High Debt, Slow Growth, Financial Instability, Growing Inequality: What Role for Economic Policy?

Transcription

1 High Debt, Slow Growth, Financial Instability, Growing Inequality: What Role for Economic Policy? Paul van den Noord Counsellor to the Chief Economist, OECD 1

2 Central projection growth, annualised, in per cent Source: OECD (Pre-Cannes G20 release) and national sources. 2

3 Near term outlook The economic outlook is highly uncertain Heavily dependent on policy decisions in the euro area and the US. With continued but not decisive policy intervention (baseline scenario): very weak OECD growth in the near term. In the absence of comprehensive and preventive policy action (downside scenario): deep recession in the euro area with negative effects elsewhere. 3

4 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 The sovereign crisis in Europe Sovereign bond spreads over German Bunds - basis points Italy Greece Ireland France Austria Belgium Portugal Spain Netherlands

5 Intra euro area competitiveness Unit labour costs, 2000 = Germany France Ireland Portugal Spain Greece Italy

6 Euro area crisis S&P down-graded ratings of nine euro area countries. ECB three years facility provides some relief. Substantive policy action is required: 1. Urgently put in place credible and adequate financing backstop. 2. Urgently need resolution of debt crisis in Greece. 3. The banking system needs to be strengthened without excessive deleveraging. 6

7 Confidence deterioration can lead to a downside scenario Intensification of euro-area crisis and excessive US fiscal consolidation Baseline Downside scenario United States Euro area Japan China -4 Source: OECD calculations. 7

8 A confidence bridge can lead to an upside scenario 12 Euro-area debt crisis successfully defused Baseline Upside scenario United States Euro area Japan China 0 Source: OECD calculations. 8

9 Public debt has soared 9

10 Growth is slower because of higher debt 10

11 Empirical evidence on debt and growth Debt becoming more burdensome above certain levels OECD estimates: interest rate effects larger at gross debt levels above 75 % of GDP (4 bps per %). OECD estimates: reduced stabilisation effect (stronger saving offset) above 75 % GDP Reinhart and Rogoff: lower growth at debt levels above 90 % of GDP Cecchetti, Mohanty and Zampolli: lower growth at debt levels above 85/95% of GDP Our own estimates: growth significantly lower at debt levels exceeding 66 % of GDP 11 11

12 A daunting task Required improvement in underlying primary balances, percentage points of GDP Projected consolidation Additional consolidation required after USA JPN IRL GBR POL GRC SVK PRT ISL FRA AUS ESP NZL CZE CAN NLD AUT FIN ITA KOR DEU BEL HUN LUX DNK CHE SWE -4 12

13 A new challenging environment for economic policy The crisis has dramatically changed the macroeconomic landscape, especially in advanced economies Growth is lower; Public debt is (much) higher; Fiscal space is smaller; Sovereign debt and banking fragilities interact; Monetary policy is operating at the zero bound; Inequality is growing 13

14 The good, the bad and the ugly 14

15 The good, the bad and the ugly A = good B = bad Area right of B: ugly Dividing by D yields: 15

16 The good, the bad and the ugly Germany: debt ratio falls, growth higher Greece: debt ratio increases, growth contracts 16

17 The good, the bad and the ugly Greece: structural reforms pushes the economy in the stability range 17

18 Growth impact of structural reforms 18

19 Growth impact of structural reforms 19

20 Structural reform and inequality Cutting tax expenditures (mostly benefitting the well-off) and marginal tax rates contributes to equity and growth objectives. Shifting the tax mix away from labour towards consumption improves incentives to work and save, but raises inequality. 20

21 Thank you! Paul van den Noord Counsellor to the Chief Economist, OECD 21