OECD: Governments Must Cut Spending and Raise Taxes to Reduce Debt and Restore Fiscal Power

Governments must cut spending and raise taxes to reduce debt and restore the fiscal power needed to respond to future economic shocks, the OECD warned, as reported by the Financial Times.

The OECD also announced that major economies have now ‘shifted their focus’ in the fight against inflation, and in its new forecast, it stated that price pressures will continue to weaken and that global GDP growth will stabilize at 3.2 percent this year and next.

This should create room for central banks to continue lowering interest rates, although the timing and pace of reductions should be ‘carefully assessed’. Nevertheless, the OECD urged governments to intensify their efforts to rein in spending and increase taxes to rebuild fiscal reserves.

– Fiscal issues have not received enough attention in recent years – stated OECD Chief Economist Álvaro Pereira, highlighting the growing pressures of an aging population, climate change, and rising defense spending. He added that it is necessary to restore fiscal discipline as soon as possible.

Such messages from the OECD are a result of growing concerns about France’s (in)ability to reduce its budget deficit to the extent required by the EU. The Governor of the French central bank, François Villeroy de Galhau, stated that the European targeted deficit of three percent of GDP over the next three years is ‘not realistic’, but could be achieved within five years.

Yields on French ten-year bonds this week are at the same level as those in Spain, as Finance Minister Antoine Armand stated that Paris is looking for ways to raise taxes on corporations and the wealthy to tackle ‘one of the worst deficits in France’s history’.

Pereira declined to comment on the situation in France but said it is ‘certainly very possible’ that high levels of debt in certain countries could lead to market disruptions.

– We advocate for fiscal discipline, not a return to austerity – the OECD stated, adding that many countries need to reform their pension systems and social welfare systems while simultaneously increasing revenues through indirect taxes and property taxes and eliminating tax exemptions.

However, the end of the inflation crisis is not yet guaranteed, Pereira warned, as many countries still need a decline in service inflation to bring core inflation back to rates consistent with central bank targets. He also stated that there is a ‘disconnect’ between policy direction and people’s everyday experiences in countries where wages have not yet caught up with food prices.

According to new OECD projections, the U.S. economy is expected to grow by 2.6 percent in 2024 and 1.6 percent in 2025, while the eurozone is expected to grow by only 0.7 percent this year and 1.3 percent in 2025.