Governments should take advantage of very low borrowing costs to increase their investment spending and cut some taxes, steps that are needed to escape a "low-growth trap," the Organization for Economic Cooperation and Development said Thursday.
Adding detail to earlier calls for a switch to budget stimulus from exhausted monetary policies, the Paris-based think tank said most governments have room to boost spending by half a percentage point of economic output over a period of three to four years without risking an increase in their already high debts.
U.S. President-elect Donald Trump has pledged to boost infrastructure spending by as much as $1 trillion, although details of his proposals are sketchy. He has also promised to cut corporate andincome taxes, both measures recommended by the OECD, which provides advise to its member governments, including the U.S.
"The likely shift towards more expansionary fiscal policy in the United States in coming years will provide support to economic growth, although the mix between tax cuts and spending may unduly favour tax cuts," the OECD said.
The think tank calculates that an increase in spending on the scale it recommends would lift economic growth in the countries involved by between 0.4 and 0.6 of a percentage point, with an additional 0.2 percentage point boost if the effort were to be coordinated internationally.
The impact on growth would be greatest in countries such as the U.K. and Germany where the OECD reckons the existing stock of public investment is low. But it would have little impact on growth in Japan, where the stock is very high.
If combined with needed economic overhauls, the boost to growth could be large enough to lead to a decline in government debt relative to gross domestic product, the OECD said.
"By choosing wisely, you could end up with debt to GDP actually falling," said Catherine Mann, the OECD's chief economist
If governments were to follow the OECD's advice, it would mark a further turn away from the policies of austerity that were an immediate response to surging government debts in the aftermath of the 2008 financial crisis. During those years, central banks did most of the heavy lifting in providing support to growth, but there is a growing recognition that monetary policy has little left to offer.
A slow shift toward a greater reliance on fiscal policy has been under way since last year, when Canada embarked on a fiscal stimulus, while the OECD noted that increases in spending are also under way in Germany, Italy and China. At their meeting in Hangzhou, China in September, leaders from the Group of 20 largest economies stressedthe importance of fiscal policy to achieving "balanced growth."
And in a budget statement Thursday, U.K. Treasury Chief Philip Hammond announced a new, £ 23 billion investment fund designed to boost productivity, marking a turn away from the efforts to narrow the budget deficit by cutting spending under his predecessor.
"There is quite a bit more receptivity to the notion of using fiscal policy more actively," said Ms. Mann.
The think tank stressed that increased spending should be limited by the "fiscal space" that has opened up as a result of low interest rates, which differs between countries. It also noted that more room to invest would be created if governments acted to cut the future costs of providing health care and other entitlements.
"We're not giving out a blank check," said Ms. Mann.
Write to Paul Hannon at email@example.com
(END) Dow Jones Newswires
November 24, 2016 08:05 ET (13:05 GMT)
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