OECD Chief Economist Calls for Reduction in Fiscal Support and Public Debt Levels

It is time for countries to bring their public finances into better shape, stated the new Chief Economist of the Organisation for Economic Co-operation and Development (OECD) Clare Lombardelli to the Financial Times ahead of the organization’s global forecasts presentation in Paris.

As the coronavirus pandemic along with the energy crisis slowly fades, Lombardelli stated that the global economy is expected to grow by 2.7 percent this year and 2.9 percent in 2024.

The Chief Economist believes that now is the time for governments to rebuild their fiscal reserves while also helping to combat high inflation and putting countries in a better position to deal with the costs of an aging population.

– We have seen understandable and necessary fiscal support in response to the war in Ukraine and the pandemic, but now is the time for general fiscal support to be withdrawn – she said, adding that offering support only to ‘those who truly need it’ should also be in line with the increase in central bank rates.

The US and European countries have increased spending since the onset of the pandemic, and are now facing much larger bills for financing and support following the rise in global borrowing costs. Lombardelli stated that there are ‘no expectations’ on when economies will reduce their debt.

– We do not want to permanently increase the level of debt. It makes countries less resilient – she explained, emphasizing that while a few countries may have exceptional circumstances, on average, the ‘level of debt must be reduced‘.

The OECD’s main forecasts indicate that the global economy will weather the banking crises that have arisen this year, that the US will avoid recession, and that Germany will recover from a recent production decline.

– The global economy is growing and recovering from the shocks we have seen over the past few years – she said.

An immediate priority should be to ensure that inflation returns to its target levels of around two percent in the most advanced economies, the OECD Chief Economist stated, adding that this would require interest rates to remain at their recent high levels for some time or to rise slightly.

– Forecasters, both national and international, have misunderstood the persistence of inflation. Therefore, you might see additional tightening of monetary policy – she stated.

Modest Evidence of Excess Profits

She also mentioned that central bankers will need to pay particular attention to wages due to signs of entrenched inflation.

As part of its economic outlook, the OECD has monitored nine countries to see if companies have increased inflation by raising margins. They found only modest evidence of higher profits mostly concentrated in mining and energy companies.

The only country with a more concerning current inflation problem was the United Kingdom, which she said has a ‘specific problem with the labor market’.

Another global economic issue that has occupied policymakers in recent months has been trade with China. Led by the US, which seeks to ‘mitigate the risk’ of its relationship with Beijing, the G7 has emphasized the importance of resilience in global supply chains without attempting to ‘decouple’ the North American, European, and Japanese economies from China.

For the OECD, which traditionally supports free trade, the renewed desire for national security to outweigh economic efficiency has been challenging. Lombardelli stated that she wants to ensure that everyone continues to understand the arguments for liberalized trade and the exchange of goods and services.

– Trade is a benefit for people around the world. It brings significant advantages in terms of choice, prosperity, and lower prices. It is entirely reasonable for countries to think about supply chains, but what is important is to think about it in a way that does not undermine the global trading system based on broad rules – she stated.

In its outlook, the OECD noted that the US has significantly reduced its share of trade with China, although the overall level of trade has increased since 2018. European countries have increased their share of trade with Beijing.

Lombardelli stated that she wants to focus her efforts on utilizing OECD resources to provide the data needed to guide economic changes and stimulate long-term growth prospects.