential effects of laws and regulations before they are implemented. These assessments ensure that regulations are not only necessary but also aligned with their intended objectives and designed to minimise any unintended consequences (Sunstein, 2018[66]; OECD, 2020[67]). By systematically evaluating the potential impacts of regulations on productivity and competitiveness, RIAs can play a vital role in fostering a regulatory environment that encourages economic growth and innovation (Davidson, Kauffmann and de Liedekerke, 2021[68]). Conducting RIAs for both primary laws and subordinate regulations allows governments to create regulatory frameworks that are better tailored to specific challenges and less likely to require costly revisions later.

In contrast, ex-post evaluations focus on assessing the effectiveness of regulations after their implementation. This includes the systematic review of laws and regulations to determine whether they have achieved their intended outcomes. By providing feedback on the actual performance of regulations, ex-post evaluations help to refine, amend, or repeal ineffective regulations. This ensures that regulatory frameworks remain adaptable to evolving economic conditions. The ongoing review process supports continuous improvement, helping to maintain a regulatory environment that fosters long-term economic stability and enhances overall economic performance. Finally, stakeholder engagement, through transparent and structured consultation mechanisms, is essential to regulatory quality, helping prevent unregulated lobbying that could otherwise distort policymaking and stifle innovation (Comin and Hobijn, 2005[69]).

Policy priorities in the area of governance and institutions span reforms aimed at strengthening public sector efficiency, improving transparency and accountability, and ensuring the efficient functioning of regulatory and judicial systems (Figure 13). A particular focus has been placed on modernising the public sector through digitalisation, improving public procurement systems, and reinforcing regulatory oversight and stakeholder engagement mechanisms. One of the most common recommendations is to step up digital government and modernise public administration, with the aim of improving service delivery and reducing burdens for citizens and businesses. In Japan, for example, streamlining regulations through the digitalisation of public services has been identified as a key step to reduce administrative barriers, particularly for start-ups and entrepreneurs.

Figure 13. Policies to improve governance and public institutions can foster investment and growth
Copy link to Figure 13. Policies to improve governance and public institutions can foster investment and growth

Share of policy recommendations to strengthen governance and institutions (%)

Improving the efficiency and integrity of public procurement systems is another frequent area for reforms. In Germany, recommendations include streamlining planning procedures, harmonising procurement processes, and better using digital tools. Strengthening local capacity is also important, with a focus on increasing staffing and technical expertise through inter-municipal cooperation and targeted training. The independence and capacity of judicial systems are also central to improving institutional quality and upholding the rule of law. In Romania, for instance, reinforcing the fight against corruption includes reviewing the system of preliminary hearings in corruption cases and addressing the shortage of magistrates, alongside implementing reforms to prevent conflicts of interest in public employment. In the Slovak Republic, judicial efficiency could be enhanced by promoting alternative dispute resolution mechanisms.

Ensuring that regulatory frameworks are evidence-based and accountable is another recurring priority. In Finland, the establishment of a comprehensive ex-post evaluation system has been recommended to improve the effectiveness of regulation. This includes introducing oversight mechanisms, regularly updating evaluation practices, and fostering a culture of continuous improvement through stakeholder feedback. In Greece, recommendations include enhancing the quality and timeliness of consultations on draft legislation and reducing the use of emergency legislative procedures. Formal mechanisms for reviewing existing business regulations in collaboration with employers and trade unions have also been encouraged.

Finally, a smaller but important set of recommendations aim to improve the regulation of lobbying and the integrity of policymaking. In the Netherlands, for example, authorities are encouraged to introduce a detailed and publicly accessible lobbying register across all levels of government, and to adopt OECD standards on post-public employment conduct.

Strengthening physical infrastructure

Physical infrastructure, including reliable and well-maintained roads, ports, airports, water and sewer systems, and a well-functioning electricity network, is the backbone of a productive economy. Indeed, research has highlighted the importance of the public stock of physical capital for productivity and economic growth (Aschauer, 1989[7]; Égert, Koźluk and Sutherland, 2009[70]). For instance, efficient transport networks reduce the time and cost associated with transportation, promoting competition and more efficient resource allocation in the longer term. In the short term, new research conducted using the F4GC database suggests that increasing investment in rail infrastructure – by the observed historical average change – can boost labour productivity by 0.6% and employment by 0.3 percentage points as soon as five years after the policy change (Box 4).

Box 4. The short-term impact of investment in rail infrastructure on economic growth

Copy link to Box 4. The short-term impact of investment in rail infrastructure on economic growth

Transport infrastructure investment can boost labour productivity even in the short term

While infrastructure investment is generally thought to have a long-run effect on growth, its short-run effect can also be estimated. For this purpose, rail investment data are taken from the “Investment Spending in Transport Infrastructure” survey ran by the International Transport Forum (ITF, 2025[71]). Investment spending in rail infrastructure is measured as a fraction of GDP. The impact on GDP per worker and the employment rate is estimated by local projection methods (See Annex 1.B). The results suggest that an increase in rail investment, of an average size observed over the sample, has a positive and gradual impact on labour productivity and employment rates (Figure 14).

Figure 14. The impact of an increase in rail infrastructure investment on labour productivity and employment rates
Copy link to Figure 14. The impact of an increase in rail infrastructure investment on labour productivity and employment rates

Impact of average historical increase in the ratio of rail infrastructure investment to GDP, average shock of 0.06 % points

Some countries could see significant labour productivity and employment boosts after 5 years by investing in rail

The above results allow the estimation of the potential impact of increases in rail infrastructure investment on productivity and employment, for countries where both investment levels are lower than the OECD median and the density of the rail network is relatively low. Gains in labour productivity and increases in the employment rate would arise after 5 years. Depending on the gap, the level of GDP per worker could be up to 2.5% higher at that horizon, while the employment rate would increase by up to 1 percentage point (Figure 15). Some of the strong effects displayed are due to large differences in the ratio of investment to GDP in OECD countries, while the density of transport network will also depend strongly on countries’ characteristics such as size and topology.

Figure 15. Increasing rail infrastructure investment could lead to economic gains
Copy link to Figure 15. Increasing rail infrastructure investment could lead to economic gains

Potential impact of increasing rail investment to the OECD median

Physical infrastructure projects often involve large financial commitments, long time horizons, requiring high levels of coordination and careful planning. For these reasons, governments play a central role in planning, delivering, and financing such projects. They are also responsible for robust project appraisal, ensuring that infrastructure investments are cost-effective and aligned with long-term strategic priorities. Better regulatory frameworks for public infrastructure can encourage investment, enhance quality, and maximise economic returns (OECD, 2023[72]). Permitting procedures should be transparent, efficient, and predictable. The governance of regulators is also crucial: they must be accountable, transparent, and independent, and the participation of stakeholders needs to be ensured.

There must also be mechanisms to review infrastructure-related regulations and to ensure effective coordination between regulatory bodies and across levels of government, to minimise duplication and misaligned incentives. Additionally, public-private partnerships are one way to leverage complementarities between public and private investment, with government commitments helping to reduce risk and mobilise additional private capital. In this way, public investment can act as a catalyst for large-scale projects, enabling broader private sector participation and ensuring more efficient resource allocation.

Finally, managing threats to public integrity is essential to promote trust in government, with broader benefits for the economy. Large infrastructure projects carry a high risk of integrity failures due to the scale and complexity of transactions and the number of stakeholders involved, especially in public-private partnerships, concessions, or complex procurement processes. Integrity risks can arise at every stage of the infrastructure lifecycle, leading to inefficiencies or inappropriate conduct. Mechanisms that ensure strong external oversight, internal control and audit processes, and the management of conflicts of interest are essential to realise the productivity-enhancing effects of public infrastructure. Tools such as open contracting, e-procurement platforms, and public disclosure of project performance can further strengthen transparency and accountability.

Figure 16 shows the distribution of priorities in the area of physical infrastructure. Recommendations span a broad range of issues, with a particular emphasis on energy infrastructure, strengthening regulatory frameworks and strategic planning, and improving connectivity and access in the transport sector. Many countries are also encouraged to revise funding formulas and reinforce administrative and institutional capacity, to ensure that infrastructure projects are efficiently designed, executed, and evaluated.

Figure 16. Investment in physical infrastructure and strengthened planning policies are needed to boost growth
Copy link to Figure 16. Investment in physical infrastructure and strengthened planning policies are needed to boost growth

Share of policy recommendations to strengthen physical infrastructure (%)

Boosting infrastructure investment is particularly important in countries with an ageing capital stock or rapid urbanisation, particularly in the energy and transport sectors. In the energy sector, many countries are advised to accelerate infrastructure investment to support energy security and enable the clean energy transition, such as in Australia, Japan or Mexico. In Colombia, this includes streamlining environmental licensing processes and engaging early with affected communities to facilitate the expansion of the electricity grid. In the transport sector, ensuring efficient use and sustainable financing of infrastructure is a shared challenge. As discussed in Box 4, Portugal and Ireland could experience short-term gains in labour productivity and employment by investing in rail along high-demand corridors and fully delivering the planned improvements to the public transport system, respectively. In addition, countries like Israel could benefit from demand-side measures such as the introduction congestion charges and user fees to improve road utilisation that complement supply-side investments and help address externalities linked to congestion and emissions.

Ensuring that planning and regulatory systems are well-designed and coordinated is essential to translate investment efforts into timely, efficient and sustainable outcomes. Strengthening infrastructure planning and regulatory frameworks – to improve transparency and reduce implementation delays, cost overruns, and integrity risks – is a common priority across countries. In Belgium, for example, authorities are encouraged to improve the governance of infrastructure projects by developing a single, publicly accessible digital platform providing comprehensive information on projects, and by integrating integrity risk assessments into infrastructure management frameworks. These measures are instrumental in scaling up investment in critical areas.

In addition, strengthening administrative capacity at the different levels of the administration can play an important role in a few countries to ensure that infrastructure policies translate into well-executed projects. For example, in Brazil the national development bank (BNDES) can play a catalytic role, by expanding its technical assistance to sub-national governments for infrastructure projects. In Costa Rica, recommendations include transferring project assessment and management responsibilities to an independent public agency, improving budget execution, and reinforcing the National Concessions Council to better oversee complex infrastructure projects and coordinate across stakeholders. These reforms are aimed at enhancing technical capacity, improving project selection and execution, and fostering greater public-private cooperation.

Finally, reforming the infrastructure funding formulas can be beneficial for a few countries, including Germany, Costa Rica, Brazil and South Africa. For example, in Brazil, public infrastructure investment should be prioritised while private investment should be mobilised by expanding the use of structured financial instruments, project finance mechanisms and targeted guarantees.

Accelerating digital adoption

Access to high-quality digital infrastructure, such as high-speed fixed and mobile broadband networks, supports the diffusion of digital technologies and productivity growth (Nicoletti, von Rueden and Andrews, 2020[73]; Gal et al., 2019[74]). Digital infrastructure also facilitates firms’ participation in global markets by supporting trade in services, reinforcing integration in global value chains, and promoting the cross-border diffusion of innovation (André and Gal, 2024[75]). Broader access can also generate positive spillovers through network effects, competition, and economies of scale (Égert, Koźluk and Sutherland, 2009[70]). While internet access is nearly universal across OECD countries, many still lack widespread coverage of high-speed broadband, particularly in rural and remote areas. In countries with limited fixed-line infrastructure, mobile broadband networks have become increasingly important to bridge the digital divide. Moreover, robust and reliable digital infrastructure is essential to harness the benefits of artificial intelligence, as the development, deployment, and use of AI depend on access to large datasets, cloud computing, and low-latency connectivity.

Beyond infrastructure access, digital government initiatives can strengthen population-wide digital skills and encourage firms to digitalise their interactions with public authorities (Sorbe et al., 2019[52]). Cybersecurity policies also play a role: by helping manage risk, they reduce barriers to digital adoption. Governments can support this process by developing voluntary frameworks and practical guidance to help firms manage digital security risks in communications infrastructure (OECD, 2023[76]). Finally, recent advances in artificial intelligence highlight its transformative potential for productivity and economic organisation, though policy best practices in this area remain at an early stage (Box 1).

Policy recommendations in the digital infrastructure space largely fall into two broad categories: fostering the adoption of digital tools across the economy and increasing public or private investment in digital infrastructure (Figure 17). A key priority is encouraging the uptake of digital tools by firms, households and public institutions. In Australia, for example, authorities are advised to expand the Consumer Data Right system to additional sectors, enabling consumers to safely share data held by businesses and facilitating innovation in digital services. In New Zealand, ensuring legislation is fit for digital markets, including by adapting copyright rules to avoid unduly hampering the use of AI, is seen as critical to enabling the next wave of digital transformation.

Figure 17. Policies to raise investment in digital infrastructure and foster the adoption of digital technologies
Copy link to Figure 17. Policies to raise investment in digital infrastructure and foster the adoption of digital technologies

Share of policy recommendations to accelerate digital adoption (%)

Alongside these efforts, expanding access to high-quality digital infrastructure remains a key goal. In Ireland, recommendations focus on completing the rollout of high-speed broadband by 2026 under the National Broadband Plan. Estonia is advised to increase public investment to extend ultra-fast broadband coverage, including through subsidies for last-mile connectivity in underserved areas and for small firms.

Setting the macroeconomic foundations for growth

Macroeconomic and financial stability is a pre-requisite for economic growth. Macroeconomic instability heightens economic uncertainty, prompting businesses to defer crucial investment and hiring decisions, potentially triggering capital flight (Loayza and Hnatkovska, 2003[77]; Ramey and Ramey, 1995[78]; Fischer, 1993[79]; Bloom, 2009[3]) and distorting the efficiency of the price mechanism and resource allocation (Lucas, 1973[80]). High inflation or large public deficits pose significant challenges to a stable macroeconomic environment, undermining confidence. Addressing an unsustainable fiscal situation may require significant cuts in spending and increases in taxation, financial repression, or even default or the restructuring of public debt in some cases, which can have important long-term consequences for growth (Reinhart and Sbrancia, 2015[81]; Reinhart, Rogoff and Savastano, 2003[82]). Taming high inflation may also require significant tightening of fiscal and monetary policy, with similar consequences for economic growth.

Financial systems prone to excessive credit expansions can trigger financial crises, which can result in deep recessions and prolonged recoveries (Minsky, 1975[83]; Reinhart and Rogoff, 2009[84]; Claessens and Kose, 2014[85]). This underscores the importance of policies that promote financial stability, including banking regulations and prudential tools aimed at limiting systemic risk, including regulatory limits on loan-to-value, capital requirements for banks, limits on bank leverage, and loan loss provision requirements. These policies tend to be associated with more sustainable credit growth, particularly household credit (Cerutti, Claessens and Laeven, 2015[86]; Alam et al., 2024[87]). More broadly, an efficient financial sector supports growth by allocating capital to productive uses, managing risk, facilitating transactions, and encouraging innovation (King and Levine, 1993[88]), while well-developed risk capital markets can help finance entrepreneurial start-ups, spurring innovation.

Relevant policy priorities in this space span measures to broaden access to finance for firms, strengthen prudential oversight, improve competition in the financial sector, and enhancing fiscal sustainability (Figure 18). A key policy recommendation is to relieve financing constraints on innovative and high growth firms through the development of the venture capital (VC) ecosystem, particularly in sectors like ICT, green technologies, and digital services. In Finland, for example, greater venture capital and private equity investment could be fostered by using public-private co-financing models and expanding government guarantees, measures that can crowd in private investors in sectors with high potential but higher perceived risks. Similarly, Italy is encouraged to develop its VC market to support the scaling up of medium-sized firms.

Figure 18. Broadening access to finance for firms, ensuring fiscal sustainability and strengthening prudential oversight are key policies to ensure macroeconomic and financial stability
Copy link to Figure 18. Broadening access to finance for firms, ensuring fiscal sustainability and strengthening prudential oversight are key policies to ensure macroeconomic and financial stability

Share of policy recommendations on macroeconomic and financial stability (%)

Some countries are also advised to strengthen the role of institutional investors to mobilise long-term savings toward productive investments. In Czechia, policies could promote a shift from capital-guaranteed pension funds to life-cycle-based investment strategies, while also improving conditions for institutional investors to invest in venture capital. Similarly, Lithuania has scope to further develop pension funds and soften investment rules to allow more capital to flow into unlisted firms. Fostering fintech through proper regulation, digital payments infrastructure, and financial literacy, could also help expand financing options for SMEs and startups. Improving competition in the financial sector is also a key objective. In Slovenia, evaluating the regulatory burden and aligning fintech regulations more closely with those of other European countries could help promote digitalisation in the financial sector.

3. Shaping incentives for businesses and individuals

Copy link to 3. Shaping incentives for businesses and individuals

Providing the right market incentives for firms and households is essential to foster sustained economic growth. A regulatory framework encouraging firm competition and business dynamism with limited barriers to firm entry and exit, and to the use and mobility of capital and labour, allows firms and households to respond flexibly to opportunities and manage downside risks. Existing evidence suggests that economies that more readily accommodate reallocation carry fewer scarring effects from recessionary episodes (Ollivaud and Turner, 2014[89]; Andrews et al., 2020[90]). Conversely, barriers preventing reallocation can also undermine the effectiveness of other policies, for example, those targeting human capital and innovation, as discussed in Sections 2 and 4.

This Section outlines the policy priorities to strengthen the foundations for economic growth by enhancing markets’ functioning and incentives. Given longer run declines in business dynamism and job mobility and persistent barriers to firm scale-up in many OECD countries, a more dynamic economy is needed. This requires a shift away from pandemic-era policies that prioritise economic preservation over reallocation (OECD, 2021[33]). Furthermore, megatrends like demographic change, shifting globalisation patterns and the digital and green transitions will demand a more adaptable and mobile economy to strengthen resilience in the face of future shocks and uncertainty. While the precise challenges differ across countries, several common structural policy needs emerge (Figure 19).

Pro-competitive regulatory reforms in domestic markets and reforms to streamline insolvency regimes are the most frequently identified priorities. These are followed by measures to boost labour force participation and mobility, to enhance the efficiency of the tax system, to strengthen openness to trade and foreign direct investment, and to reform housing sector regulations.

Figure 19. Distribution of policy recommendations to foster market incentives and allocative efficiency
Copy link to Figure 19. Distribution of policy recommendations to foster market incentives and allocative efficiency

Share of policy recommendations on market incentives by area (%)

Encouraging market efficiency and business dynamism

A business environment that encourages market efficiency and business dynamism is a key driver of long-term economic growth (Porter, 1990[4]). By influencing firm entry and exit and the level of competition in domestic markets, less stringent product market regulations and efficient insolvency regimes promote capital deepening and greater labour utilisation. Evidence suggests pro-competitive product market reforms increase investment (Gal and Hijzen, 2016[91]; Nicoletti and Scarpetta, 2005[92]; Andrews et al., 2025[93]), although the strength of the effect depends on the degree of credit constraints firms face and the existence of policies supporting firms’ access to finance (Gal and Hijzen, 2016[91]). These product market reforms also boost aggregate employment (Gal and Hijzen, 2016[91]; Gal and Theising, 2015[94]), in part by facilitating the expansion of young firms, which contribute disproportionately to net job creation (Criscuolo, Gal and Menon, 2014[35]; Haltiwanger, Jarmin and Miranda, 2013[34]). Efficient insolvency regimes that resolve firms’ financial distress quickly, predictably, by minimising losses and preserving viable activity, further underpin investment and labour utilisation by reducing the personal costs of business failure and thereby encouraging entrepreneurial risk-taking (Fossen, 2013[95]; Melcarne and Ramello, 2018[96]).

Pro-competitive product market regulations and efficient insolvency regimes can raise multi-factor productivity (Cette, Lopez and Mairesse, 2016[97]; Nicoletti and Scarpetta, 2005[92]) via several channels. First, by facilitating firm entry and an orderly firm exit, they provide outside options for workers to switch jobs (Shambaugh, Nunn and Liu, 2018[36]) and pave the way for the redirection of resources towards more dynamic and productive industries (Messina, 2006[98]) and enterprises (Adalet McGowan and Andrews, 2016[99]). This enhances the efficiency of labour allocation, particularly in innovative industries (Andrews and Cingano, 2014[100]). Second, they incentivise innovation (Futia, 1980[101]) both among frontier firms (Aghion et al., 2005[102]) and new entrants, which often hold a comparative advantage in developing and commercialising radical innovations (Henderson, 1993[103]). Third, due to competitive pressures, they promote the use of better managerial practices among firms (Bloom and Van Reenen, 2010[104]).

There remains scope to strengthen market efficiency and business dynamism, with key policy priorities including streamlining permits, licensing and reducing red tape, facilitating firm entry and exit, easing regulatory barriers in professional services and network sectors, strengthening competition frameworks and reducing the scope of SOEs and improving their governance (Figure 20).

Figure 20. Policy recommendations to encourage market efficiency and business dynamism
Copy link to Figure 20. Policy recommendations to encourage market efficiency and business dynamism

Share of policy recommendations to encourage market efficiency and business dynamism (%)

Reducing administrative and regulatory burdens is essential to boost competition and business dynamism. High regulatory burdens can deter the entry of productive firms, dampening innovation and the incentive for incumbents to improve efficiency (OECD, 2015[8]). Thus, reducing red tape would be beneficial for many countries. For example, streamlining business requirements through greater digitalisation could support start-up creation in Japan, while reducing the overlap and inconsistency across state regulations could lower administrative costs in Australia. Introducing “silence is consent” rules, where appropriate, would reduce administrative delays and costs in countries such as Chile and South Africa. One-stop shops, especially digital platforms, can further reduce administrative burdens in countries such as Israel, Switzerland or Peru.

While broad regulatory simplification is pivotal, reducing sector-specific regulatory burdens is also important, especially in industries supplying intermediate goods and services to the rest of the economy. Product market deregulation in these industries can generate positive spillovers for downstream firms that rely heavily on their inputs, both domestically and abroad (Gal and Hijzen, 2016[91]). In the long run, network sector deregulation between 1980 and 2023 in electricity, gas, telecom, post and air, rail and road transports boosted economy-wide labour productivity, on average across the OECD, by around 5% in cumulative terms, following material gains to value added (6%), employment (2%) and capital stock (4%) (Andrews et al., 2025[93]), with larger gains in industries heavily relying on inputs from deregulated upstream sectors like manufacturing (Andrews et al., 2025[93]; Benz et al., 2023[105]).

Reducing regulatory barriers in network sectors would be beneficial for several countries. In Canada, easing foreign entry restrictions could increase competition, while in Peru, lowering entry barriers and promoting business formalisation, including phasing out undue advantages for incumbents and opening access to essential infrastructure (e.g. energy grids, telecom networks), would support market dynamism. In the energy sector, regulatory reforms can help mobilise investment in infrastructure and strengthen energy security. For example, streamlining permitting processes would support electricity grid upgrades, storage systems and interconnections in Spain, while fast-tracking approvals would facilitate resilient infrastructure projects in Chile. Additional reforms to ease regulatory burdens in the energy sector would be beneficial in Australia, Belgium, Colombia, Costa Rica, Czechia, Hungary, Iceland, Korea, Mexico, Poland, Bulgaria and South Africa.

Easing the strict entry requirements and other regulatory restrictions in professional occupations like accountants, lawyers and real estate agents, and tailoring regulation to risks in these activities to safeguard quality, would strengthen competition and service quality, and are prevalent recommendations for Austria, Belgium, Canada, France, Greece, Israel, Italy, Korea, Luxembourg, Poland, Portugal, Türkiye, Argentina, Brazil and Bulgaria. Türkiye could particularly benefit from reducing restrictions on advertising and marketing of professional services to promote effective competition among service providers.

Ensuring contestability and fair competition in digital markets is increasingly important for growth, as digital platforms and services play a growing role in modern economies (Nicoletti, Vitale and Abate, 2023[106]). Promoting access to digital markets, particularly for SMEs, can support innovation and, through enhanced competition, improve digital service quality at a competitive price. This requires pro-competitive regulatory frameworks for the ICT sector, efficient infrastructure deployment, the effective allocation of public funds to close connectivity gaps and the availability of technical enablers (e.g. spectrum, internet protocol and exchange points) (OECD, 2021[107]; Sorbe et al., 2019[52]). For example, Australia would benefit from assessing barriers to digital competition and improving rules on data access and use; Canada from facilitating access by smaller firms to large telecom networks; and Israel from continuing to promote competition in fibre-optic broadband provision. Similar reforms would benefit Austria, Chile, Ireland, New Zealand, Switzerland, Brazil and Indonesia.

In addition, efficient insolvency regimes, early warning systems and effective restructuring tools enable the fast recovery of assets in the context of firm exit, supporting economic reallocation and fostering a dynamic and competitive market environment. For example, Belgium would benefit from speeding up the initiation of procedures and promoting the use of available out-of-court options and Greece from monitoring the evolution of non-performing loans and distressed debt. Similar measures to streamline insolvency procedures, strengthen early warning systems and improve restructuring tools would be beneficial in Austria, Chile, France, Iceland, Israel, Japan, Latvia, the Netherlands, Norway, Poland, Switzerland and South Africa.

Overall, ensuring a level playing field for all firms so that younger and smaller firms can compete on merit, rather than being locked out by incumbents, is essential to support economic growth. Strengthening competition frameworks and authorities remains a priority in many countries. For example, Germany could strengthen the mandate of its competition agency to challenge decisions by public regulators that hinder competition, while Peru could reinforce its competition framework to promote firm formalisation.

Strengthening competition frameworks also requires limiting and regulating direct government intervention, as state ownership and price controls can distort market dynamics, restrict competition and weaken productivity (OECD, 2015[108]). High public ownership is associated with lower employment and productivity, due to limited entry and inefficient resource allocation (Nicoletti and Scarpetta, 2005[92]). Reducing state ownership in inherently competitive industries, such as tourism in Slovenia, or network sectors in Switzerland, Brazil and South Africa would enhance efficiency. Aligning the regulatory treatment of state-owned enterprises (SOEs) with that of private firms to foster a level playing field would be beneficial in Canada and Switzerland.

Similarly, strengthening SOE governance, by enhancing transparency, clarifying mandates, and separating commercial and policy objectives, can improve performance and reduce inefficiencies in countries like Poland, Türkiye or China. For example, Türkiye would benefit from requiring independent SOE board members, setting formal rate-of-return targets for its SOEs, and limiting preferential access to state-backed financing. Furthermore, reducing the use of price controls would support a more dynamic and competitive business environment in Türkiye, as price controls, although intended to protect consumers, can undermine market incentives and productivity.

Removing obstacles to labour utilisation and encouraging an efficient allocation of labour

Boosting labour participation and ensuring an efficient allocation of skills to jobs remain crucial to support long-run economic growth. A well-functioning labour market serves as the backbone of the economy by ensuring that a large proportion of the population is engaged in productive activities and human capital is allocated efficiently. When individuals can easily enter and change occupations, it fosters a dynamic environment where skills and talents are matched with the needs of employers (Davis and Haltiwanger, 2014[38]). Furthermore, strong competition in labour markets can stimulate wage growth, as it raises workers’ bargaining power by increasing their outside options (Karahan, 2017[39]).

Ensuring a well-functioning labour market becomes particularly crucial in the context of population ageing (André, Gal and Schief, 2024[109]). With demographic change, the working-age population is projected to decline by 8% by 2060 in the OECD, with more than a quarter of OECD countries experiencing reductions of over 30%. Falling labour supply is projected to reduce GDP per capita growth l by about 40% from 1.0% per year in the 2010s to 0.6% per year on average over the period 2024-60 (OECD, 2025[110]).

Figure 21 shows the distribution of priorities to promote high labour participation and ensure the effective use of skills across the workforce. Policy recommendations to promote labour force participation include reducing the tax wedge and removing disincentives to work, expanding access to care support, reforming parental leave or promoting flexible work arrangements, extending working lives, and supporting the labour market integration of displaced workers including via a more efficient use of Active Labour Market Policies (ALMPs). Policy recommendations to promote labour mobility include reforms to employment protection legislation (EPL) and the wage bargaining system, and policy action to reduce the coverage of non-compete clauses.

Figure 21. Policy recommendations to remove obstacles to labour utilisation and mobility
Copy link to Figure 21. Policy recommendations to remove obstacles to labour utilisation and mobility

Share of policy recommendations to remove obstacles to labour utilisation (%)

Lowering the labour tax wedge

Tax and benefit systems have first-order impacts on work incentives. Passive labour market policies, including safety nets such as unemployment benefits and income support, cushion households against the impact of economic shocks and help prevent poverty. At the same time, they affect incentives to work: benefits that are too generous or long-lasting may reduce the urgency to return to employment, whereas steeper benefit reductions can encourage a faster return to work (OECD, 2023[111]; Kolsrud et al., 2018[112]). Similarly, a high tax wedge can discourage both hiring and the willingness to work, with particularly strong effects for low-income groups (L’Horty, Martin and Mayer, 2019[113]). These effects are often amplified when combined with benefit withdrawals, which can make additional work less financially rewarding. For these groups, the main adjustment is often whether to work at all rather than how many hours to work, as illustrated, for example, by the case of single mothers (Eissa, Kleven and Kreiner, 2008[114]).

New OECD evidence shows that lowering the tax wedge can have a positive effect on employment, including in the short term (Box 5). Reducing the tax wedge by around 1.7 percentage points could increase employment rates by close to 0.3 percentage points after two years, and by more than half a percentage point after five years.

Box 5. Lowering tax wedges can help boost employment in the short term

Copy link to Box 5. Lowering tax wedges can help boost employment in the short term

High tax wedges can weaken work incentives by reducing the financial gain from employment and deter firms from hiring by raising labour costs. This box presents estimates of the short-term effect of reducing marginal tax wedges on employment rates for different household types that earn average income. The estimation uses local projection methods and explores separately the effects for (i) single individuals without children earning the average wage and (ii) dual-earner married couples with two children, where both earn average income. For both groups, the marginal tax wedge is defined as the share of an increase in gross labour costs (at the average income) which is paid in personal income tax and social security contributions net of cash benefits. For example, for a single-earner household, the marginal tax wedge at average income was 35.8% in 2024 across OECD countries on average (OECD, 2025[115]).

The estimated impulse response functions suggest that lowering marginal tax wedges has a positive and statistically significant effect on the employment rate over the medium term, underscoring the importance of well-designed labour taxation systems that minimise disincentives to work and hiring. A 1.8-point reduction in the marginal tax wedge for single individuals (a typical change in this variable) raises the employment rate by about 0.6 percentage points after five years (Figure 22, left panel). A comparable effect is found for dual-earner households with children (Figure 22, right panel).

Figure 22. The impact of a reduction in the marginal tax wedge on employment
Copy link to Figure 22. The impact of a reduction in the marginal tax wedge on employment

Impact (in % points) of average historical reduction in the marginal tax wedge on the employment rate

Using these estimated effects, policy simulations illustrate the potential employment gains from reducing marginal tax wedges in countries where they are currently above the OECD median. As shown in Figure 23, countries such as Italy and Belgium could achieve employment increases of between 4 and 6 percentage points over five years by aligning their marginal tax wedges for single individuals with the OECD median. However, these would be the result from reductions of more than 10 percentage points in the marginal tax wedge, an order of magnitude above the average policy change between 2000-2018 across the OECD.

Figure 23. Lowering the marginal tax wedge could lead to employment gains
Copy link to Figure 23. Lowering the marginal tax wedge could lead to employment gains

Potential impact (in % points) on the employment rate of reducing marginal tax wedge for single households to the OECD median

Several country-specific policy recommendations focus on adjusting taxes to promote labour market participation. In Spain, for example, work incentives could be improved by lowering the tax wedge by reducing social security contributions for low-income earners. A more gradual withdrawal of benefits as earnings increase, thereby smoothing labour tax wedge thresholds, could also strengthen labour market participation incentives in Belgium, Italy and Spain. More specifically, adding to the recent reform of unemployment insurance benefits, Belgium could benefit from reducing benefits over the unemployment spell in fewer and larger steps. Estimates suggest that Belgium and Italy could experience the largest potential employment gains from aligning their tax wedge to the OECD median (Box 5), although this would require large reductions in the tax wedge. In Spain, the employment impact would also be positive, albeit more modest.

Boosting second earners’ participation through fiscal incentives and family-friendly policies

Reducing the tax wedge, in turn, can also contribute to reducing disincentives to work for second earners, who are often women (OECD, 2024[116]). Raising female employment rates has the potential to raise overall labour force participation and support future growth. OECD estimates show that rising female employment rates contributed nearly 0.4 percentage points to annual GDP per capita growth across the OECD between 2000-22, compared to just 0.1 percentage points from increases in male employment. In turn, closing the remaining gaps in female labour force participation and hours could still raise GDP per capita by around 4% in the average OECD country (Fluchtmann, Keese and Adema, 2024[117]).

Family-friendly policies and flexible work options supporting work-family life balance can also help raise female employment rates without imposing excessive costs on firms (Fernández-Kranz and Rodríguez-Planas, 2025[118]; Bover et al., 2025[119]; Asai, 2019[120]). Investments in early childhood education and care, for example, are associated with strong productivity and labour supply gains. Childcare offers a double dividend for productivity and competitiveness by both facilitating women’s return to work after childbirth and fostering early childhood development, laying a foundation for future workforce competencies as discussed in Section 2 (Égert, de la Maisonneuve and Turner, 2023[48]; Card, Kluve and Weber, 2010[121]).

Expanding access to affordable childcare therefore remains a key policy lever and is the most widely identified priority within F4GC to increase labour participation, with countries like Greece, Israel or Italy standing to benefit from it. In addition, extending access to full-day primary schooling could support participation in countries like Costa Rica, where schools typically operate only four hours per day, and Mexico, where full-day schedules are not yet universal. Mexico could also benefit from expanding access to formal elderly care, as informal elderly care continues to disproportionately fall on women due to persistent social norms.

Jointly considering taxes, benefits, and childcare costs is crucial to understanding and shaping work incentives, especially for second earners. Decisions on whether to return to work after having a child, for example, can be greatly affected by the concurrent effect on income tax rates, the potential loss of benefits, and the additional cost of childcare. To this point, lowering the marginal tax rate for second earners by reforming the current joint taxation of couples would be beneficial for Germany, while the Slovak Republic or Türkiye would benefit from introducing more flexible work options. In turn, smoothing disincentives arising from the combined effect of childcare costs, taxation and the withdrawal of benefits would be beneficial in Ireland.

Parental leave policies are also an important policy lever to promote long-term growth through their effects on participation. According to the literature, paid parental leave duration has a non-linear effect on female labour market participation, following an inverted U-shape with a threshold between 30 weeks and a year, above which female labour force participation falls (Del Rey, Kyriacou and Silva, 2020[122]; Olivetti and Petrongolo, 2017[123]). The United States would benefit from introducing a federal paid parental leave entitlement, while Czechia and the Slovak Republic would benefit from reducing excessively long parental leave durations that weigh on female employment. Several countries such as Sweden, France, Japan and Korea have already introduced earmarked leave for fathers or bonus schemes to encourage more equal sharing of parental leave (Gonne and Trincão, 2024[124]). But measures to promote a more balanced distribution of leave between parents and to strengthen incentives for the father to take paternity leave could also be beneficial in Austria, Czechia, Greece, Italy, the Slovak Republic, Switzerland and Türkiye, where gender disparities in caregiving responsibilities remain pronounced.

Easing the labour market integration of migrants

Migration can also help mitigate the challenge demographic change poses to economic growth. Supporting immigrant and refugee labour market integration can help boost aggregate labour market participation, reduce skills shortages, and promote a more efficient allocation of skills to jobs. Yet, language barriers remain the most significant obstacle to labour market access for migrants (European Migration Network, 2023[125]). Consequently, around one-third of highly-educated immigrants across the OECD and EU are employed in jobs for which they are overqualified, a rate 12 percentage points higher than among EU natives (OECD/European Commission, 2023[126]).

Establishing one-stop shops targeted at employers and local authorities to facilitate the recognition of foreign qualifications, expanding bridging programmes for migrants (OECD, 2017[127]) and broadening access to language training that supports labour market integration while addressing the unique challenges of adult language learning (OECD, 2021[128]) can help to make better use of migrant skills. Specifically, France could benefit from streamlining the recognition of foreign qualifications, while in Canada this recognition should be standardised across provinces along with domestic qualifications. Poland would benefit from implementing the recently adopted migration strategy to address skills shortages. Furthermore, administrative and regulatory measures for the employment of high-skilled foreigners could be eased in France, for key personnel in Israel, and for residency requirements in Hungary and Peru. Similarly, the processing of visa and work permits could be made smoother in Luxembourg via digitalisation, while employment-based visas in the United States could be redesigned to align them with the skills that are needed in the local labour market.

Encouraging employment at older ages

Another crucial element of the reform agenda in ageing societies is to remove barriers to the labour supply of older workers and encourage longer working lives. OECD simulations suggest that raising the effective retirement age by two-thirds of the projected increase in life expectancy for both men and women would raise real GDP per capita in the median OECD country by 3% in 2060 (Guillemette and Turner, 2021[129]).

Pension reforms to link statutory retirement ages to life expectancy or to phase out early retirement emerge as priorities in countries like Belgium, Germany, Luxembourg, Poland and Türkiye. At the same time, complementary measures to pension reforms are needed to support longer working lives in countries like Belgium, which would benefit from addressing barriers to older workers’ labour market retention. Health-related issues are a major driver of early retirement, with older workers more likely to experience sickness leave. Promoting healthy ageing, for example through incentives for employer investments in workplace health and well-being, can yield significant growth gains (OECD, 2023[130]), potentially exceeding those from increasing the effective retirement age in many countries (IMF, 2025[131]). Continuous education and training are also essential, particularly given recent declines in average proficiency among older adults (OECD, 2024[17]). Addressing age-related discrimination, including through training for line managers on the advantages of age-diverse teams, can further support work retention and participation among older workers (OECD, 2023[130]).

Improving matches between workers and employers in a rapidly changing economy

Active labour market policies, including training programmes, job placement services and wage subsidies, can also help reduce unemployment and improve job matches by promoting the mobility and adaptability of workers (Card, Kluve and Weber, 2017[132]). New OECD research suggests that active labour market policies can significantly support growth in GDP per capita even in the short term, with average reforms potentially boosting employment rates by close to 0.6 percentage points after five years (Box 6).

Box 6. The short-term employment impact of scaling up active labour market policies

Copy link to Box 6. The short-term employment impact of scaling up active labour market policies

Higher ALMP spending can significantly raise employment

Active labour market policies (ALMPs) play a key role in supporting labour market performance by facilitating job search, enhancing skills, and improving matching between workers and firms. While their long-term benefits are well documented, Figure 24 shows that the positive effects of higher ALMP spending on employment can also materialise within a relatively short time frame. The chart presents the results of local projection analysis estimating the impact of a 1.9 percentage point increase in ALMP spending per unemployed (as a fraction of GDP per capita), a change equivalent to the average reform observed across OECD countries during the period between 1999 and 2018. The results suggest a gradually increasing impact on the employment rate, reaching around 0.6 percentage points after five years.

Figure 24. The impact of an increase in ALMP spending on employment
Copy link to Figure 24. The impact of an increase in ALMP spending on employment

Impact (in % points) of average historical increase in ALMP spending per unemployed in % of GDP per capita on the employment rate, average shock of 1.94 units

These estimates allow for country-specific simulations. Figure 25 illustrates the potential employment gains for countries where ALMP spending is currently below the OECD median, highlighting the value of more ambitious investments in activation policies, particularly in countries where underinvestment may be contributing to persistent labour market slack. In countries such as Greece, the Slovak Republic, the United States, Latvia, Costa Rica, Chile, and Mexico, increasing ALMP spending to the OECD median could lift the employment rate by over 3 percentage points within five years. However, this would require large policy changes of more than 10 percentage points in the ALMP spending per unemployed relative to the GDP per capita, an order of magnitude above the 1999-2018 historical average change across the OECD.

Figure 25. Higher Active Labour Market Policies spending could boost employment
Copy link to Figure 25. Higher Active Labour Market Policies spending could boost employment

Potential impact (in % points) on the employment rate of increasing spending on Active Labour Market Policies to the OECD median

Several countries could benefit from redirecting public resources towards ALMPs, including Czechia, Estonia, Greece, Japan, the Slovak Republic, and Spain, with a particular emphasis on supporting training programmes. Simulations suggest that the largest potential employment gains from aligning ALMP expenditure levels to the OECD median would be observed in the Slovak Republic and Greece (Box 6). For some countries, the improvement in ALMPs can be achieved by improving the Public Employment Service (PES): this is the case in Germany and Spain, where better coordination with the private sector would be beneficial, and in Czechia by providing more resources to profile jobseekers.

ALMPs can be particularly beneficial for vulnerable groups, including displaced workers due to structural economic transformations and the long-term unemployed (Card, Kluve and Weber, 2017[132]), who are much less likely to receive callbacks from employers (Kroft, Lange and Notowidigdo, 2013[133]) and tend to have specific needs (e.g. as a consequence of caring responsibilities or health conditions) (Dromundo, Lüske and Tuccio, 2023[134]). Targeting ALMPs towards these groups can increase the efficiency of these programmes. For example, ALMPs can facilitate the reallocation of displaced workers from the phase out of coal in Bulgaria and of oil shale production in Estonia, as well as for the workers affected by the creative destruction generated by the growth of innovative firms in Korea. More generally, the targeting of ALMPs towards more vulnerable groups could also be improved in Lithuania and Austria, towards low-skilled workers in Japan and towards young people who are the furthest away from finding employment in France.

ALMPs can be made more efficient through quality assessments, a rebalancing between programmes, and better targeting to labour market needs. For example, in Czechia and Greece, ALMPs can shift towards more training, reskilling, and counselling programmes. The quality of training programmes also needs to be carefully monitored – a priority for the Netherlands and Greece, for example, through regular quality assessments. Boosting digital and green skills is a priority in Estonia, France, and the Netherlands to match labour market needs.

Ensuring labour regulation balances protection and flexibility adequately

Employment protection legislation (EPL), a core component of labour market regulation that defines hiring and dismissal laws, has important implications for growth. For example, well-designed employment protection can support productivity by fostering long-term work relationships and encouraging firm-specific human capital accumulation, as it protects workers from undue or unfair dismissals and provides employment stability (Belot, Boone and Van Ours, 2007[135]; Nickell and Layard, 1999[136]). Overly strict EPL, however, can weigh on productivity by hampering labour reallocation (Andrews and Cingano, 2014[100]; Gamberoni, Giordano and Lopez-Garcia, 2016[137]; Petrin and Sivadasan, 2013[138]; Bassanini and Garnero, 2013[139]) and by raising the cost of internal workforce restructuring, it can reduce the incentive to experiment with disruptive innovation and adopt leading technologies (André and Gal, 2024[75]; Coste and Coatanlem, 2025[140]).

Consequently, carefully designed EPL reforms that balance worker protection and flexibility can support economic growth, including in the short run. New research conducted for this edition of F4GC suggests that a reduction in the stringency of regular workers’ EPL equivalent to the average historical change over the period 2008-19 was associated with an increase in the employment rate of up to 1.5 percentage points over the following five years (Box 7). Similarly, a reform in Sweden in 2001 that gave small firms discretion to retain more productive workers instead of strictly following seniority rules boosted productivity by fostering labour mobility and increased capital accumulation (Bjuggren, 2018[141]). Building on these lessons, Portugal could benefit from promoting proportionate compensation in case of unfair dismissals and reducing reliance on reinstatement, while Türkiye could increase the flexibility of permanent contracts and expand the use of fixed-term contracts.

Introducing flexibility mainly through the excessive use of temporary contracts, however, can weigh on growth (OECD, 2025[110]). While a moderate use of temporary contracts may support job creation by facilitating matches between workers and firms, overreliance – particularly in dual labour markets where regular workers benefit from strong protection and temporary workers from little – can lead to inefficiently high turnover with adverse consequences on productivity (Hijzen, Mondauto and Scarpetta, 2017[142]; Bentolila, Dolado and Jimeno, 2019[143]; Bassanini and Garnero, 2013[139]). Overreliance on temporary contracts also lowers conversion rates from temporary to permanent jobs (Bentolila, Dolado and Jimeno, 2019[143]), which is associated with weaker worker effort, further dampening productivity (Dolado, Ortigueira and Stucchi, 2016[144]). Tackling dualism to diminish the gap between temporary and permanent workers, alongside reforms aimed at easing overall EPL is therefore recommended in Czechia and the Netherlands.

Box 7. The short-term impact of easing employment protection legislation (EPL)

Copy link to Box 7. The short-term impact of easing employment protection legislation (EPL)

More flexible labour markets can significantly increase employment in the short run

While structural reforms are typically thought to yield long-term benefits, their short-run effects can also be estimated. Figure 26 presents the results of local projection analysis estimating the average impact of a change in employment protection legislation on the employment rate (15–64 years). The shock considered, of 0.15 points, is equivalent to the average reform episode over the historical sample period. The results indicate a statistically and economically significant increase in the employment rate following an easing of EPL. The effect grows over time, with the employment rate increasing by approximately 1.5 percentage points after five years.

Figure 26. The impact of a reduction in the stringency of employment protection legislation on employment
Copy link to Figure 26. The impact of a reduction in the stringency of employment protection legislation on employment

Impact (in % points) of average historical reduction in EPL stringency on the employment rate, average shock of 0.15 units

Furthermore, wage-setting institutions such as collective bargaining can promote growth when well-designed, notably through effective coordination across bargaining levels and when involving representative social partners. An effective coordination across bargaining levels aligns wage negotiations at firm, sectoral and national levels, ensuring consistent wage outcomes and reducing conflicts. In addition, representative social partners, such as unions and employer associations with broad membership and legitimacy allow for agreements that cover a large share of workers and firms and strengthen the effectiveness of collective bargaining (Bhuller et al., 2022[145]). In France, for example, where bargaining occurs at multiple levels and industry-wide agreements cover most workers, collective bargaining appears to support growth by helping counterbalance employer market power (Azkarate-Askasua and Zerecero, 2025[146]). In addition, collective bargaining systems should balance inclusiveness and flexibility (OECD, 2019[147]), noting that it is particularly important in systems characterized by sector-level bargaining to provide sufficient flexibility to adjust wages and working conditions to accommodate firm-level shocks (OECD, 2018[148]). In Argentina, for example, introducing flexibility in the wage bargaining system, such as temporary opt-out clauses that allow firms in economic difficulties to suspend sectoral agreements, could improve labour outcomes.

Finally, non-compete clauses, which prevent workers from joining or establishing a competing firm, disclosing confidential information or soliciting former clients or colleagues, have been traditionally used to protect legitimate business interests such as trade secrets, client relationships and investments in training. However, growing concerns point to the potential misuse of such clauses to restrict job mobility and suppress competition. Preliminary evidence for OECD countries suggests that non-compete clauses reduce job mobility, firm entry, innovation and productivity, and are more widespread than often assumed, affecting up to 25 % of employees in some countries, including many low-wage workers (Andrews and Garnero, 2025[149]). For example, narrowing the scope of non-compete clauses to promote inter-firm mobility could support long-term productivity and economic growth in Italy.

Establishing a pro-growth tax framework

While tax systems are primarily aimed at financing public expenditures, they are also used to promote economic and social objectives (Johansson et al., 2008[150]). This variety in objectives has led countries to adopt different tax structures, with their tax systems differing in the design and combination of tax instruments, such as personal and corporate income taxes (Figure 27), and consumption and property taxes.

Figure 27. Tax structures vary across countries
Copy link to Figure 27. Tax structures vary across countries

Revenues from different tax sources as a percentage of GDP, 2023

A country’s tax structure can have large and heterogeneous effects on its growth potential, given that different tax instruments can alter firms’ and households’ incentives to work, save, invest and innovate. The growth response to tax changes also depends on other economic fundamentals, like the importance of capital and labour for production and the rate at which capital depreciates or the responsiveness of households’ labour supply, consumption and savings decisions (Ortigueira, 1998[151]; Stokey and Rebelo, 1995[152]). For example, in economies where capital accounts for a relatively large share of production, an increase in the corporate income tax may result in a more pronounced decline in growth. Higher personal income tax may also have stronger effects on employment and hours worked in countries with larger social safety nets.

High personal and corporate income taxes distort labour utilisation, capital accumulation and TFP, with adverse consequences for growth (Romer and Romer, 2010[153]; Cloyne, Dimsdale and Postel-Vinay, 2023[154]; Johansson et al., 2008[150]; Akgun, Cournède and Fournier, 2017[155]; Hagemann, 2018[156]). Specifically, personal income and payroll taxes reduce after-tax wages and impact leisure-work trade-offs, shifting labour supply decisions of both men and women (Keane, 2011[157]) as well as their human capital investments (Heckman, 1976[158]). Corporate income taxes raise the user cost of capital, reducing investment and the capital stock and are often considered a key lever through which governments may influence long-run growth (Rebelo, 1991[159]). But recent studies highlight the positive role of capital allowances and of defining the tax base appropriately in the design of the corporate income tax (Hanappi, Millot and Turban, 2023[160]). In addition, personal and corporate income taxes have been found to influence the location of innovative individuals and companies (Moretti and Wilson, 2017[161]) and FDI decisions (Devereux and Griffith, 2003[162]).

Indirect taxation, including consumption and property taxes, is less distortionary than taxing personal or capital income. Consumption taxes, while potentially regressive relative to yearly income, are considered to have a less adverse influence on the decisions of households and firms than income taxes (Akgun, Cournède and Fournier, 2017[155]; Hagemann, 2018[156]; Johansson et al., 2008[150]), with even more limited behavioural responses to changes in sales taxes when they are not salient (Chetty, Looney and Kroft, 2009[163]). In addition, recurrent property taxes are usually considered the least harmful to economic growth (Brys et al., 2016[164]; Johansson et al., 2008[150]) since the tax base is highly immobile, and consequently, there is limited behavioural response to the tax. Property taxation is discussed in greater detail in Section 3 in the context of targeted housing policies.

Other forms of indirect taxation, such as those addressing negative externalities like environmental or carbon taxes, can improve overall tax efficiency, even more so when their revenues are used to reduce more distortionary taxes. Simulations for OECD countries suggest that, on average, recycling a carbon tax yielding a one-percentage point of GDP increase in additional tax revenue to reduce the labour tax wedge could raise employment rates by around 1.5 pp by 2035, fully offsetting the output costs associated with the energy transition and resulting in higher living standards by 2035 compared to a scenario without the tax shift (Guillemette and Château, 2023[165]). This potential for efficiency gains in the tax system strengthens the economic case for environmental taxation, in addition to its environmental benefits.

Countries not only differ in the structure of their tax systems, but also in the effectiveness and efficiency of their tax administrations. Changes in the tax structure can interact with compliance behaviours in persistent ways (Londoño-Vélez and Ávila-Mahecha, 2024[166]). For instance, reducing complexity, broadening tax bases, or shifting towards less evasion-prone tax instruments, such as property or consumption taxes, can help strengthen compliance incentives. Supporting positive attitudes toward tax compliance, by making it as easy and as seamless as possible to meet tax obligations, is central to a tax administration’s task of raising vital public funds (OECD, 2023[167]). Digital solutions can help prevent non-compliance and increase the effectiveness of tax collection. The development of pre-filled tax returns over the last two decades has led to reduced errors and burdens for taxpayers, while encouraging more timely tax filings.

Policy recommendations in the tax space include broadening the tax base, reducing the tax burden from highly distortionary taxes while shifting the tax burden to indirect taxation, reducing tax complexity and improving tax compliance (Figure 28). The latter can be achieved by facilitating tax authorities’ access to bank information or promoting the use of digital payments.

Figure 28. Key policy recommendations to establish a pro-growth tax framework
Copy link to Figure 28. Key policy recommendations to establish a pro-growth tax framework

Share of policy recommendations to establish a pro-growth tax framework (%)

Recommendations to change the tax structure are widespread. First, Belgium, Canada, Czechia, France, Germany, Ireland, Italy, the Netherlands, Portugal, Sweden, the United Kingdom, Argentina and South Africa would benefit from broadening the tax base, including by reducing tax expenditures. For example, widening the consumption tax base and discontinuing the preferential corporate tax rate for SMEs would be beneficial in Canada, while Ireland could be better off by broadening the personal income and consumption tax bases.

Second, several countries would benefit from shifting the focus of the tax system towards indirect forms of taxation, such as on immovable property (Australia, Czechia, Denmark, Finland, France, Germany, Ireland, Norway, Portugal, Slovenia, Sweden and South Africa), on consumption by raising VAT or reducing the scope of VAT reduced rates and exemptions (Australia, Canada, Czechia, Finland, Slovenia, Spain, the United Kingdom, Argentina, Romania and South Africa) or on the environment, including by raising carbon taxes or expanding their scope (Belgium, Czechia, France, New Zealand, Poland, Portugal, Spain and Sweden).

Third, Belgium, Canada, Czechia, Denmark, France, Germany, Norway, Portugal, Slovenia and Sweden would benefit from reducing the tax burden on labour income, while Canada and Denmark could also benefit from changes in corporate income taxation. In addition to its well-documented long-term economic benefits (Cournède, Fournier and Hoeller, 2018[168]), new OECD evidence shows that effective corporate income tax reductions can also boost capital deepening (Box 8) and economic growth in the short-run, albeit without short-term effects on employment (Mertens and Ravn, 2013[169]). Specifically, the simulations conducted for this edition of F4GC show that increasing capital tax allowances, that would de facto decrease the corporate tax rate, could increase the stock of capital in the Netherlands and New Zealand two years after the raise (Box 8).Similarly, cuts to average personal income tax rates have been associated with higher investment and employment in the short term (Mertens and Ravn, 2013[169]).

Box 8. The short-term impact of effective corporate tax rates

Copy link to Box 8. The short-term impact of effective corporate tax rates

Reducing effective corporate tax rate would support capital deepening

This box assesses the short-term impact of changes in corporate tax on economic growth. For this purpose, forward looking effective corporate tax rates (ETR) computed by the Centre for Tax Policy and Administration (CTPA), and included in the F4GC data base, are used. For the purpose of the estimation, this box uses ETRs computed for a longer horizon as in (Hanappi, Millot and Turban, 2023[160])based on the methodology developed by CTPA (Hanappi, 2018[170]).

Two ETR measures are used. The effective average tax rate is an estimate of the effect of taxation on the average investment in a country and is often used to analyse location decisions such as the location of a subsidiary for a multinational. The effective marginal tax rate is the impact of taxation on the rate of return to break even on an investment and, as such, reflects the impact of taxation on the marginal investment, which in turn determines decisions of firms to expand or not.

The impact on the contribution of capital deepening to labour productivity growth is estimated by local projection methods (See Annex 1.B). The results suggest that a reduction in the effective average corporate tax rates (EATR) of -1.9 pp, the average change observed over the 1998-2019 period, has had a significantly positive and gradual impact on capital deepening (Figure 29).

Figure 29. The impact of a reduction in the effective corporate tax rate on capital deepening
Copy link to Figure 29. The impact of a reduction in the effective corporate tax rate on capital deepening

Impact (in % points) of average historical reduction in the effective corporate tax rate on the contribution of capital deepening to labour productivity growth

Some countries could see significant labour productivity boosts from cuts in corporate taxation

Using the results above allows to estimate the potential impact of cuts in effective corporate tax rates in OECD countries, where those rates are above the OECD median today. Gains in investment and thus in labour productivity would arise gradually. Depending on the current gap, the increase in capital deepening from a cut in the EATR could support productivity growth by 0.05 to 0.3 percentage points (pp) after 2 years, and up to 0.4 pp after 5 years (Figure 30). Because of the larger variations in effective marginal corporate tax rates (EMTR), cuts in EMTR could bring benefits of more than 0.5 pp in some countries.

Figure 30. Easing corporate taxation could lead to economic gains
Copy link to Figure 30. Easing corporate taxation could lead to economic gains

Potential impact on the contribution of capital deepening to labour productivity growth

Countries could reduce statutory tax rates or increase capital allowances to raise their capital stocks

The data constructed in Hanappi, Millot and Turban (2023[160]) also allows to distinguish the impact of changes in statutory corporate tax rates (STRs) and the present value of capital allowances (as a share of the initial investment).¹ In theory, those two dimensions of the corporate tax code target different investments (Adam, Delestre and Nair, 2022[171]). STRs should have a small impact on firms’ marginal investments since, by definition, those investments have low profitability. However, they will affect the tax revenue from economic rents, which also matter for investment decisions. As STRs affect the return on all investments, they play a particularly important role in shaping firms’ location decisions (Barro and Furman, 2018[172]). Consequently, the STR matters for the overall level and location of business investment. On the other hand, capital allowances are better targeted at reducing the cost of capital and the effective marginal tax rates, increasing the potential scale of investments, particularly when accompanied by scaling back of interest expensing. In practice, a recent analysis of the United States’ Tax Cuts and Jobs Act has suggested that the capital allowances provisions in the Act have had a higher return than the STR cut relative to their respective fiscal costs (Chodorow-Reich, Zidar and Zwick, 2024[173]).

Local projection results suggest that both statutory tax cuts and increases in capital allowances have a significant impact on productive capital investment, and that the impact of the average historical reform is of a similar order of magnitude (Figure 31). Gains in investment and thus in labour productivity would arise gradually from STR cuts and faster from increases in capital allowances. STR cuts to the median OECD country could have a potentially strong impact on productivity growth by up to 0.4 pp after 2 years, and up to 0.7 pp after 5 years for the highest-taxed countries, although this would require large tax cuts of more than 10 pp in France and Colombia (Figure 32). Increases in capital allowances to the median OECD country could boost capital deepening by between 0.2 and 0.3 pp after 2 years in the Netherlands and New Zealand.

Figure 31. The impact of a reduction in statutory corporate tax rate and an increase in capital allowances on capital deepening
Copy link to Figure 31. The impact of a reduction in statutory corporate tax rate and an increase in capital allowances on capital deepening

Impact (in % points) of average historical reduction in the statutory corporate tax rate and an increase in capital allowances on the contribution of capital deepening to labour productivity growth

Figure 32. Easing corporate taxation could support capital deepening
Copy link to Figure 32. Easing corporate taxation could support capital deepening

Potential impact on the contribution of capital deepening to labour productivity growth

Fourth, a few countries would benefit from reforming their capital gains, dividends and wealth taxes. Australia would benefit from reducing tax concessions on private pensions and capital gains on housing and France from further reducing the preferential treatment of capital gains and wealth. In Sweden, aligning the taxation of investment savings accounts with other forms of capital income and increasing dividend taxation could help reduce the scope for income shifting and increase the efficiency of the tax structure.

Despite playing a limited role in revenue collection, implementing those reforms offer scope to improve the tax system efficiency and can have positive effects on growth under specific circumstances. For example, applying moderate and broad-based levies that minimise distortions can complement labour taxation and finance productivity-enhancing public investment (Hagemann, 2018[156]).

Maintaining international rules-based open markets and FDI

Lower barriers to trade and FDI result in unambiguous gains in economic performance (André and Gal, 2024[75]). Openness to trade and FDI boosts capital deepening by encouraging domestic firms to invest in productive capacity to access export markets, and by improving access to a wider variety of capital goods and services (Goldberg and Pavcnik, 2016[174]). It can also incentivise innovation among domestic firms due to increased competition pressure (Akcigit, Ates and Impullitti, 2018[175]; Bloom, Draca and Van Reenen, 2015[176]; Kang, 2025[177]), and expose domestic firms to technology spill-overs, resulting in productivity gains and convergence towards international best practices (Melitz and Redding, 2014[178]).

While the long-run impact of trade on overall employment appears limited even in the case of large trade shocks (Autor, Dorn and Hanson, 2025[179]; Bloom et al., 2024[180]), the reallocation of economic activity can entail substantial adjustment costs that are unevenly distributed (Dorn and Levell, 2024[181]). Trade integration may lead to job losses and weaker economic prospects in local labour markets with a high concentration of import-competing industries. Ensuring that the benefits of trade are widely shared requires complementary policy responses that include social safety nets to protect displaced workers, active labour market policies (ALMPs) to support mobility by re-skilling and up-skilling, and potentially place-based policies to promote economic diversification and resilience in affected areas.

Openness to trade and FDI can also support long-term growth by fostering more diversified trade and investment relationships, thereby increasing resilience to shocks. Recent crises have exposed vulnerabilities in global value chains, at a time when trade concentration has been rising globally (OECD, 2025[182]), underscoring the importance of policies that promote more diversified and resilient trade (Box 9) and FDI linkages.

Box 9. Strategies to invest in trade resilience

Copy link to Box 9. Strategies to invest in trade resilience

While highly integrated supply chains support efficiency gains, they can also heighten trade vulnerabilities by increasing the exposure to external shocks, raising concerns around economic security. Limited slack or diversification means that disruptions at a single point (e.g. supplier delays or factory closures) can propagate rapidly across the global trade network, amplifying the risks to output and stability.

OECD research shows that trade-related vulnerabilities – particularly those arising from deep integration in global value chains (GVCs) – rise with both the size of foreign inputs used and the length of foreign value chains (Schwellnus et al., 2023[183]). Vulnerabilities become strategically concerning when large levels of trade concentration arise in products of strategic importance for national defence, public health and key industrial sectors. A bilateral import is considered highly concentrated when a country sources a significant share (10% or more) of a product from a specific partner, and overall national imports of that product are sourced from relatively few suppliers, as indicated by a Herfindahl-Hirschman Index (HHI) of 0.2 or higher. The risks are particularly pronounced in the automotive and ICT industries, where high GVC integration often coincides with strong geographic concentration of critical suppliers or buyers, compounding the risk of disruption (Arriola et al., 2024[184]).

Diversifying, bringing production home or to closer/friendlier locations (the so-called re-shoring and near-/friend-shoring), and optimising stockpiling are the three most common strategies to reducing GVC risks without eroding efficiency gains (Crowe and Rawdanowicz, 2023[185]). Diversification is generally the most effective strategy for reducing exposure to shocks and maintaining production continuity, especially when it involves goods that are standardised, rely on simple technologies, and are not subject to large economies of scale. Near-shoring and friend-shoring strategies can also mitigate risks by shortening supply chains and fostering regulatory alignment, respectively, but they face limitations such as higher relocation costs and geopolitical ambiguity in defining trusted partners. While re-shoring offers the promise of greater domestic control, it is often economically unviable, for example in sectors with high fixed costs or dependence on natural resources. Increasing inventory levels can serve as a buffer against shocks and contribute to robustness, but it is not a universal solution, given the high costs and limited applicability across products and firms.

Most recent policy action has focused on re-/near-/friend-shoring with fewer measures aimed at diversification and inventory management, despite mixed evidence on the effectiveness of such government measures to improve resilience (Crowe and Rawdanowicz, 2023[185]). For example, OECD simulations suggest that re-shoring policies – i.e. a combination of across-the-board 25% import tariffs, value-added subsidies equivalent to 1% of GDP directed to labour and capital in domestic non-services sectors, and additional restrictions on international sourcing through reduced trade elasticities – could lower global GDP by more than 5% by foregoing the benefits of international specialisation. Moreover, such measures do not significantly improve resilience and could instead increase economic volatility, with estimated GDP losses for individual countries ranging between 1% and 12%, depending on GVC integration (OECD, 2025[182]; Arriola et al., 2020[186]).

In the current context of rising trade tensions and trade policy uncertainty, one general recommendation for countries is to find ways of engaging co-operatively within the global trading system while addressing economic security concerns. Some specific policy recommendations include reducing barriers to goods trade, i.e. both tariff and non-tariff barriers, reducing barriers to FDI and reducing barriers to services trade (Figure 33).

Figure 33. Policy recommendations to promote rules-based open markets and FDI
Copy link to Figure 33. Policy recommendations to promote rules-based open markets and FDI

Share of policy recommendations to maintain openness to trade and FDI (%)

By acting as taxes that effectively increase the price of affected goods, tariff barriers reduce trade flows and hamper the positive impact of openness on economic growth described above, resulting in a loss both domestically and internationally. Tariffs reduce the number of traded varieties (Amiti, Redding and Weinstein, 2019[187]) and shield domestic producers from foreign competition, increasing their market shares and market power (Amiti, Redding and Weinstein, 2019[187]), with negative consequences for domestic innovation (Coelli, Moxnes and Ulltveit-Moe, 2022[188]). When tariffs are met with retaliatory tariff measures, the foreign demand for domestic exporters decreases, wiping out the positive effects on the market share of protected domestic industries (Handley, Kamal and Monarch, 2025[189]).

The overall impact of tariffs on long-run growth depends on the type of goods targeted and how they ripple through supply chains. While tariffs on consumer goods tend to have more limited effects on long-term economic growth, tariffs on intermediate inputs and capital goods are more detrimental as they distort domestic production processes and undermine investment in downstream industries (Baqaee and Malmberg, 2025[190]; Meleshchuk and Timmer, 2020[191]; Goldberg and Pavcnik, 2016[174]).

Moreover, further evidence from two separate tariff episodes suggests that tariffs on intermediate goods lead to a persistent reduction in aggregate productivity and employment in downstream industries (Cox, 2025[192]) and limited employment effects in the tariff-protected industries (Lake and Liu, forthcoming[193]; Flaaen and Pierce, 2024[194]). Some countries could benefit from reducing tariff barriers, including Colombia, the United States, Argentina, Brazil and India, for intermediate and capital goods.

Non-tariff barriers (i.e. trade policies other than tariffs and tariff-rate quotas) can also impact trade flows through a similar effect on trade costs and flows as tariffs. Non-tariff measures can be motivated by sanitary and phytosanitary restrictions and other technical regulations or standards with legitimate goals reflecting country preferences, e.g. to protect public health or ensure a certain quality standard. However, other measures can be excessively burdensome on foreign firms, including public procurement restrictions and administrative burdens to trade (Disdier and Fugazza, 2019[195]).

The OECD estimates the costs associated with non-tariff barriers at between two and ten times the costs of tariffs and suggest scope to lower unnecessary costs (OECD, 2019[196]). Trade Facilitation measures ensuring transparent, predictable and straightforward border procedures can significantly lower trade costs and allow firms to be more responsive to changing consumer preferences and participate in time-sensitive global value chains, and reduce distortions in consumption and production choices (OECD, 2018[197]). Such measures include simplifying the procedures, paperwork, and administrative formalities that add layers of additional costs to goods as they cross borders. Recent OECD evidence suggests that continuing to improve the efficiency of border processes towards best practices could reduce trade costs by around 8% in OECD countries (OECD, 2025[198]). Austria, Finland, France, Iceland, Israel, Mexico, Türkiye, the United States, Argentina, Brazil, Colombia, India, Indonesia and Peru would benefit from reducing non-tariff measures and improving trade facilitation.

Reducing the restrictiveness of services trade can also have large benefits on economic growth (OECD, 2025[13]). For example, services represent a growing share of the total value of manufactured goods (IMF, 2018[199]) and, on average, more than 30% of the value added of exported manufactured goods comes from services (both domestic and foreign) (OECD, 2021[200]; Miroudot and Cadestin, 2017[201]). As a consequence, reducing barriers to services trade – such as easing restrictions on the movement of people – including visa permit quotas, nationality requirements or limitations on the stay duration – improving regulatory transparency to eliminate opaque licensing procedures, and easing administrative requirements, can support manufacturing export performance (Liu et al., 2020[202]).

Trade that entirely takes place through digital means (e.g. digitally delivered cloud-computing services), can also be expected to bring productivity benefits by enhancing specialisation and competition, and also providing cheaper and better quality inputs for firms (Sorbe et al., 2019[52]). Easing the restrictiveness of digital services trade, for example, by establishing best practice regulations on interconnections among network operators or removing impediments to online payments, can support digital adoption and firm productivity.

Austria, Hungary, Iceland, Italy, Türkiye, the United States, India and Indonesia could all benefit from easing restrictiveness to services trade. However, restrictions on cross-border services trade, including digital services, are rising. Restrictions on services trade have historically been higher than tariffs on goods (Benz and Jaax, 2022[203]) and grew over 2024 in all service sectors as the global efforts to ease regulatory hurdles faded (OECD, 2025[204]). Similarly, the restrictiveness of the global regulatory environment in digitally enabled services has increased worldwide in more than 100 countries (OECD, 2025[204]).

Finally, further liberalising FDI would benefit several countries. Lowering regulatory restrictiveness has been shown to increase FDI inflows (Mistura and Roulet, 2019[205]), expanding the scale and diversity of capital available for productive investment in recipient countries and improving allocative efficiency (Andrews and Cingano, 2014[100]). Streamlining screening and approval procedures would support FDI in New Zealand, Korea and Iceland, while easing FDI restrictions would be beneficial in India and Indonesia. Reducing barriers to the appointment of foreign key personnel in Israel, and in network sectors in Canada, could enhance competition and productivity, provided national security concerns are appropriately managed. Similar gains could be achieved by easing FDI restrictions in services sectors in Finland, Japan and Mexico.

Implementing growth-friendly housing policies

Access to affordable housing has become an increasingly prominent issue in OECD countries, with supply constraints driving up costs and limiting access. Housing-related expenditures account for over one-fifth of household spending on average, according to the OECD Housing Affordability Database. A negative correlation between increases in housing prices and changes in the housing supply since 2011 suggests that affordability pressures are most acute in areas where housing construction has lagged, consistent with the presence of supply constraints (Figure 34) – a phenomenon also observed across US states (Glaeser and Gyourko, 2025[206]).

Figure 34. Supply constraints have contributed to the decline in housing affordability
Copy link to Figure 34. Supply constraints have contributed to the decline in housing affordability

Annualised change

A housing supply that can respond flexibly to shifts in demand enables workers to move to areas with better job opportunities and strengthens agglomeration economies – the productivity gains from firms and people locating near one another (Glaeser, 2010[207]). In contrast, housing supply constraints exacerbate affordability issues and carry large economic costs (Caldera Sánchez and Andrews, 2011[208]; Causa and Pichelmann, 2020[209]; Schleicher, 2017[210]). A key concern is that when regulations restrict the responsiveness of housing supply, they distort incentives and hinder geographic mobility, preventing workers from accessing jobs that best match their skills (Causa and Pichelmann, 2020[209]; Oswald, 2009[211]). The economic consequences can be substantial (Gyourko and Molloy, 2015[212]; Kane and Lopez, 2023[213]), with evidence from major US cities suggesting that labour misallocation due to restrictive housing policies reduced aggregate US growth by roughly one-third between 1964 and 2009 (Hsieh and Moretti, 2019[214]). Recommendations within F4GC focus on expanding the supply of affordable housing, improving access through smarter regulations and increasing the funding for social housing (Figure 35).

Figure 35. Policy recommendations to reform housing policies
Copy link to Figure 35. Policy recommendations to reform housing policies

Share of policy recommendations to reform housing policies (%)

More streamlined and flexible land-use and spatial planning policies could reduce housing supply constraints and support growth in countries such as Australia, Canada, Luxembourg, the Netherlands, Portugal, Slovenia and the United States. For example, in Australia, restrictive zoning and planning regulations, combined with rising construction costs, have constrained housing supply against a backdrop of rapid population growth. In this context, the federal government would benefit from incentivising local authorities to streamline zoning regulations. In the United States, housing development has also been limited by excessive zoning regulations, which could be reformed to allow for higher-density development in urban areas, particularly near transit corridors.

Improving the co-ordination and reducing overlapping responsibilities between levels of government, as well as addressing excessive decentralisation could also reduce the rigidity of housing supply (Cavalleri, Cournède and Özsöğüt, 2019[215]; Bétin and Ziemann, 2019[216]; Andrews, Caldera Sánchez and Johansson, 2011[217]). To this end, Portugal would benefit from harmonising regulation across municipalities. The example of Israel’s Housing Headquarters committee that oversees all relevant housing authorities and facilitates horizontal co-operation among them could be helpful (OECD, 2017[218]).

In addition, increasing the availability of social housing can increase the supply of affordable housing, especially among lower income households (Favilukis, Mabille and Van Nieuwerburgh, 2022[219]). Social housing can yield benefits with limited distortions on mobility and private development when paired with measures that support residential mobility and ease broader supply constraints. For example, eligibility rules – such as the 2015 United Kingdom’s Right to Move, which removed local residency requirements for social housing applicants moving for employment or apprenticeships – can facilitate mobility (OECD, 2021[220]; OECD, 2020[221]). Additionally, a larger social housing stock can further reduce mobility costs for eligible households relocating to seize economic opportunities (OECD, 2020[221]; Causa and Pichelmann, 2020[209]; OECD, 2020[222]).

Building more social housing is a priority for several OECD countries, including Australia, Canada, Israel, Portugal and Sweden. In Sweden, a social housing system could, if implemented, support the transition away from rent controls discussed below by providing affordable housing for low-income households. Such a system could also contribute to reducing socio-economic spatial segregation, which is more pronounced in Sweden than in other Nordic countries (Tunström and Wang, 2019[223]). In Australia, Canada and Portugal, a relatively small stock of social housing compared to other countries with available data (OECD, 2020[224]) calls for greater investment to expand the supply of affordable units. In Israel, increasing the housing supply via social housing development in economically dynamic areas would also address the rapid increase in house prices, which have recently hampered the labour market participation for new entrants.

Easing overly stringent rental regulations could also help alleviate housing constraints and support labour market dynamism. Rental regulations aim at addressing market imperfections such as asymmetric information and unequal bargaining power between landlords and tenants. However, overly strict rent controls and tenant-landlord regulations can reduce the quality of housing and the housing supply, by reducing the responsiveness of residential construction to demand pressures (Cavalleri, Cournède and Özsöğüt, 2019[215]; Diamond, McQuade and Qian, 2019[225]). Ultimately, these regulations can thus raise rents and home prices, hindering labour mobility (Kholodilin, 2024[226]; Mineshima et al., 2021[227]; Diamond, 2018[228]; Sims, 2007[229]). These associated longer-term costs tend to offset the short-term benefits of protecting tenants from large rent variations (López-Rodríguez and de los Llanos Matea, 2020[230]; Favilukis, Mabille and Van Nieuwerburgh, 2022[219]). Evidence for OECD countries suggests that relaxing strict rent controls could increase residential mobility rates by one third (Andrews, Caldera Sánchez and Johansson, 2011[217]; OECD, 2021[220]). Easing strict rental regulations restrictions could yield economic gains even in the short term, with gains increasing gradually over time, as suggested by new OECD evidence (Box 10).

Box 10. Loosening rental market regulations can gradually improve productivity and employment

Copy link to Box 10. Loosening rental market regulations can gradually improve productivity and employment

This box assesses the short-term impact of changes in rental market regulations on economic growth. Estimates below exploit data on rental market regulations developed by Kholodilin (2020[231]) which provides information on three types of policies (rent control, tenant protection, and housing rationing) for 150 countries since 1910. Several binary variables are averaged for each of the three types and then aggregated into a Rental Market Regulation Index (RMRI).

The impact on labour productivity, capital deepening and the employment rate is estimated by local projection methods (See Annex 1.B). The results suggest that a decrease in rental market regulation, for a shock calibrated as the average change observed over the sample, has a significantly positive impact on employment and a small positive impact on labour productivity (Figure 36). Thus, by easing rental market regulations, countries with tight rental market regulations could raise growth (Figure 37): employment rates could increase by up to 2 points at horizon 2 years, and 4 points at horizon 5 years, if countries with the tightest regulations were to set them at the OECD median. However, this would imply sizeable changes: in 2024, the OECD median was 0.33 against 0.66 in France and the Netherlands, while the average historical yearly shock was around 0.09 over the estimation window.

Figure 36. The impact of loosening rental market regulations on growth
Copy link to Figure 36. The impact of loosening rental market regulations on growth

Impact of average historical reduction in aggregate Rental Market Regulation Index, average shock of 0.09 units

Figure 37. Easing of rental market regulations could boost labour utilisation
Copy link to Figure 37. Easing of rental market regulations could boost labour utilisation

Potential impact (in % points) on the employment rate of reducing the Rental Market Regulation Index to the OECD median

Easing rental market regulations is a priority in Sweden and Slovenia. Evidence from the OECD suggests that such easing would support inclusive growth by supporting housing supply. For example, in Finland, the liberalisation of the rental market expanded supply –the private rental stock grew from 12% in 1990 to 17% in 2012– while preserving affordability with the simultaneous implementation of complementary measures to improve the responsiveness of housing supply (de Boer and Bitetti, 2014[233]). Sweden, which maintains some of the strictest rent controls in the OECD, could also benefit from abolishing rent controls for both newly built and existing housing units. Simulations conducted for this edition of F4GC suggest that these reforms could generate some of the largest potential gains in labour productivity and employment across OECD countries (Box 10), consistent with estimates that housing market misallocation in central Stockholm alone imposes an annual welfare loss of around 0.5% of GDP (Andersson and Söderberg, 2012[234]). In Slovenia, strict rental regulations are often bypassed, and the country would benefit from introducing standard rental contracts ensuring compliance with national law and protection for both tenants and landlords.

Finally, housing taxation can also play a role in reducing housing supply constraints. For example, taxing vacant land or property can increase the housing supply (Segú, 2020[235]). To boost the housing supply, Slovenia could apply higher property tax rates on secondary homes and short-term rentals and in Luxembourg, raising taxes on unused land could further incentivise housing supply beyond the easing of construction regulations also recommended.

Shifting from transaction-based property taxes to recurring property taxes would reduce barriers to mobility, support labour market adjustment, and foster economic growth (OECD, 2021[220]; OECD, 2022[236]). As noted in the discussion of pro-growth tax framework recommendations, transaction taxes are highly distortive, discouraging property trades and thereby limiting labour mobility (Causa and Pichelmann, 2020[209]; O’Sullivan, Sexton and Sheffrin, 1995[237]), whereas recurrent property taxes have a small adverse impact on mobility and growth relative to the other major sources of revenues (Arnold et al., 2011[238]; Akgun, Cournède and Fournier, 2017[155]). Among the countries that could benefit from a gradual shift from transaction-based taxes to recurrent taxation is Portugal. In addition, regular updates of property values – such as through computer-assisted mass appraisal tools, which are still absent in many OECD countries (OECD, 2022[236]) – would provide further benefits to the country.

Capping the capital gains tax exemption or phasing out mortgage interest relief can also support growth. They can increase housing supply and support labour mobility by reducing incentives that lock households into oversized owner-occupied homes. This makes it easier for households to move for work or other needs, and can reduce upward pressure on house prices, particularly where supply is constrained. Most OECD countries exempt owner-occupied housing from capital gains taxation, supporting homeownership and savings in an indirect, inefficient and regressive way. Likewise, tax relief for mortgage interest on owner-occupied housing is common in the OECD but tends to be capitalised into prices given low housing supply elasticity. It is also regressive and encourages indebtedness and overconsumption of housing services (e.g. via larger houses). In Australia, the capital gains tax concessions on main residences are particularly high and could be reduced, which would also limit the risks to financial stability. Reducing generous mortgage interest deductibility would also improve the efficiency of the tax system in the Netherlands and in Sweden in a progressive way.

4. Guiding and supporting activities through targeted and sectoral policies

Copy link to 4. Guiding and supporting activities through targeted and sectoral policies

Targeted policies serve to guide and support economic activity and correct for market failures, including the internalisation of externalities, which involves compensating those firms who generate positive externalities and taxing those who cause negative ones. For example, firms tend to innovate less than what is socially optimal, while many firms do not internalise the environmental costs that carbon emissions have on society. In turn, the decarbonisation of buildings is constrained by high fixed costs (e.g. heat pump adoptions) and coordination failures (e.g. between landlords and renters); the decarbonisation of the transport sector requires a parallel development of the electric vehicle fleet and a network of charging stations; and greening industrial processes require innovation, which has significant positive externalities beyond pollution reduction. Targeted policies covered by F4GC include:

Subsidies and incentives, such as financial support for R&D or industrial policies, including the strategic government involvement to develop high-potential industries and enhance technological capabilities to boost innovative activities and, in turn, increase multi-factor productivity.
Policies reducing price distortions on energy, deploying good design and evaluation of environmental policies, and reducing barriers to energy diversification and natural capital investments to enhance productivity by ensuring a reliable and affordable energy supply.

Targeted policies complement enabling policies and policies shaping market incentives described above, and key policy interactions emerge between them. For example, there is clear evidence that the effectiveness of targeted innovation policies will be enhanced by structural policies which promote competition, business dynamism and the reallocation of scarce resources to innovative firms (Acemoglu et al., 2018[239]). Moreover, human capital-augmenting policies may also be more growth-enhancing when accompanied by targeted innovation policies that address market failures and promote the diffusion of innovation.

Targeted policy recommendations identified in F4GC are prevalent, representing 10% of the total recommendations. Three in four recommended targeted policies focus on innovation support, and one in four on energy and the environment (Figure 38).

Figure 38. Targeted policies are warranted in various areas
Copy link to Figure 38. Targeted policies are warranted in various areas

Share of recommendations in targeted policies by area (%)

Accelerating innovation

Technological progress and innovation are the primary catalysts of long-term economic growth (Swan, 1956[240]; Solow, 1956[241]; Romer, 1990[242]). As economies move closer to the technological frontier, productivity growth becomes increasingly dependent on the development of new ideas, technologies and methods in production and service delivery. However, due to the unique nature of knowledge – being non-rival and only partially excludable – private sector investment in innovation may fall short of societal optimal levels, justifying government intervention to correct imperfections in the market for ideas (Andrews and Criscuolo, 2013[243]). Accordingly, innovation policies captured in the F4GC framework are based on quantitative indicators that capture various ways in which governments subsidise the innovation process (see Annex 1.C).

The preferential tax treatment of R&D – in the form of R&D tax credits and deductions – can generate additionality: that is, it can encourage firms to undertake more R&D than they otherwise would have absent the policy intervention. A range of factors determine the effectiveness of R&D tax incentives. First, additionality tends to be larger for policy measures targeted at smaller firms: OECD research shows that one extra unit of R&D tax support translates into 1.4 extra units of R&D, but with a larger effect for small and medium-sized firms compared to larger firms (OECD, 2023[244]). Second, policy stability may be just as critical as the scale of policy support in stimulating innovation: large fluctuations in R&D tax policies (whether towards higher or lower support for R&D) may be detrimental given that cost certainty is particularly important for intangible investment projects that have much longer time horizons and where the investment decision is difficult to reverse once the project has commenced (Westmore, 2013[245]).

While R&D tax incentives can potentially raise productivity by expanding the technological frontier and encouraging knowledge spillovers, design is crucial to ensure additionality and that it does not favour incumbents at the expense of young firms that typically possess a comparative advantage in radical innovations (OECD, 2023[246]). This can be done by making R&D incentives refundable for loss-making entities or redeemable against payroll taxes. In fact, OECD research indicates that firms respond more vigorously to tax incentives when refunds are available for loss-making entities, with an even stronger response when tax incentives are redeemable against payroll taxes (OECD, 2023[244]).

Preferential tax treatment can effectively promote R&D, but there are certain limitations that call for complementary expenditure on R&D. One concern is that the exclusive use of tax instruments to foster R&D may direct effort towards projects that are closer to the market, thus inducing a misallocation between basic and applied research. This is crucial because basic research is more non-rival in nature, thus resulting in larger knowledge spillovers than applied research, and tends to make applied R&D more productive (Akcigit, Hanley and Serrano-Velarde, 2020[247]), but its sizeable benefits come with long lags (Clancy, 2021[248]).

However, new research conducted for this edition of F4GC suggests that productivity gains from increased basic research spending materialise within four years (Box 11). Specifically, raising basic research expenditure by the average historical change over the 1995-2019 period could boost labour productivity by, on average, 0.3% within four years. Basic research is underfunded but additional direct government expenditure and indirect incentives for basic research could boost productivity and pay for itself over a decade (Barrett et al., 2021[249]). More generally, public expenditure directed towards R&D can crowd in private investment and innovation and boost productivity and living standards in the long run (Antolin-Diaz and Surico, forthcoming[250]; Moretti, Steinwender and Van Reenen, 2025[251]).

Box 11. Basic research can boost labour productivity in the short term

Copy link to Box 11. Basic research can boost labour productivity in the short term

This box assesses the short-term impact of basic research expenditure on labour productivity, using data from the F4GC database on basic research expenditure as a share of GDP and economic performance indicators across OECD countries. Estimation is conducted by local projection methods (see Annex 1.B).

The results suggest that increasing by 0.02 percentage points the fraction of GDP devoted to basic research can lead to a 0.3% gain in labour productivity, starting four years after the expenditure rises (Figure 39). The labour productivity gains tend to materialise more slowly than those of other structural reforms. This reflects the inherently high uncertainty surrounding basic research, as well as its often indirect and unpredictable outcomes. While these outcomes may not yield immediate benefits, they frequently serve as the foundation for future innovations and advances in fundamental knowledge. In addition, greater investment in basic research can foster conditions that enable non-frontier firms to adopt technologies and know-how developed by frontier firms through applied research. This may help mitigate the decline in knowledge diffusion between frontier and laggard firms, which has been identified as a key factor behind the weakening of business dynamism in recent years (Akcigit and Ates, 2021[252]).

Figure 39. The impact of an increase in basic research expenditure on labour productivity
Copy link to Figure 39. The impact of an increase in basic research expenditure on labour productivity

Impact (in %) of average historical increase in the ratio of basic research expenditure to GDP on labour productivity, average shock of 0.02 % points

Some countries could see significant labour productivity boosts from increasing basic research spending

Closing the gap in basic research expenditure with the OECD median could yield labour productivity gains across countries over a five-year horizon, ranging from 0.01% in Slovenia, where basic research spending is close to the OECD median, to 1.3% in Lithuania, where spending is further below the OECD median (Figure 40). In this context, using part of the increase in defence budgets toward defence-related basic research could help support the necessary investment. Indeed, defence agencies such as DARPA often support high-risk, high-reward projects rooted in fundamental science, with spillovers that extend well beyond military applications, such as the early internet protocols (ARPANET).

Figure 40. Raising basic research expenditure to the OECD median could boost labour productivity
Copy link to Figure 40. Raising basic research expenditure to the OECD median could boost labour productivity

Potential impact (in %) on labour productivity of increasing basic research expenditure to the OECD median

For these reasons, tax measures should be complemented with additional support policies to further R&D efforts. Governments can directly fund private R&D by providing grants, loans, or loan guarantees. In fact, improvements in the design of schemes that provide direct government support to R&D may explain why, in contrast with earlier empirical research, there is clearer evidence of a positive association with innovation (Westmore, 2013[245]). For example, the structure of public support has become more focused on subsidies for commercial R&D activities, and matching grants (for private investments) have become more common (Andrews and Criscuolo, 2013[243]). Recent OECD analysis also highlights a similar degree of additionality for direct funding compared to tax support and as well as complementarities between both policy instruments (OECD, 2023[244]).

Governments may also support research through universities or public laboratories, noting that more than half of basic research is performed in higher-education institutions (in the median OECD country) which is mainly funded by government (OECD, 2025[253]; OECD, 2025[254]). Beyond that, university-industry collaboration is also key: recent OECD evidence suggests that most of the industry inventive activity occurs close to universities and that academic start-ups account for an important share of overall start-up activity (OECD, 2019[255]). Accordingly, governments can promote knowledge transfers from academia to industry to support the commercialisation of inventions and the broader diffusion of foreign advanced technologies. In fact, the productivity gap between national and global frontier firms tends to be narrower in countries with more intensive R&D collaboration (Andrews, Criscuolo and Gal, 2015[256]), demonstrating the scope for R&D collaboration to aid the diffusion of new ideas.

Reforms to support innovation account for almost two fifths of recommendations related to targeted policies. In general, countries have room to increase expenditure on R&D – particularly on basic research – while ensuring that the support is delivered efficiently (Figure 41). For instance, expanding the scale of public support is a priority for countries such as Croatia, India or the Slovak Republic, while public investment in business R&D should increase in Ireland. Chile and Colombia could also raise the level of their R&D tax credits. Regarding basic research, boosting it would be beneficial for Japan (particularly by enhancing the role of the University Endowment Fund) or Sweden.

Figure 41. Increasing and improving R&D support while encouraging research collaborations will be important to boost growth
Copy link to Figure 41. Increasing and improving R&D support while encouraging research collaborations will be important to boost growth

Share of policy recommendations to accelerate innovation (%)

R&D support could also be made more efficient. For example, Denmark, France, Finland, Latvia and Italy could evaluate and monitor their tax credits (and other incentives) and redesign their policies accordingly. The targeting of R&D support policies could also be improved. For example, the refundable tax credit in Chile could provide priority access to digital SMEs, while the existing tax credits for small and young firms could be made refundable in Czechia, Croatia, Japan, and the Slovak Republic. Loss carry-forward provisions, particularly for those small and young firms which are less likely to be profitable initially, could be provided or enhanced in Czechia, Croatia, Japan and Poland.

More generally, those firms would be likely to benefit more from reduced barriers to accessing support. Luxembourg, Poland, and Spain could simplify application procedures to innovation programmes, while Italia, Lithuania, and Spain could provide better information to improve access to those programmes. Better information in those countries could contribute to close the gap in basic research spending with the OECD median and grasp the large potential labour productivity gains suggested by simulations (Box 11). Some R&D programmes may also be redundant: for instance, Chile, Croatia and Denmark could potentially better coordinate current schemes to ensure that they do not overlap.

Furthermore, the link between Higher-Education or Public Research Institutions and smaller businesses could be improved in Ireland and Italy. And to improve the diffusion of new ideas, the links between businesses and universities (and public research institutions more generally) could be strengthened in Chile, Denmark, Estonia, France, Ireland, Italy, Japan, Luxembourg, and Sweden. This could be done by encouraging staff mobility through cross-appointments, ensuring co-governance of research centres, and careful design of the intellectual property right system, for example. Co-financing public-private mechanisms could also be developed in Luxembourg and Finland, to fund research in high-potential but risky sectors.

Reducing barriers to energy and natural capital investments

Long-term shifts in weather and temperatures present significant risks to economies. Rising global temperatures and the increasing frequency of natural disasters threaten to reduce overall economic growth, by damaging productive assets and reducing labour productivity, including through heat stress (Costa et al., 2024[257]). Such shifts are also likely to exacerbate capital misallocation, as adaptation expenditures crowd out investment in productive assets. Adjustment costs affecting capital, labour, and material inputs can impose additional large economic costs (Caggese et al., 2025[258]; Parker, 2023[259]). Recent estimates, largely based on historical data, suggest that an unmitigated climate scenario (i.e. an increase of more than 4°C) could reduce global GDP per capita by 10-20% over the long term (IMF, 2017[260]; Kahn et al., 2021[261]; Burke, Hsiang and Miguel, 2015[262]; Burke, Davis and Diffenbaugh, 2018[263]; Neal, Newell and Pitman, 2025[264]; Swiss Re Institute, 2021[265]).

But an effective transition can also unlock large opportunities. The cost of renewable power generation has been falling significantly and is expected to do so in the future (BloombergNEF, 2025[266]), and the levelised cost of energy (LCOE) is already typically lower for renewables than for fossil fuels. The average LCOE has fallen by 90% since 2010 for utility-scale solar PV and by more than 50% for onshore wind projects (IRENA, 2024[267]). During the transition, improvements in energy efficiency could boost investment and innovation, and thus productivity (André et al., 2023[268]). The induced positive impact on air pollution is expected to boost labour (and agricultural) productivity.

Thus, well-designed environmental policies (OECD, 2024[269]) can boost economic growth particularly via green investment and energy efficiency gains (OECD/UNDP, 2025[270]; IEA, 2025[271]), as well as innovation spillovers. Securing affordable and diversified energy supply can also promote growth and economic resilience by cutting exposure to fuel price volatility, and temporary or localised disruptions in energy supply. The F4GC framework incorporates indicators which aim to assess countries’ policy mix in that area with the view to also boost growth, including the importance of renewables in energy supply, the support to innovation, and the country’s progress towards reducing energy intensity and enhancing energy security.

The mitigation of carbon emissions requires a comprehensive policy mix including emission pricing, and regulation and standards (D’Arcangelo et al., 2022[272]; Blanchard, Gollier and Tirole, 2023[273]), with their design and implementation key factors to ensure that they do not hinder productivity by imposing unnecessary burdens on firms (e.g. by increasing barriers to entry, distorting competition, or imposing transaction costs related to permitting and licensing (Berestycki and Dechezleprêtre, 2020[274]; Koźluk, 2014[275]). The ability of environmental regulation to boost economic growth is included in the F4GC framework by considering product market regulations in the electricity and gas sectors, and the indicator of design and evaluation of environmental policies (DEEP), which assess the market burdens generated by environmental policies. More recently, the OECD has developed a diagnostic tool for policymakers to reduce regulatory barriers for the deployment of renewables infrastructure (Box 12).

Box 12. Regulatory barriers to solar, wind, and pumped hydro storage in the OECD

Copy link to Box 12. Regulatory barriers to solar, wind, and pumped hydro storage in the OECD

Electricity demand is expected to rise significantly globally across the OECD by 2040, driven by increased electrification in sectors such as transport, heating, and industry. A growing share of this electricity is projected to come from renewable sources. However, unlike centralised thermal generation, renewable-based electricity systems require greater system flexibility—including storage, demand-side response, supply-side balancing, and enhanced interconnection across regions and countries.

Legacy regulatory frameworks, designed for conventional, centralised systems, are often ill-suited to the decentralised, variable, and diverse nature of modern renewable energy systems. They frequently lag behind in accommodating the grid investments, flexibility measures, and business models essential for efficient system operation, thereby creating regulatory barriers to entry and deployment.

Recent OECD analysis identified five key common barriers to renewable energy in the EU countries.

Typology of key regulatory barriers in the EU for renewable energy

First, unclear or limited legal definitions, rights and obligations create uncertainty and discourage market entry, especially of new solutions. Examples include restrictions on dual land use for agricultural land in most EU countries, which constrain the development of agrivoltaics (the integration of solar energy generation on agricultural land). In France and Italy, where such dual land use was made explicit in recent legislative changes, there has been significant increase in agrivoltaics projects.

Second, uncertain remuneration and cost treatment can also weaken incentives for market entry. For example, regulatory frameworks in most EU countries neither provide for, nor allow remuneration of new services (such as inertia services), which severely limits their deployment on a stand-alone basis. In response, countries like Ireland have recently introduced new market rules to create price signals for emerging inertia technologies and services.

Third, spatial planning and permitting processes, often governed at sub‑national or even local levels, are often outdated, complex and involve multiple authorities acting sequentially. This results in wide discretion, which is resource intensive, and results in excessive permitting timelines (commonly more than five years in the EU, and in some cases up to nine). Such delays significantly affect investment and efficient siting decisions. By contrast, streamlining rules has proven highly effective: during the energy crisis, emergency regulations drove double‑digit increases in permit issuance across several EU Member States. In Flanders (Belgium), for example, 300 MW of wind power was approved within eight months of the reforms—exceeding the total from the entire previous year. Likewise, Germany’s 2023 Grid Expansion Acceleration Act produced a fourfold increase in approved power lines between 2024 and 2025.

Fourth, grid connection rules, which in many countries still operate on a first‑come, first‑served basis, creates bottlenecks, allowing speculative projects to hold capacity while delaying or discouraging viable investments. Sweden has taken a different approach, adopting a project‑maturity model., underpinned by an industry standard developed with the national Transmission System Operator. This approach allocates connections based on readiness, ensuring capacity is prioritised for projects with the highest likelihood of completion.

Fifth, structural disincentives in grid development persist. Current regulatory frameworks generally favour traditional capital‑intensive expenditure, offering limited incentives for anticipatory investment or adoption of innovative grid-enhancing technologies or digital solutions. For instance, in many Member States, grid system operators lack regulatory scope to procure flexibility services or recover costs for non‑wire alternatives, such as digitalisation investments, even when these are more efficient than conventional grid expansion.

Source: OECD Diagnostic Toolkit for reducing regulatory barriers to solar, wind and pumped hydro storage in EU – Empowering Policymakers at National, Regional and Local Levels (2025, forthcoming).

Based on these considerations, most recommendations for energy and natural capital emphasise the importance of an articulated policy agenda for the green transition, combining increases in the taxation of carbon with the support for investments in green energy, transport and buildings infrastructure, and climate resiliency. While raising carbon taxation can support growth as part of a package of market incentives to improve public finances efficiency (see Section 3) and network infrastructures can provide better foundational growth conditions (see Section 2), targeted policies – including well-designed regulation and standards, as well as the removal of price distortions supporting brown energy – are also recommended to support long-term growth (Figure 42).

Figure 42. A mix of higher carbon pricing, additional green investment, and smart regulations can support a growth-friendly green transition
Copy link to Figure 42. A mix of higher carbon pricing, additional green investment, and smart regulations can support a growth-friendly green transition

Share of policy recommendations to raise investment in energy and natural capital (%)

The main targeted policy area to promote energy investment and natural capital is a review of the permitting and regulatory framework. In Belgium, Bulgaria, Chile, Croatia, Czechia, Iceland, and Korea, and renewable energy and electricity projects could be fast-tracked by streamlining permitting procedures. Recommendations to accompany this streamlining include increasing administrative capacity (Croatia), launching a one-stop shop (Croatia, Czechia, Bulgaria), identifying suitable land for “acceleration zones”, making provisions to override public interest in project approval (Belgium, Czechia), and sharing the benefits with local communities (Korea, Iceland). Moreover, price distortions due to subsidies to energy prices are sizeable and should be phased out in Croatia (particularly for natural gas), Czechia, and France, which would carry the added benefit of raising the effective price of carbon while boosting growth and raising revenues. Finally, countries like Portugal and Spain could benefit from investing in tools to build climate resilience, such as public-private risk-sharing mechanisms.

5. Structural reforms amid fiscal and political constraints

Copy link to 5. Structural reforms amid fiscal and political constraints

Having reviewed the key policy priorities to lift long-run growth, this final section turns to the practical realities of making reform happen. Ambitious reform agendas can only succeed if they are implemented in ways that acknowledge short-term trade-offs and real-world constraints. Governments often face limited fiscal space due to high debt burdens and rising spending pressures, while also navigating political economy challenges in building support for reforms whose benefits materialise only gradually. In addition, different reforms have different near-term effects on growth and employment: some stimulate activity quickly, while others create transitional costs before gains emerge. Recognising these fiscal, political, and short-term growth dimensions is essential to design and sequence reforms that are not only well-targeted, but also credible, feasible, and politically sustainable.

Public debt levels are elevated in many advanced and emerging market economies, and spending pressures are rising in areas such as defence, the green transition and ageing-related social costs (see Figure 43). Debt service costs are also rising alongside higher interest rates, further increasing pressures on public finances (OECD, 2025[13]). High debt levels and tighter financial conditions pose particular risks for developing countries, many of which have large debt refinancing needs in the near future. Implementing structural reforms in such a fiscally constrained environment is therefore both urgent and challenging, as it requires careful attention to design, sequencing, and financing.

Figure 43. Public debt levels are elevated
Copy link to Figure 43. Public debt levels are elevated

Percentage of GDP

Structural reforms remain a powerful tool to support productivity, employment, and long-term fiscal sustainability (Bettarelli et al., 2025[276]). Yet, reforms often entail short-term economic and fiscal costs, implying trade-offs for governments facing weak economic growth and tight budgets (Bouis et al., 2012[277]). First, some reforms may temporarily reduce demand and employment, resulting in lower revenue from taxes and social contributions. Governments facing fiscal constraints may be less able to respond to these adverse short-run effects. Additionally, while central bank policy rates are currently well above the effective lower bound in most countries, the ability of monetary policy to cushion short-term demand effects induced by structural reforms may be constrained by the perceived risk of unanchored inflation expectations, the unwinding of recent unconventional monetary policies, or the potential return to an environment of lower interest rates as pre-pandemic structural trends (e.g. demography or high global savings rates) re-emerge (Cho, Mertens and Williams, 2025[278]; Benigno et al., 2024[279]). Second, some reforms, including investment in skills and the digital transition, while supporting activity in the short run, imply front-loaded fiscal costs with benefits spread over a longer horizon. Third, some reforms may imply up-front costs to gather enough political support, including providing adjustment support to adversely affected groups.

Despite these challenges, reform strategies can be designed to minimise short-term costs and increase political acceptability. To help policymakers navigate these trade-offs, Figure 44 and Table 1 bring together evidence on the short-term growth effects and immediate fiscal implications of structural reforms. Figure 44 summarises the results of the local projection estimations presented throughout this report, which provide empirical evidence of the near-term impacts of reforms on employment and productivity across a wide set of policy areas, including labour market measures (EPL, ALMPs), public investment (rail infrastructure, basic research), and tax reforms. Some reforms are shown to already support economic growth in the short term. For example, an easing of corporate taxation can significantly boost investment. Similarly, labour market reforms, including an expansion of active labour market policies, an easing of employment protection legislation, and a reduction in marginal tax wedges, can raise the employment rate after two years. The effect of those reforms on economic growth typically increases gradually over the medium term.

Table 1 provides a stylised overview of the expected fiscal and growth implications of reforms not covered by the empirical analysis in this report. It highlights that many market-enhancing measures, such as product market liberalisation or reforms to enhance trade and FDI openness, can deliver meaningful productivity gains with limited fiscal cost in the short term (OECD, 2025[280]). In contrast, some reforms, including those related to education, lifelong learning, or infrastructure, often require upfront fiscal resources and in some cases generate benefits only over time. These contrasts underscore the importance of careful reform sequencing: prioritising reforms with low fiscal cost and early payoffs can create political and economic space for more demanding measures, while pairing costly reforms with credible financing strategies can preserve fiscal sustainability and public trust. Bundling reforms with targeted compensation, transitional support for affected workers, or visible complementary investments can also increase their political sustainability.

Figure 44. Short-term impacts of reforms covered in local projections analysis
Copy link to Figure 44. Short-term impacts of reforms covered in local projections analysis

Policy	Immediate growth impact	Immediate fiscal impact
Productivity-enhancing structural reforms
Improving product market regulation and competition	+	+
Facilitating trade and FDI openness	+	+
Increasing R&D spending and support for innovation	+	-
Facilitating the digital transition (e.g. digital government, less regulation, increase adoption)	+	-
Supporting AI adoption, skills, and innovation (e.g. pro-competitive policies, focus on labour-enhancing AI, address bias and redistribution)	+	-
Structural reforms to labour markets
Reforming pensions and extending working lives	-/+	-/+
Promoting healthy and economically-active ageing	+	-/+
Removing barriers to women’s labour market participation	+	-/+
Strengthening support for vulnerable groups (e.g. expand coverage of social protection, improve targeting, increase work incentives)	+	-
Structural reforms to education
Improving basic education (e.g. support disadvantaged students, improve teacher quality, improve vocational training, foster collaboration between universities and industry)	+	-
Strengthen lifelong learning (e.g. increase investment in training, supporting firms and managers)	+	-

Source : André et al. (2025).

When faced with fiscal constraints, identifying sustainable financing mechanisms is crucial to advancing structural reforms without undermining fiscal credibility. This often requires “paying for reforms”, by reallocating existing resources, phasing out inefficient subsidies, or introducing new revenue measures designed to minimise growth distortions. The country recommendations set out in this report therefore include, where appropriate, tailored financing strategies to support reform implementation while safeguarding fiscal sustainability. In Denmark and Slovenia, for example, reforms to reduce labour and capital income taxation could be offset through increases in immovable property or environmental taxes. In Spain and the United Kingdom, broadening the VAT base by phasing out exemptions could raise revenues to finance targeted transfers to low-income households. In Israel, introducing congestion charges and user fees could help fund transport infrastructure while improving efficiency.

Finally, institutional frameworks also play a key role in supporting the credibility and effectiveness of structural reform strategies. Fiscal rules and medium-term frameworks help discipline spending and anchor fiscal expectations (Rawdanowicz et al., 2021[281]). Such frameworks are particularly important when reforms have upfront costs, and yield returns only over time. Strong fiscal institutions, including independent fiscal councils, can assess the long-term fiscal impact of reforms and support transparency in public communication, thus enhancing reform acceptance and fiscal sustainability. Embedding structural reform considerations in fiscal planning can thus strengthen both fiscal resilience and long-term growth prospects (see Box 13).

In sum, advancing structural reforms today requires bridging the gap between long-run priorities and short-run constraints. Sound fiscal planning must be combined with strategies to address political economy constraints and manage transitional impacts. Well-sequenced, credibly financed, and socially balanced reforms can raise productivity, support employment, and strengthen fiscal resilience. The insights from the empirical results and the stylised fiscal and growth trade-offs summarised in Table 1 provide policymakers with practical tools to anticipate short-run impacts, design reform strategies that are both economically effective and politically durable, and ultimately deliver on the long-term growth objectives set out in this report.

Box 13. Flexibility for structural reforms in fiscal frameworks

Copy link to Box 13. Flexibility for structural reforms in fiscal frameworks

Some fiscal frameworks allow additional fiscal space when governments implement structural reforms. This was the case in the European Union (EU) under the Stability and Growth Pact (SGP), which included a “structural reform clause” allowing temporary deviations from fiscal adjustment paths under strict conditions - namely, if reforms were major, fully implemented, and had a verifiable positive impact on long-term fiscal sustainability or potential growth (Sajedi and Steinbach, 2019[282]). Pension reforms introducing fully funded pillars benefited from a specific provision under this clause.

Following the 2024 reform of the EU’s fiscal rules, this clause has been phased out and replaced by a new system based on national medium-term fiscal-structural plans. These plans integrate fiscal targets with reform and investment commitments. Member States can now obtain more gradual fiscal adjustment paths (i.e., longer adjustment periods) if they commit to credible, time-bound reforms and investments that enhance growth, support fiscal sustainability, and address EU priorities. This shift embeds structural reform incentives into the core fiscal framework, while reinforcing monitoring and accountability through the European Semester.

Similar settings have been discussed or implemented in other countries. In the United Kingdom, the Office for Budget Responsibility, an independent fiscal institution, provides costings and long-term fiscal assessments of policy packages, helping to inform debates around trade-offs between short-term deficits and long-term sustainability. In Japan, fiscal policy guidelines such as the Basic Policy on Economic and Fiscal Management and Reform regularly embed reform expectations into medium-term fiscal projections, particularly in areas like social security, labour markets, and productivity.

Overall, there may be a rationale for embedding structural reform considerations in fiscal frameworks. First, it would align short-term flexibility with long-term discipline: temporary deviations are allowed only when reforms plausibly improve sustainability. Second, it would introduce a growth-oriented dimension into fiscal planning, enabling governments to invest in reforms that raise potential output. However, the approach carries risks. Assessing the fiscal and growth impacts of reforms is inherently uncertain, and ex ante flexibility may be misused without strong governance and independent verification.

Therefore, such mechanisms would work best when three conditions are met: (1) reforms are clearly specified, credible, and monitorable; (2) fiscal institutions have the capacity to evaluate reform impacts; and (3) flexibility is strictly temporary and conditional on actual implementation. In this sense, fiscal rules that allow for reform-linked flexibility could enhance both credibility and efficiency, provided they are grounded in sound economic analysis and robust institutional safeguards.

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Annex 1.A. The F4GC policy prioritisation model

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The F4GC policy prioritisation model uses a mixed approach combining quantitative and qualitative assessments by OECD country desk expertise to identify structural reform recommendations to boost economic growth (Annex Figure 1.A.1). This model includes 48 economies, including all 38 OECD countries.

Annex Figure 1.A.1. The F4GC policy prioritization model
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Quantitative stage

The quantitative approach centre on a joint policy-performance benchmarking algorithm, linking structural drivers of growth and competitiveness to policies indicators contained in the F4GC database. In practice, each of the F4GC policy indicators is matched with one or more relevant indicators of performance, and these linkages are informed by the academic literature and applied research by the OECD and other institutions. The performance indicators relate to the three building blocks of economic growth: MFP (and related indicators including measures of human capital, creative destruction, business investment in R&D, seed funding), capital deepening (e.g. business investment in ICT, foreign direct investment) and labour utilisation (e.g. unemployment and employment rates by age and gender, long term unemployment, NEET). For example, the indicator of effective corporate tax rate is matched with the performance indicators measuring labour productivity and capital deepening, while the labour tax wedge is matched with the employment rate. Given that each policy indicator can be matched with more than one performance indicator, the policy-performance benchmarking algorithm includes more than 800 of these matching relationships.

For each of these outcome-policy pairs, countries are benchmarked against the OECD average. Both the outcome and the policy indicators are standardised to have the average across economies equal to zero and with a standard deviation of one. In this setting, an outcome-policy pair becomes a candidate for recommendation for a country when both the outcome and the associated policy score are below the OECD average, i.e. if falling into the lower-left quadrant of Annex Figure 1.A.2.

Annex Figure 1.A.2. Policy-performance benchmarking
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Additionally, growth-enhancing policies often exhibit complementarities, where implementing multiple reforms concurrently can lead to mutually reinforcing benefits and superior outcomes. The corollary is that policies rarely function in isolation and the economic gains of policy strength in one area can be diluted by policy weakness elsewhere. Accordingly, the policy prioritisation framework makes a first attempt by the OECD to incorporate the concept of policy complementarities into country-specific policy prioritisation. In practice, to incorporate this concept into the F4GC policy prioritisation algorithm in a tractable way, the focus is put on a limited set of policy combinations for which there is robust empirical evidence.

Annex Figure 1.A.3 illustrates in a stylised fashion the broad intuition of how these policy complementarities operate to shape growth, setting aside the direct effect for simplicity. The following key ideas emerge:

The impact of innovation subsidies on productivity is amplified by:
- Higher quality human capital: the development and effective implementation of new ideas required high skilled labour and management
- Less stringent PMRs and insolvency regimes: more competitive environments pressure incumbents to innovation, lower entry barriers allow innovative new firms to emerge and lower barriers to exit spur the reallocation of skilled labour to innovative firms.
- Higher labour mobility and participation: to accommodate the higher demand for skilled labour (triggered by innovation policies) via effective labour reallocation
The pass-through of human capital to productivity is amplified by policies that support adaptability and reallocation in labour markets, including well-designed PMRs, insolvency regimes, employment protection legislation (EPL) and Active Labour Market Policies (ALMPs; see (André and Gal, 2024[75])).
PMRs and Labour market policies have mutually reinforcing impacts on growth (as denoted by the circular arrows). For example:
- Less stringent PMRs may be conducive to the entry of new firms but flexible labour markets are required to accommodate the upscaling of such firms.
- ALMPs are more effective in re-integrating displaced workers in environments where entry barriers are low given that new firms disproportionately drive net job creation.

Annex Figure 1.A.3. An illustration of policy interactions
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To take these policy complementarities into account, the priority selection criteria deriving from the policy-performance benchmarking algorithm outlined above is updated according to a policy complementarities module to identify reform packages. Concretely, a higher weight is given to pairs of policies that are known to be complementary based on robust empirical evidence, delivering a final quantitative ranking of potential policy recommendations. For example, the policy prioritisation algorithm will give a higher weight to both innovation and education policy recommendations when a country exhibits large gaps with best practices and outcomes in both these areas, so that the policy reform packages recommended in F4GC can have a larger bang-for-the-buck by exploiting the complementarities between these two policies. Similarly, in a country exhibiting large gaps in the policy areas of labour and product market regulations, a higher probability will be assigned to policy recommendations addressing both these issues.

Qualitative stage

In the following step, OECD expert judgement is used on the identified outcome-policy pairs to select the top recommendations for each country. Those are grouped in five policy packages in the country notes, as chosen by OECD country desks. This step also considers potential recommendations which have not been included in the matching process due to improper measurement or limited comparability. Reliance on expert judgement allows overcoming limitations of data quality and coverage and ensures the framework’s comprehensiveness. For example, the F4GC database puts an emphasis on broader country coverage, which can overlook specific policies relevant for a subset of countries. In addition, expertise from OECD desks drives the formulation of detailed reform recommendations, for each of the selected priorities, and supports reporting on actions taken. A final step is the peer-review, consisting of dialogue and a consultation process with country officials before the final publication.

Annex 1.B. Estimating the short-term impact of structural reforms using local projections and differences-in-differences

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This annex introduces the common methodology applied to assess the short-term impact of various structural reforms on the components of growth in GDP per capita. A structural reform is defined as a change in a policy variable from the F4GC database, or for an equivalent policy variable with a narrower country coverage but longer time coverage. The short-term impact of reforms is assessed using estimations by local projections (LP). Local projections are an econometric technique that traces the dynamic response of a variable $y$ to a reform $Δ {P o l i c y}_{}$ , by estimating a sequence of horizon-specific regressions. In the context of panel data, such an estimation takes the following form:

$y_{c, t + h} = α_{h} + β_{h} \cdot Δ {P o l i c y}_{c, t} + γ_{h} \cdot X_{c, t} + η_{c} + δ_{t} + ϵ_{c, t + h}$

Where $h \geq 0$ is the horizon, $X_{c, t}$ are control variables (potentially including lags of the outcome and the shock), $η_{c}, δ_{t}$ are country and time fixed effects, and $ϵ_{c, t + h}$ is an error term (Jordà and Taylor, 2025[283]). This equation is estimated at different time horizons to obtain an impulse response function. $β_{h}$ is then the coefficient of interest that summarises how the shock at time t changes the outcome h periods later.

Several adjustments are made to this basic LP equation, to combine differences-in-differences estimation with LP (Dube et al., 2025[284]). The retained specification in this chapter, based on long differences, is the following:

$y_{c, t + h} - y_{c, t - 1} = β_{h} Δ {P o l i c y}_{c, t} + \sum_{j = - h, j \neq 0}^{3} θ_{j, h} \cdot Δ {P o l i c y}_{c, t - j} + χ_{h} (y_{c, t - 1} - y_{c, t - 2}) + π_{h} \cdot Δ {O u t p u t G a p}_{c, t - 1} + δ_{t} + {ϵ'}_{c, t, h} (1)$

where $θ_{j, h}$ accounts for the effect of past but also future shocks, $χ_{h}$ accounts for the effect of past trends in the outcome, $π_{h}$ accounts for the economic cycle, $δ_{t}$ are time fixed effects and ${ϵ'}_{c, t, h}$ is an error term. When estimating the equation, the variance is computed via the implementation of the Driscoll-Kraay covariance matrix estimator, which aims to yield standard errors robust to cross-sectional and serial correlations.

The motivation behind this specification is as follows. First, an estimation in long differences is likely to be significantly less prone to bias when the outcome process is autocorrelated. Jorda and Taylor (2025[283]) also argue in favour of estimating the model in long-difference, regressing $y_{t + h} - y_{t - 1}$ on $y_{t - 1} - y_{t - 2}$ . Indeed, they show that the long-difference specification is more robust to small-sample bias when the outcome is auto-correlated. The estimation in long differences implies that the country-specific fixed effects disappear (Dube et al., 2025[284]).

However, the use of local projections for difference-in-differences estimation in panel data can lead to misleading results in the case of so-called “staggered treatments”, which happens when treatments are rolled out at different times across various units. In the F4GC database, this is typically the case as reforms are not taking place at the same time across countries. In that case, The recent literature on differences-in-differences has shown that the estimation of the treatment effect via two-way fixed effect regressions can lead to important biases (including inverting the sign of the estimate), when the treatment is staggered and the treatment effect is dynamic (Roth et al., 2023[285]). This can be addressed with a long lead and lag structure of the shock.

Indeed, in theory adding a sufficiently long lead and lag structure reduces this concern when the impact of the shock is homogeneous – i.e. when it does not differ depending on the time that it is implemented (Dube et al., 2025[284]). In particular, Equation (1) would provide an unbiased estimate of the dynamic impact of the shock if it included an infinite number of lags and h leads in that context, under the traditional differences-in differences estimation assumptions of no anticipation and parallel trends. The intuition behind this result is that including the lags of the shock allows to control for countries which have already experienced shocks in the past - which would bias the estimates in the case that the effect is dynamic (as those countries would not be appropriate controls). Similarly, the leads of the shock account for countries that experience a shock between t and t+h (as those countries would be inappropriate controls to estimate the impact of a shock experienced by a specific country at t-1 on an outcome at t+h), In addition, and in the case where treatments might be anticipated, the leads of the treatment allow to control for anticipatory effects (capturing cases where the shock is expected and already reflected in outcomes, such as in the case of tax reforms).

In practice, a potential drawback is that the inclusion of leads and lags quickly reduces the number of observations available in the estimation. The estimations conducted in this chapter have been tested with higher lag depth and the qualitative results (including significance) are similar. This is consistent with the finding that the choice regarding lag structure is relatively arbitrary in theory, but in practice varying the numbers of lags has few consequences in LPs (Montiel Olea et al., 2025[286]).

The retained specification also controls for the cycle via the output gap to ensure that the shocks and the outcome are not both driven by business cycle considerations. This would be the case, for example, if the propensity of governments to implement structural reforms depend on the cycle. Indeed, recent evidence suggest that structural reforms were more likely during deep troughs in activity and when the country was further away from best practices (Dias da Silva, Givone and Sondermann, 2018[287]).

As standard in the LP literature, the impulse response functions are shown with confidence bands based on the confidence intervals at 68% and 90% for each horizon-specific estimate. Various papers have suggested that reporting a 68% confidence interval for impulse response functions is actually more useful than a 90 or 95% interval. The motivation is derived from Sims and Zha (1999[288]), where it is highlighted that the goal of estimating impulse response functions is to provide an idea of the posterior distribution for the function. Thus, this is not a classical confidence region, whose coverage probability typically mixes information about parameter location with information about overall model fit. Indeed, there is a rather intuitive difference between representing the confidence region for a curve and the confidence region of a single parameter. For the former, intervals that capture the high-density core of the posterior distribution, defined in Bayesian analysis as ±1 standard error, i.e. about 68 % of the posterior probability distribution, can be more informative than wide 90 % or 95 % bands. This approach is retained in this chapter.

Finally, the sample includes all OECD member countries for which data are available before 2019 (included), to exclude variations from the COVID-19 period. When countries leave and re-enter the sample, only the longest (and if tied, latest) period available is kept.

Annex 1.C. List of indicators in the F4GC database

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This annex presents the complete list of indicators of the F4GC database. Those have been curated based on the following criteria:

Consistency with the literature on the drivers of growth and competitiveness: what the indicator aims to measure must be consistent with what is known on policies relevant to growth and competitiveness
Policy amenability: the indicator must be a clearly defined policy lever
Comparability and consistency: the indicator must be comparable across countries. As such, most of the indicators retained are OECD sources, meaning that they have already been vetted by OECD committees to ensure their consistency
Data availability and timeliness: the indicator must be available for a sufficiently large set of countries and produced at regular interval

These five criteria define the “ideal” set of indicators for monitoring competitiveness across countries and over time. The inclusion of indicators that relate to concrete policy levers – i.e., that are leverageable by policy makers – is especially critical (e.g., PMR indicators that directly measure regulations). However, in those instances where such data are unavailable or country coverage is too narrow, careful consideration is given to including an indicator more related to policy outcomes (e.g., indicators on the proportion of population with access to broadband or PISA scores) instead. Finally, adhering to these criteria the F4GC database will be regularly updated as new data become available in certain areas.

Sub-policy area	Name	Countries available	Latest year available	Source
Macroeconomic stability	Yearly inflation, 10-year average	48	2024	OECD Analytical Database
	Composite sovereign ratings index	48	2024	Moody's and S&P Long-term Issuer Ratings from Refinitiv with OECD calculations
	Volatility in real GDP growth rate (last 5 years)	48	2023	OECD Analytical Database
Financial Institutions	Debt to equity ratio of financial corporations	38	2024	OECD STD Financial Statistics
	Bank non-performing loans to total gross loans	46	2024	IMF Financial Soundness Indicators
	Bank Capital to Assets Ratio	46	2024	IMF Financial Soundness Indicators
	Capital Adequacy Ratio	46	2024	IMF Financial Soundness Indicators
	Loan-to-Deposit Ratio	36	2024	OECD STD Financial Statistics
	Interest rate spreads between loans to SMEs and to large firms	32	2022	Financing SMEs and Entrepreneurs 2024: An OECD Scoreboard
	Financial institutions access index	48	2021	IMF Financial Development Indicators
	Financial institutions depth index	48	2021	IMF Financial Development Indicators
	Financial institutions efficiency index	48	2021	IMF Financial Development Indicators
Financial Markets	Financial markets access index	48	2021	IMF Financial Development Indicators
	Financial markets depth index	48	2021	IMF Financial Development Indicators
	Financial markets efficiency index	48	2021	IMF Financial Development Indicators
Rule of Law	Rule of Law index	45	2024	The World Justice Project Rule of Law Index
	Political Stability and Absence of Violence/Terrorism	48	2023	The Worldwide Governance Indicators: Methodology and Analytical Issues. World Bank Policy Research Working Paper No. 5430
	Corruption Perceptions Index	48	2023	Corruption Perceptions Index, Transparency International
Public integrity	Share of population who indicate different levels of trust in their national government	30	2023	OECD Trust Survey
	Distribution of responses to whether it is likely that the national parliament holds the national government accountable	30	2023	OECD Trust Survey
	Public Integrity Indicator - Legislative procedural scrutiny	34	2024	OECD Public Integrity Indicators
	Public Integrity Indicator - Trust in parliament	18	2022	OECD Public Integrity Indicators
	Public Integrity Indicator - Use of oversight and prevention mechanisms for financing of political parties and election campaigns	38	2024	OECD Public Integrity Indicators
	Public Integrity Indicator - Evidence-based problem analysis and use of diagnostic tools	37	2023	OECD Public Integrity Indicators
	Public Integrity Indicator - Financial sustainability	37	2023	OECD Public Integrity Indicators
	Public Integrity Indicator - Legislative stability	32	2024	OECD Public Integrity Indicators
	Public Integrity Indicator - Openness of government decision-making process	39	2024	OECD Public Integrity Indicators
	Public Integrity Indicator - Use of conflict-of-interest prevention mechanisms for senior officials	38	2024	OECD Public Integrity Indicators
	Public Integrity Indicator - Transparency of evaluation practices and use in decision making	37	2023	OECD Public Integrity Indicators
	Public Integrity Indicator - Post-employment integrity in practice (top officials)	11	2024	OECD Public Integrity Indicators
	Public Integrity Indicator - Trust in government	18	2022	OECD Public Integrity Indicators
	Public Integrity Indicator - Proactive disclosure of datasets	39	2024	OECD Public Integrity Indicators
Digital Government	Digital Government Index (DGI) - Digital by design	36	2023	OECD Government at a Glance
	Digital Government Index (DGI) - Data-driven public sector	36	2023	OECD Government at a Glance
	Digital Government Index (DGI) - Government as a platform	36	2023	OECD Government at a Glance
	Digital Government Index (DGI) - Proactiveness	36	2023	OECD Government at a Glance
Evaluation of regulatory quality	Regulatory Quality	48	2023	The Worldwide Governance Indicators: Methodology and Analytical Issues. World Bank Policy Research Working Paper No. 5430
	Regulatory impact assessment of primary laws	40	2021	OECD Government at a Glance
	Regulatory impact assessment of subordinate regulations	41	2021	OECD Government at a Glance
	Ex post evaluation of primary laws	41	2021	OECD Government at a Glance
	Ex post evaluation of subordinate regulations	41	2021	OECD Government at a Glance
Stakeholder engagement in laws and regulations	Stakeholder engagement in primary laws	40	2021	OECD Government at a Glance
	Stakeholder engagement in subordinate regulations	41	2021	OECD Government at a Glance
Regulatory Frameworks for Public Infrastructure	Regulatory Frameworks for public Infrastructure (RFI) - regulatory framework	31	2022	OECD Government at a Glance
	Regulatory Frameworks for public Infrastructure (RFI) - permitting and licensing	31	2022	OECD Government at a Glance
	Regulatory Frameworks for public Infrastructure (RFI) - governance of economic regulators	34	2022	OECD Government at a Glance
	Long-term planning for infrastructure	30	2021	OECD Infrastructure Toolkit
	Infrastructure: fiscal sustainability, affordability and value for money	31	2020	OECD Infrastructure Toolkit
	Public procurement of infrastructure	30	2020	OECD Infrastructure Toolkit
Management of Threats to Public Integrity in Decision Making	Management of threats to public integrity in infrastructure decision making (MTPII) - Risk-based approach	27	2022	OECD Government at a Glance
	Management of threats to public integrity in infrastructure decision making (MTPII) - conflict of interest management	27	2022	OECD Government at a Glance
	Management of threats to public integrity in infrastructure decision making (MTPII) - external control and oversight	28	2022	OECD Government at a Glance
	Management of threats to public integrity in infrastructure decision making (MTPII) - effective enforcement mechanisms	28	2022	OECD Government at a Glance
	Management of threats to public integrity in infrastructure decision making (MTPII) - Internal control and audit	25	2022	OECD Government at a Glance
Density of Infrastructure	Share of urban population with convenient access to public transport (%)	48	2023	UN-HABITAT, Urban Indicators database
	Airports per one hundred thousand sq. km	42	2016	OECD International Transport Forum
	Share of electrified rail lines in total rail network	34	2023	OECD International Transport Forum
	Share of high-speed rail lines in total rail network	10	2023	OECD International Transport Forum
	Density of rail lines (km per one hundred sq. km)	37	2023	OECD International Transport Forum
	Density of road (km per one hundred sq. km)	38	2023	OECD International Transport Forum
	Pipeline transport in tonne-km per one thousand units of current USD GDP	25	2023	OECD International Transport Forum
	Rail freight transport in tonne-km per one thousand units of current USD GDP	41	2023	OECD International Transport Forum
	Rail passenger transport in passenger-km per one thousand units of current USD GDP	40	2023	OECD International Transport Forum
	Proportion of population with access to electricity	48	2021	World Bank, World Development Indicators
Transport Regulation	Product Market Regulation (PMR) - Air Transport	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Rail Transport	44	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Road Transport	45	2023	OECD Product Market Regulation Indicators
Environmentally sustainable and climate-resilient infrastructure	Total public sewerage (% of resident population connected to a wastewater collecting system)	46	2022	OECD (2024), Wastewater treatment (indicator)
	Environmentally sustainable and climate-resilient infrastructure	26	2022	OECD Infrastructure Toolkit
Access to Digital infrastructure	Fixed broadband basket price as a % of GNI	48	2023	Policy brief - The affordability of ICT services 2023, International Telecommunication Union
	Fixed broadband subscriptions per 100 inhabitants, greater than or equal to 30Mbps	34	2023	OECD, Broadband Portal
	Fixed broadband subscriptions per 100 inhabitants, greater than or equal to 100Mbps	34	2023	OECD, Broadband Portal
	Fixed broadband subscriptions per 100 inhabitants, greater than or equal to 1Gbps	34	2023	OECD, Broadband Portal
	Total fixed broadband subscriptions per 100 inhabitants	38	2023	OECD, Broadband Portal
	Percentage of fibre in total broadband	38	2023	OECD, Broadband Portal
	Proportion of population covered by at least 4G	43	2021	OECD, Broadband Portal
	Businesses with a broadband connection -includes both fixed and mobile (% of all businesses)	38	2024	OECD ICT Access and Usage by Businesses
	Businesses with a broadband download speed at least 1 Gbit/s (% of all businesses)	28	2024	OECD ICT Access and Usage by Businesses
Information and Communication Technology (ICT) Policies	Businesses using Artificial Intelligence (% of all businesses)	38	2024	OECD ICT Access and Usage by Businesses
	Share of businesses purchasing cloud services	37	2022	OECD Going Digital Toolkit
E-Communications Regulation	Product Market Regulation (PMR) - Fixed communications	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Mobile communications	45	2023	OECD Product Market Regulation Indicators
Educational Attainment	Government expenditure on education, constant PPP$ per capita	44	2021	OECD calculations based on the OECD's Education database. Population data come from the World Bank's World Development Indicators.
	Government expenditure on education, constant PPP$ per person below the age of 18	43	2021	OECD calculations based on Education and Population databases
	Educational attainment in upper secondary education	48	2023	OECD Education at a Glance
	Educational attainment in tertiary education	48	2023	OECD Education at a Glance
	Educational attainment in upper secondary education for women	48	2023	OECD Education at a Glance
	Educational attainment in tertiary education for women	48	2023	OECD Education at a Glance
	Share of students in vocational education and at upper secondary education level	39	2022	OECD Education at a Glance
	Gap in educational attainment between men and women for lower secondary education	47	2023	OECD Education at a Glance
	Gap in educational attainment between men and women for upper secondary education	48	2023	OECD Education at a Glance
	Gap in educational attainment between men and women for tertiary education	48	2023	OECD Education at a Glance
Student Performance	Student to teacher ratio, primary education	43	2022	OECD Ratio of students to teaching staff by type of institution database
	Programme for International Student Assessment (PISA) - performance in Mathematics	44	2022	OECD's Programme for International Student Assessment
	Programme for International Student Assessment (PISA) - performance in Reading	44	2022	OECD's Programme for International Student Assessment
	Programme for International Student Assessment (PISA) - performance in Science	44	2022	OECD's Programme for International Student Assessment
	Impact of socioeconomic background on PISA reading score	46	2022	OECD's Programme for International Student Assessment
Adult Competencies	Programme for the International Assessment of Adult Competencies (PIAAC) - score in Literacy	36	2023	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Programme for the International Assessment of Adult Competencies (PIAAC) - score in Numeracy	36	2023	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Programme for the International Assessment of Adult Competencies (PIAAC) - score in Problem solving	30	2023	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Share of adults proficient at problem solving in technology rich environment	24	2015	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
Digital Skills	Index of use of Information and communication technology (ICT) skills at home	29	2022	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Index of use of Information and communication technology (ICT) skills at work	29	2022	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Share of adults with low Information and communication technology (ICT) skills	32	2018	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
Continuing Education and Lifelong Learning	Index of learning at work	29	2022	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Index of use of numeracy skills at work	29	2022	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Index of use of reading skills at home	29	2022	OECD Programme for the International Assessment of Adult Competencies (PIAAC)
	Share of tertiary educated adults (25-64 years old) participating in non-formal job-related education and training	30	2022	OECD Education at a Glance
Early childhood education	Enrolment rates in Early childhood and pre-primary education	40	2021	OECD Education at a Glance
	Net childcare costs (couple)	37	2022	OECD tax-benefit indicators
	Child-to-staff ratios in early childhood education	39	2022	OECD Education at a Glance

Sub-policy area	Name	Countries available	Latest year available	Source
Tax Structure	Indirect taxes % of total revenue (recurrent taxes on immovable property + taxes on goods and services)	47	2022	OECD Global Revenue Statistics Database
	Composite Effective Marginal Tax Rate (EMTR) - Country-specific interest and inflation rates	48	2023	OECD Tax Database
	Composite Effective Marginal Tax Rate (EMTR) - Low interest and inflation rates	48	2023	OECD Tax Database
	VAT-revenue-ratio	37	2022	OECD Consumption Tax Trends
	Overall Tax Complexity Index	47	2022	The Global MNC Tax Complexity Project
	Composite Average Effective Tax Rate (AETR)	48	2023	OECD Tax Database
Administrative and Regulatory Burden	Product Market Regulation (PMR) - Communication and Simplification of Administrative and Regulatory Burden	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Administrative requirements for limited liability companies and personally owned enterprises	45	2023	OECD Product Market Regulation Indicators
Barriers in Service & Network Sectors	Product Market Regulation (PMR) - Barriers to entry in services sectors	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Digital markets	45	2023	OECD Product Market Regulation Indicators
Distortions Induced by Public Ownership	Product Market Regulation (PMR) - Quality and scope of public ownership	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Governance of commercial state-owned enterprises	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Public procurement	45	2023	OECD Product Market Regulation Indicators
Involvement in Business Operations	Product Market Regulation (PMR) - Retail price controls and regulation	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Involvement in business operations in network sectors	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Involvement in business operations in services sectors	45	2023	OECD Product Market Regulation Indicators
Insolvency	OECD insolvency indicator - Treatment of failed entrepreneurs (revised version)	43	2022	OECD Insolvency indicator
	OECD insolvency indicator - Prevention and streamlining	44	2022	OECD Insolvency indicator
	OECD insolvency indicator - Restructuring tools	44	2022	OECD Insolvency indicator
Tariff Barriers	Product Market Regulation (PMR) - Tariff Barriers	45	2023	OECD Product Market Regulation Indicators
Trade Facilitation	Trade Facilitation Indicators (TFI) - Information availability	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Involvement of the Trade Community (Consultations)	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Advance rulings	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Appeal procedures	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Fees and charges	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Formalities: Documents	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Formalities: Automation	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Formalities: Procedures	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Internal co-operation	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - External co-operation	48	2022	OECD Trade Facilitation Indicators
	Trade Facilitation Indicators (TFI) - Governance and impartiality	48	2022	OECD Trade Facilitation Indicators
Restrictiveness of Services Trade	Services Trade Restrictiveness Index (STRI) - Restrictions on the movement of people	44	2022	OECD, Services Trade Restrictions Database
	Services Trade Restrictiveness Index (STRI) - Restrictions on foreign ownership and other market entry conditions	44	2022	OECD, Services Trade Restrictions Database
	Services Trade Restrictiveness Index (STRI) - Other discriminatory measures and international standards	44	2022	OECD, Services Trade Restrictions Database
	Services Trade Restrictiveness Index (STRI) - Barriers to competition and public ownership	44	2022	OECD, Services Trade Restrictions Database
	Services Trade Restrictiveness Index (STRI) - Regulatory transparency and administrative requirements	44	2022	OECD, Services Trade Restrictions Database
Restrictiveness of Digital Services Trade	Digital Services Trade Restrictiveness Index (DSTRI) - Infrastructure and connectivity	45	2024	OECD Digital Services Trade Restrictiveness Index
	Digital Services Trade Restrictiveness Index (DSTRI) - Electronic transactions	45	2024	OECD Digital Services Trade Restrictiveness Index
	Digital Services Trade Restrictiveness Index (DSTRI) - Payment systems	45	2024	OECD Digital Services Trade Restrictiveness Index
	Digital Services Trade Restrictiveness Index (DSTRI) - Intellectual property rights	45	2024	OECD Digital Services Trade Restrictiveness Index
	Digital Services Trade Restrictiveness Index (DSTRI) - Other barriers affecting trade in digitally enabled services	45	2024	OECD Digital Services Trade Restrictiveness Index
Regulatory Restrictiveness of FDI	FDI Regulatory Restrictiveness Index - Foreign equity limitations	47	2020	OECD Foreign Direct Investment Regulatory Restrictiveness Index
	FDI Regulatory Restrictiveness Index - Screening or approval mechanisms	47	2020	OECD Foreign Direct Investment Regulatory Restrictiveness Index
	FDI Regulatory Restrictiveness Index - Restrictions on the employment of foreigners as key personnel	47	2020	OECD Foreign Direct Investment Regulatory Restrictiveness Index
	FDI Regulatory Restrictiveness Index - Operational restrictions, e.g. restrictions on branching and on capital repatriation or on land ownership	47	2020	OECD Foreign Direct Investment Regulatory Restrictiveness Index
Workforce Participation Incentives	Average tax wedge (% labour costs): average over different family situations	38	2023	Labour taxation - OECD comparative indicators
	Difference in net transfers to government between single-earner and equal dual-earner couple	38	2024	OECD Tax-Benefit models
	Length of paid maternity, parental and home care leave available to mothers in weeks	38	2024	OECD Family Database
	Length of paid paternity and parental leave reserved for fathers in weeks	38	2024	OECD Family Database
	Women as a share of all 16-24-year-olds who can program	33	2023	OECD Going Digital Toolkit
	Degressivity of unemployment benefits	38	2024	OECD Tax-Benefit Indicators
	Implicit tax on returning to work for second earners, % of gross earnings in the new job	37	2022	OECD Tax-Benefit Indicators
	Implicit tax on returning to work for lone parents, % of gross earnings in the new job	37	2022	OECD Tax-Benefit Indicators
Adaptability and Mobility	Index of extension of collective wage bargaining	38	2020	OECD/AIAS ICTWSS Database
	Share of social housing in total number of dwellings	32	2023	OECD Affordable Housing database
	Active Labour Market Policies (ALMPs) per unemployed, % of GDP per capita	39	2022	OECD Employment database
	Employment Protection Legislation (EPL) - Individual and collective dismissals of regular workers	46	2019	OECD Employment Protection Legislation Database
	Duality of Employment Protection Legislation (EPL) - Difference between Individual and collective dismissals of regular workers and temporary workers	37	2019	OECD Employment Protection Legislation Database
	Rent control Indicator	37	2021	OECD calculations carried out by the Economics Department using a questionnaire administered by the Employment, Labour and Social Affairs Department
	Tenant-Landlord Relation Indicator	34	2021	OECD calculations carried out by the Economics Department using a questionnaire administered by the Employment, Labour and Social Affairs Department
Pension and retirement policies	Change in net pension wealth for men, age 55, 100 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for men, age 55, 200 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for men, age 55, 50 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for men, age 60, 100 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for men, age 60, 200 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for men, age 60, 50 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for women, age 55, 100 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for women, age 55, 200 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for women, age 55, 50 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for women, age 60, 100 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for women, age 60, 200 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Change in net pension wealth for women, age 60, 50 % of individual gross earnings	44	2022	OECD Pensions at a Glance
	Current retirement age	47	2022	OECD Pensions at a Glance

Sub-policy area	Name	Countries available	Latest year available	Source
Innovative Firms	R&D active product and/or business process innovative firms, % of innovative firms	31	2021	OECD Science and Technology Indicators
	Business process innovative firms, % of total firms	39	2021	OECD Innovation Indicators database
	Business process innovative firms with innovations in the production of goods or services, % of total firms	39	2021	OECD Innovation Indicators database
	Business process innovative firms with innovations in distribution and logistics, % of total firms	38	2021	OECD Innovation Indicators database
	Business process innovative firms with innovations in marketing and sales, % of total firms	39	2021	OECD Innovation Indicators database
	Business process innovative firms with innovations in information & communication systems, % of total firms	37	2021	OECD Innovation Indicators database
	Business process innovative firms with innovations in administration & management, % of total firms	31	2021	OECD Innovation Indicators database
	Firms that applied for patents, as a percentage of total firms	29	2021	OECD Innovation Indicators database
	Innovative firms (product/process), % of total firms	32	2021	OECD Innovation Indicators database
	Share of persons employed in innovative firms in total employment	31	2021	OECD Innovation Indicators database
	Firms co-operating on innovation activities with public R&D institutes, % of innovation active firms	36	2021	OECD Innovation Indicators database
	Firms co-operating on innovation activities with universities or other higher education institutions, % of innovation active firms	37	2021	OECD Innovation Indicators database
Tax Treatment of R&D	Implied tax subsidy rates on R&D tax incentives: loss-making large firms	45	2023	OECD R&D Tax Incentives database
	Implied tax subsidy rates on R&D tax incentives: loss-making large firms, 5-year change	45	2023	OECD R&D Tax Incentives database
	Implied tax subsidy rates on R&D tax incentives: loss-making SMEs	45	2023	OECD R&D Tax Incentives database
	Implied tax subsidy rates on R&D tax incentives: loss-making SMEs, 5-year change	45	2023	OECD R&D Tax Incentives database
	Implied tax subsidy rates on R&D tax incentives: profitable large firms	45	2023	OECD R&D Tax Incentives database
	Implied tax subsidy rates on R&D tax incentives: profitable large firms, 5-year change	45	2023	OECD R&D Tax Incentives database
	Implied tax subsidy rates on R&D tax incentives: profitable SMEs	45	2023	OECD R&D Tax Incentives database
	Implied tax subsidy rates on R&D tax incentives: profitable SMEs, 5-year change	45	2023	OECD R&D Tax Incentives database
Expenditure on R&D: Business	Business enterprise Expenditure on R&D (BERD) financed by government, % of GDP	44	2023	OECD Research and Development Statistics
	Venture capital investment in the ICT sector as a share of GDP	27	2023	OECD Going Digital Toolkit
Expenditure on R&D: Higher education	Percentage of Higher Education Expenditure on R&D (HERD) financed by the business sector	44	2023	OECD Main Science and Technology Indicators
	Higher Education Expenditure on R&D (HERD) as a % of GDP	44	2023	OECD Main Science and Technology Indicators
	GERD financed by the Higher Education and PNP sectors, % of GDP	43	2023	OECD Main Science and Technology Indicators
Expenditure on R&D: Personnel	Total R&D personnel per thousand total employment	41	2022	OECD Science and Technology Indicators
Expenditure on R&D: Basic Research	Basic Research expenditure as a percentage of GDP	39	2022	OECD Science and Technology Indicators
Technology Support	Environmental stringency index - Low carbon R&D expenditure	39	2020	OECD, Environmental Policy Stringency index
Energy Regulation	Product Market Regulation (PMR) - Electricity sector	45	2023	OECD Product Market Regulation Indicators
	Product Market Regulation (PMR) - Gas sector	43	2023	OECD Product Market Regulation Indicators
Renewable energy	Share of renewables, % of energy supply	48	2021	OECD Green Growth database
	Share of renewables in the electricity production	48	2023	OECD Green Growth database
	Share of renewables in the energy mix, change over the last 20 years	48	2021	OECD Green Growth database
Energy Intensity	Energy productivity, GDP per unit of total energy supply	48	2023	OECD Green Growth database
	Energy intensity per capita, in tonnes of oil equivalent per person	48	2023	OECD Green Growth database
Water, Biodiversity, and Waste	Land cover changes, % of natural and semi-natural land	48	2022	OECD Land cover and land cover change database
	Percentage of terrestrial protected areas in total land area	48	2022	OECD Protected areas database
	Waste generation per capita: Total waste (Kg per person)	44	2022	OECD Waste - Municipal waste: generation and treatment database
	Recycling rates (% of recycling in total treatment of Municipal waste)	42	2022	OECD Waste - Municipal waste: generation and treatment database
Design and Evaluation of Environmental Policies	Design and Evaluation of Environmental Policies Indicator	29	2018	OECD Design and Evaluation of Environmental Policies Indicator

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