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19 Oct 2021

OECD Warns that World Faces Fiscal Problems Much Worse Than COVID

The Index Today

Organization for Economic Co-operation and Development said that the Covid-19 pandemic may have bloated public debt to levels already pushing some governments to consider consolidation, but that’s nothing compared to the fiscal difficulties brewing in the coming decades.
Bloomberg reported that according to its long-term scenario, a deceleration in large emerging economies, demographic change and slowing productivity gains will drag trend economic growth among the OECD’s 38 members and the Group-of-20 nations to 1.5% in 2060 from around 3% currently. At the same time, states will face rising costs, particular from pensions and health care.

The OECD mentioned that to keep up with the public services and benefits while stabilizing debt in that environment, governments would have to raise revenues by nearly 8% of gross domestic product. In some countries, including France and Japan, the size of the challenge would amount to more than 10% of output, and the economists didn’t even account for new expenditures such as climate change adaptation.

The OECD said in the policy paper prepared by Yvan Guillemette and David Turner said that “Secular trends such as population aging and the rising relative price of services will keep adding pressure on government budgets, fiscal pressure from these long-run trends dwarf that associated with servicing Covid-legacy public debt.”

Countries need not necessarily raise taxes to meet these challenges, the OECD said. Instead, it called for reforms to boost employment rates and raise retirement ages.
A combination of action in those two areas that includes ensuring the effective retirement ages rise by two thirds of future gains in life expectancy that could cut in half the projected increase in fiscal pressure by 2060 in the median country, according to the OECD.

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