Deploy effective fiscal initiatives and promote inclusive trade policies to escape from the low-growth trap – ECOSCOPE
by Catherine L Mann, OECD Chief Economist and Head of OECD Economic Department
For the past five years, the world economy has been in a slow growth trap, with disappointingly low growth, at around 3 percent per year. Persistent growth deficits have weighed on future output expectations and thereby reduced current expenditures and potential output gains. Across the world, private investment is weak, public investment has slowed and global trade growth has collapsed. All of this has limited the improvement in employment, labor productivity and wages needed to support a sustainable rise in living standards. Overall, a slowdown in structural policy ambition and policy inconsistency have slowed business dynamics, trapped resources in unproductive companies, weakened financial institutions and undermined productivity growth. In light of this limited outlook, the OECD has argued in previous economic outlooks that fiscal, monetary and structural policies must be deployed comprehensively and collectively to allow economies to grow sufficiently to deliver on promises made to their citizens.
The projections in this Economic Outlook offer the prospect that fiscal initiatives could boost private economic activity and push the world economy towards the modestly higher growth rate of around 3½ percent by 2018. A sustainable exit from the low-growth tap depends on policy choices that go beyond those of the monetary authorities – that is, fiscal and structural policies, including trade policies, and coordinated and effective implementation. Collective tax action undertaken by all countries, including a more expansionary stance than planned in many countries in Europe, would support domestic and global growth, even for those economies, which need to consolidate their fiscal positions or pursue a more neutral stance due to specific circumstances.
Some might argue that it is no room for such tax initiatives, given the heavy government debt in many economies. In fact, after five years of intensive fiscal consolidation, debt ratios have leveled off in most advanced countries. It is high time to focus on increasing the denominator – GDP growth. This Economic Outlook states that the current economic climate of extraordinarily accommodative monetary policy with very low interest rates opens an opportunity for fiscal initiatives to take place. Tax scope has been created by lower interest payments on rolled-over debt, which also increases the degree of market access and debt sustainability. OECD economies could on average engage in deficit-funded fiscal initiatives for three to four years, while the long-term debt ratio remains unchanged. A head-on effort could accelerate deficit financing and put the debt ratio on a sustained downward path.
The key is to deploy the right kind of fiscal initiatives that support short-term demand and long-term supply and address not only growth challenges but concerns about inequality. These include soft investments in education and R&D, along with hard investments in public infrastructure. Such fiscal initiatives would further improve the outcomes for supply and demand potential for economies facing long-term unemployment when undertaken collectively and when fiscal initiatives are complemented by country-specific structural policies brought together in a coherent package. The mix is different for different countries, as developed in Chapter 2, with further details in the Country Notes in Chapter 3 of this Economic Outlook.
Against this backdrop of fiscal initiatives, boosting trade growth through better policies would help push the global economy out of the slow growth trap and support renewed productivity growth. In this Economic Outlook Trade growth is expected to accelerate from a dismal global trade to GDP ratio of about 0.8 to roughly equal to global output growth – remaining far less than the multiple of 2 enjoyed over the past few decades. This sluggish trade growth compared to historical experience decreases about 0.2 percentage point of total factor productivity growth – which may seem small – but makes sense given the slow productivity growth of about 0.5% per year during the post-crisis period.
Some argue that slower globalization would dampen the impact of adjustments on workers and businesses. This Economic Outlook suggests that protectionism and inevitable trade retaliatory measures would offset many of the effects of the fiscal initiatives on domestic and global growth, raise prices, harm living standards and leave countries in a deteriorated fiscal position. Trade protectionism protects some jobs but worsens the outlook and lowers the well-being of many others. In many OECD countries, more than 25% of jobs depend on foreign demand. Instead, policymakers must implement the structural policy packages that create more jobs, increase business dynamism, promote successful redistribution and strengthen policies to ensure that trade profits are better shared. Fortunately, the country-specific policy packages that make tax initiatives more effective in promoting growth in demand and supply potential, also help make growth more inclusive.
The transition path to a more balanced policy and more sustainable growth entails financial risks. But so is the status quo dependence on extraordinary monetary policy. Price distortions in financial markets abound. The yield curves are still fairly flat, with negative interest rates. Credit risk pricing has fallen, even as riskier bond issuance has increased. Real estate prices continue to rise in many markets, even despite attempts at tempering by macro-prudential measures. Expectations in the currency markets are tense, as evidenced by the high degree of currency volatility. These financial disruptions and risks expose fragile corporate balance sheets in emerging markets and jeopardize the profitability of banks and the long-term stability of pension plans in advanced economies.
The tax initiatives in connection with trade and structural policy, as outlined in the scenarios herein Economic Outlook, should revive expectations for faster and more inclusive growth, allowing monetary policy at least in the United States, and possibly other countries, to move towards a more neutral stance. The risk of increasing divergence in monetary policy positions across the major economies over the next two years could be a new source of financial market tensions even as growth picks up, putting a premium on collective action by countries to boost growth at the same time. to stimulate.
In short, policymakers should carefully examine the fiscal space; low interest rates allow many countries to promote hard and soft infrastructure and other growth-enhancing initiatives. Avoiding trade pitfalls, coupled with social action to better share the benefits of globalization and technological change, are important policy priorities. By taking advantage of the opportunity created by monetary policy and continuing fiscal and structural measures, growth expectations should be raised and the global economy should create the necessary momentum to escape the trap of low growth.