With lower nominal GDP growth and bond yields having risen substantially since the pandemic, stronger primary balances are needed to keep public debt burdens from increasing. In most advanced economies, including some major economies, gross financial liabilities are again rising more rapidly than GDP due to persistent primary deficits and GDP growth that no longer exceeds the effective interest rate on debt. This is reflected in rising projections for the weighted average of OECD economies’ gross public debt – which is projected to reach 113% of GDP by the end of 2027.
Public finance
Public finance is about government revenues, expenditures, assets and debt and how they impact the economy. Impacts are multiple and far-reaching, ranging from the short-run response to downturns to income distribution, long-term growth and environmental sustainability. Many countries around the world need to tackle high and rising public debt while responding to mounting spending pressures from ageing, defence and climate and preserving social support to those most in need. The OECD works with governments to help them address these challenges.
Latest public finance recommendations from the OECD Economic Outlook
Public debt has been rising more rapidly than GDP
Higher defence spending will absorb fiscal room for manoeuvre
Many advanced economies have begun to implement plans to bolster defence spending, including NATO countries who have committed to allocating 3.5% of GDP to core military spending by 2035. Near-term gains to economic activity are expected in countries borrowing to finance re-armament, with potentially larger payoffs in economies with ample spare capacity and established local defence industries. Lasting benefits may, however, be modest in many small, highly-open economies heavily reliant on purchases of foreign-produced military equipment. Some countries can afford to sustain higher debt-financed expenditure on defence for some time, with debt ratios climbing above current levels. However, even in these countries, concurrent pressures to spend more on health, long-term care and climate measures will eventually absorb fiscal room for manoeuvre, requiring spending reallocation or higher revenues.
Fiscal consolidation is needed in many countries to keep public debt sustainable
Optimal fiscal adjustments will vary across economies and depend on initial conditions, including the state of the public finances and the economy. A reduction and reallocation of government outlays would be desirable where debt needs to be lowered and spending is high relative to the size of the economy. Higher tax receipts may also be needed where there is room to lift revenues in a manner that limits distortions to work incentives and economic activity. Fiscal consolidation should in all cases be guided by credible medium-term plans, supported by strong fiscal institutions.
OECD Public Finance Dataset
To investigate how public finances can best be designed to promote long-run growth and address inequality, it is essential to have comprehensive, cross-country comparable data on government spending and revenues. By identifying key variables of public finance across as many countries as possible, and with a time series element to allow for longitudinal analysis, the OECD Public Finance Dataset provides a detailed data set to contribute to an evidence-based debate on shaping growth-enhancing and equality-promoting fiscal policies.
