OECD says developed nations should target debt to GDP of 50%

PARIS: Developed nations should cut their public debt to half of gross domestic product (GDP) over the coming decades from current levels of more than 100% in some countries, the Organisation for Economic Cooperation and Development (OECD) said, flagging a potential long period of deleveraging ahead.

“Countries should reduce debt levels to around 50% of GDP or lower to provide a safety margin against future adverse shocks,” the Paris-based organisation said in a study.

With its public debt topping 200% of GDP, Japan would have to make the biggest effort to meet the recommendation by the middle of this century, followed by New Zealand, the United States and Luxembourg, the OECD said.

The organisation warned that gross government debt across the OECD as a whole had hit an unprecedented level above 100% in 2011 as a result of the financial crisis, which has hiked welfare costs, slashed tax receipts and entailed costly financial bailouts in many countries.

That is already well above the debt level of 70%-80% of GDP which academic studies suggests starts to have a negative impact on economic growth.

Japan would need to carry out a fiscal tightening worth more than 12% of GDP a year to reach the 50% target by the middle of the century, the OECD estimated. The United States would require an effort worth nearly 10%.

Since Greece, Ireland, Portugal and Spain already have severe austerity drives underway, they would not need as much effort as other highly indebted nations if they stick to their current tightening.

At the other end of the spectrum, Sweden did not need to carry out any additional tightening on top of what is already planned, while Denmark and Switzerland would have to make only minimal additional effort.

However, the OECD noted that spending on health and long-term care would keep rising and could force governments to tighten their budgets even more.

Inflation would offer no easy path to lower debt as the OECD calculated any gains in debt reduction would only be modest while there would be all the drawbacks associated with higher inflation.

Even though debt levels need to come down almost everywhere, it is best for growth that countries do not all have the same pace of reduction.

“If you do have a global fiscal consolidation that is quite rapid, then there does tend to be more detrimental effects on demand,” OECD economist Douglas Sutherland said. “That it has been staggered a little bit is probably for the better.”

In light of the scale of deleveraging ahead for most countries, better efficiency on health and education could yield savings of 0.5%-4.5% in the long run while many governments could broaden their tax bases and root out exemptions and loopholes. - Reuters

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