PARIS • Governments need to get over the fixation with debt levels and ramp up spending on growth friendly policies while cutting tax burdens where possible, the OECD said yesterday.
The message in its Economic Outlook to be published on Monday could offer support to a growing number of governments, starting with the incoming administration of Mr Donald Trump, looking to fire up growth with tax cuts.
But OECD chief economist Catherine Mann insisted it was not a call for blind deficit spending and corporate tax cuts across the board.
After years of low growth in most developed economies, governments could scarcely afford to ignore the opportunity presented by record low interest rates for financing growth-boosting investments, the Organisation for Economic Cooperation and Development said.
Pre-releasing a special chapter in its biannual Economic Outlook, it said letting deficits rise to finance investment and ease tax burdens could raise economic output more than it increases debt.
That, in turn, could ultimately reduce debt as a percentage of gross domestic product (GDP) without the economic pain that comes with reducing the debt through fiscal austerity.
“When we think about why many countries have been reluctant to deploy fiscal initiatives, it’s because of debt-to-GDP ratios and their concerns about not being able to borrow,” Ms Mann told Reuters.
The OECD estimates that increasing budget deficits by half a per cent of GDP to finance investment could increase output by 0.4-0.6 per cent in the first year on average across its 35 member countries.
However, it was crucial that extra public spending wentt o productivity- boosting policies like infrastructure, education and research while fiscal easing should target specific taxes holding back growth.
Competition is picking up among major economies to cut tax rates, which was part of Mr Trump’s election platform.
But Ms Mann warned against broad-based corporate tax cuts without anything to support overall demand.
“Cutting corporate taxes in an environment where many companies are flush with cash does not create that impetus to get us out of the low growth trap because there’s plenty of cash already on firms’ balance sheets,” she said.