OECD Economic Outlook

Frequency :
Semiannual
ISSN :
1609-7408 (online)
ISSN :
0474-5574 (print)
DOI :
10.1787/16097408
Next Edition: 06 May 2014
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The OECD Economic Outlook is the OECD’s twice-yearly analysis of the major economic trends and prospects for the next two years.  Prepared by the OECD Economics Department, the Outlook puts forward a consistent set of projections for output, employment, prices and current balances based on a review of each member country and of the induced effect on each of them on international developments. 

Coverage is provided for all OECD member countries as well as for selected non-member countries. Each issue includes a general assessment, chapters summarizing developments and providing projections for each individual country, three to five chapters on topics of current interest, and an extensive statistical annex. Subscribers to the print edition also have access to an online edition, published on internet six to eight weeks prior to the release of the print edition, and now available from Issue 1 from 1967 onwwards.

Also available in: French, German
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OECD Economic Outlook, Volume 2003 Issue 2

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Author(s):
OECD
Publication Date :
18 Dec 2003
Pages :
256
ISBN :
9789264105843 (PDF) ; 9789264105829 (print)
DOI :
10.1787/eco_outlook-v2003-2-en

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This issue of the OECD Economic Outlook analyses the major trends that will mark the next two years. It  covers the outlook to the end of 2005 and examines the economic policies required to foster high and sustainable growth in member countries. Developments in selected major non-OECD economies are also evaluated. Three analytical chapters look at fiscal policy and its influence on economic activity, fiscal relations across levels of government, and  crubing the growth in government spending and raising its  cost effectiveness.
Also available in: French, German

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  • Click to Access:  Making the most of the recovery

    After a drawn-out period of fits and starts, a palpable recovery has finally taken hold across the OECD. The strong momentum already achieved in Asia, North America and the United Kingdom provides ample evidence of the renewed strength of the world economy. Despite lingering domestic weaknesses, Continental Europe is also on its way to join the recovery....

  • Click to Access:  General Assessment of the Macroeconomic Situation

    After a drawn-out period of fits and starts, a palpable recovery has finally taken hold across the OECD. The strong momentum already achieved in Asia, North America and the United Kingdom provides ample evidence of the renewed strength of the world economy. Despite lingering domestic weaknesses, Continental Europe is also on its way to join the recovery. However, the persistence of very large current account imbalances at this early stage of the recovery may complicate the outlook. The combination of large public and external deficits in the United States could be a source of exchange rate instability. Under such delicate circumstances, a sudden weakening of the dollar could stifle a fledgling European recovery. This would exacerbate the unevenness of the global upturn while not doing much to help reduce current account imbalances or tensions in the trade policy arena. All of this underscores the importance of strengthening fiscal policy frameworks...

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  • Expand / Collapse Hide / Show all Abstracts Developments in individual OECD countries

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    • Click to Access:  United States

      Economic growth has increased markedly since the spring, supported by highly stimulative fiscal and monetary policies. Consumption responded strongly to increases in disposable income induced by tax reductions, and business investment rebounded noticeably. Military expenditures are providing a further boost to demand. The recent rapid productivity growth bodes well for future investment and growth. Despite its strength, the current recovery is only beginning to generate employment gains and to support consumer confidence. With inflation slightly below desirable levels, monetary policy has remained supportive, but interest rates will need to be raised as the slack in product and labour markets dissipates. Government finances have deteriorated substantially as a result of tax cuts, additional military spending, and the widening output gap. The large deficits projected over the coming years underline the need to adjust current policies towards balancing the budget to cope with impending demographic pressures...

    • Click to Access:  Japan

      Following the recent acceleration of growth, led by business investment and exports, activity is likely to be sustained by faster world trade growth. However, the upturn, which is concentrated in certain manufacturing industries, is unlikely to be strong enough either to reduce unemployment significantly or to end deflation. The pressure for a rise in the yen and the strains associated with rising public debt pose risks to a durable expansion. Monetary policy should continue to focus on ending deflation by enhancing the effectiveness of quantitative easing. This should remain in place until positive inflation is achieved on a sustained basis and the risk of deflation is negligible. Putting the structural budget deficit on a downward path in 2004 would boost confidence in the prospects for consolidation over the medium term. Financial-sector restructuring, including the reduction of non-performing loans, should be a priority, accompanied by a broad structural reform programme to revitalise business activity...

    • Click to Access:  Euro Area

      Growth is estimated to have slumped further to a meagre ½ per cent in 2003. It should pick up to 1¾ and 2½ per cent in 2004 and 2005 respectively, underpinned by rebounding world trade, improving corporate balance sheets and a supportive stance of monetary policy. However, further exchange rate appreciation could hamper the recovery. Fiscal policy is set to be broadly neutral despite calls for fiscal consolidation. The unemployment rate is expected to peak at 9 per cent in 2004 with inflation remaining subdued. Achieving economic growth on a sustainable basis requires that greater progress be made in implementing the structural reform agenda already laid out and that attention be given to the additional efforts which may be required. The gains from creating a truly integrated and competitive European market, increasing business dynamism, investing in knowledge and innovation and pushing ahead with labour market and pension reforms could be very large....

    • Click to Access:  Germany

      Output fell in the first half of 2003, as exports declined sharply and domestic demand remained weak. While activity for the year as a whole is estimated to have stagnated, forward looking indicators signal that growth is likely to have picked up in the second half and into 2004 driven initially by strengthening exports. As activity broadens in 2005, GDP is projected to grow at above its potential rate, at some 2¼ per cent. The general government deficit is likely to exceed 4 per cent of GDP in 2003 and -- on current legislation -- will remain at around 3½ per cent in 2005. Expenditure reforms are required to reduce the structural deficit in a sustainable way. Income tax reductions should not be brought forward into 2004 without corresponding reductions in government spending and tax expenditures. Important steps have been taken towards implementing the government’s programme of labour market and social spending reform. These reform plans must not be watered down...

    • Click to Access:  France

      GDP declined somewhat in the first half of 2003, reflecting a sharp fall in exports and weaker domestic demand. Data for the thrid quarter show a pick-up in activity. Considering the extent of the slowdown, unemployment has increased only moderately. At the same time, the August heatwave and administrative price hikes have brought an end to declining inflation. Overall, economic activity is projected to continue strengthening through 2004, with GDP increasing by some 2½ per cent in 2005. The draft budget for 2004 calls for a substantial tightening of fiscal policy, principally from slower expenditure growth. For this objective to be met, effective action will have to be taken to ensure that past slippages in the deficit will not be repeated. Over the medium-term a comprehensive reform of the healthcare system would help contain overall government spending...

    • Click to Access:  Italy

      The economy stalled in the first half of 2003, but has since recovered somewhat. Growth should gradually gather strength during 2004, largely in response to more robust world trade growth. Employment has held up well, thanks to structural reforms. Persistently high inflation is harming competitiveness, but a continuing large output gap and decelerating unit labour costs should support disinflation during 2004. The public sector deficit-to-GDP ratio is increasing in 2003 and could rise further in 2004 because of the weak economy and the likelihood of higher than programmed public capital spending. In the absence of corrective measures, the 3 per cent threshold could be exceeded in 2005. A significant decline in the high debt ratio will require additional structural measures, notably a faster implementation of the recent pension proposals. More rapid progress in product market reforms is also required to bring inflation closer to the euro area average and spur investment dynamism...

    • Click to Access:  United Kingdom

      The UK economy continues to exhibit greater resilience than most other OECD countries. Growth, led by private and public consumption, has remained close to potential, while inflation and unemployment are internationally low. The recent pick-up in activity should lead to above trend growth in 2004-05, with a more balanced expenditure composition, providing instability stemming from the housing market can be avoided. A gradual continuation of the recent tightening of monetary policy will be needed to ensure consistency with the inflation target and would also reduce the risk of another surge in house prices. The public sector deficit has widened considerably and, though arguably still consistent with the "golden rule", may call for a slowdown in spending or a rise in taxes during the current upswing to avoid a destabilising adjustment later on...

    • Click to Access:  Canada

      A series of adverse shocks and the sharp appreciation of the exchange rate have caused economic activity to weaken markedly since the spring. The output slowdown and lower import prices have also contributed to a rapid decline in inflation. But continuing robust household spending and the expected global demand recovery should help output growth return to above its potential rate. Over time, rising capacity utilisation and profit growth should also support a pick-up in business investment. The Bank of Canada has reacted appropriately to the changing output and inflation outlook by reversing the earlier rise in interest rates. But since the adverse shocks were temporary, it will need to be ready to resume monetary tightening as soon as the recovery is firmly in place and the output gap is narrowing. The additional public spending announced in the last budget has turned out to be helpful in underpinning economic activity through the recent soft patch, but an expansionary fiscal stance will no longer be justifiable next year and in 2005, when the recovery is in full swing...

    • Click to Access:  Australia

      The economy slowed sharply during the first half of 2003, when brisk domestic demand growth was almost offset by a steep fall in exports. With farm output likely to recover from the drought and adverse external influences receding, economic activity is projected to gather momentum, despite a cyclical downturn in housing investment. The labour market should improve further, with inflation remaining under control, given sizeable productivity gains, wage moderation and the strong Australian dollar. To preserve price stability over the longer run, monetary policy needs to move to a more neutral policy stance. The government should maintain its fiscal objective of keeping the budget balanced over the economic cycle, allowing fiscal policy to play a stabilisation role through the operation of the automatic stabilisers. Reform of the income support system should aim at strengthening the incentives of welfare recipients to participate in gainful employment...

    • Click to Access:  Austria

      Output growth was weak in the first half of the year but is expected to gain momentum gradually this year and through 2005 in line with the broadening of the recovery in Europe. The unemployment rate will fall slightly and inflation will continue to be low. Tax reductions scheduled for 2005, which will be mostly debt-financed, will mean a delay in reaching the objective of a balanced budget and are likely to have a procyclical impact. Priority should be given to cuts in government expenditure to create room for the planned tax reductions, while also reducing impediments to increased labour market participation...

    • Click to Access:  Belgium

      Economic growth is beginning to recover and should reach around 2¾ per cent in 2005 as the international economy recovers and business investment strengthens. Meanwhile, unemployment is likely to remain above 8 per cent and inflation to fall below 1½ per cent in 2004-05, mainly reflecting significantly lower increases in unit labour costs. The government should continue to take the steps necessary to ensure that the budget remains balanced. This is important to maintain confidence in its debt-reduction strategy, a central element in preparing for population ageing. This should be supported by further reductions in the tax burden on low-income earners and in incentives for early retirement...

    • Click to Access:  Czech Republic

      Domestic demand growth is weakening as the effects of earlier fiscal expansion wane. But signs of a recovery in exports are becoming visible. Together with an investment rebound driven by foreign companies, this should lead to a gradual acceleration in GDP to above 3 per cent over the next two years. Fiscal policy has embarked on a consolidation path, though a gradual one, which is likely to postpone joining the euro to 2010 or beyond. Establishing a multi-year budgeting framework will be essential to implementing the consolidation plan. Monetary policy has been successful in bringing down inflation and establishing an environment of lower interest rates...

    • Click to Access:  Denmark

      Demand has slowed considerably, reflecting weak export market growth and household and business caution. Growth prospects should brighten as the international situation improves and firms gain sufficient optimism to increase investment and hiring. Wage and price inflation pressures have eased as output has slipped below potential and are likely to remain contained over the projection period. A neutral fiscal stance, with automatic stabilisers working to cushion output fluctuations, remains appropriate. But the government’s strategy for managing public finances prudently could be put at risk if local government spending continues to slip. A faster pick-up in activity than projected could put upward pressure on wage inflation as the output gap closes. Further labour market reforms would not only help to address such risks but also reinforce the longer-term budget position...

    • Click to Access:  Finland

      GDP fell slightly during the first half of 2003, despite a significant fiscal stimulus to public and private consumption. A pick-up in world trade is likely to contribute substantially to growth over the coming years and the current negative output gap should close by 2005. Tax cuts implemented in the summer and proposed for the 2004 budget will sustain demand but pose a challenge to the government’s objective of balancing central government finances by 2007. Cuts in labour taxes are welcome if accompanied by spending restraint, but further fiscal stimulus would risk being pro-cyclical, and make it more difficult to cope with the future fiscal implications of ageing...

    • Click to Access:  Greece

      The economy performed strongly in the first half of 2003, as buoyant domestic demand more than offset the weakness of exports. With monetary and other conditions remaining supportive and net exports recovering thanks to the international rebound, output growth is projected to gather additional momentum, before easing somewhat in 2005. The labour market should improve further, but the inflation gap vis-à-vis the euro area average is likely to widen. Fiscal consolidation, especially tighter control of government primary expenditure, needs to be persevered with, to ensure the reduction of the still high debt-to-GDP ratio. There is also a need to strengthen the longer-term underpinnings of growth and competitiveness, through more decisive action to address labour market rigidities and to open up network industries to competition...

    • Click to Access:  Hungary

      Growth is projected to rise from 3 per cent in 2003 to close to 4 per cent in 2005 and become better balanced. While exceptional consumption growth carried through to the first quarter of 2003, it is set to slow considerably. Exports are estimated to have picked up in the second half of 2003 and are projected to accelerate further. Successful entry to the euro area, planned for January 2008, requires strong consensus and coordination on macroeconomic policy and determined fiscal discipline. Measures to strengthen the budget process need to be implemented soon, and the authorities should use consolidation as a vehicle for deep reforms to public expenditure...

    • Click to Access:  Iceland

      A new economic expansion has begun, driven by domestic demand, and growth is projected to exceed 5 per cent per annum by 2005 as work on the major aluminium-related investment projects gathers momentum. Inflation is likely to move to the top of the official target range. The challenge for policymakers will be to restrain domestic demand and avoid overheating at the peak of construction activity in the middle of the decade, through timely monetary and fiscal tightening. Government plans to cut taxes from 2005 should be reconsidered if the intended slowdown in public spending growth is not achieved. In any case, official interest rates will need to be raised substantially, probably in the not-too-distant future...

    • Click to Access:  Ireland

      GDP growth plummeted from 7 per cent in 2002 to an estimated 1¾ per cent in 2003, as exports were hit by the appreciation of the euro and investment declined sharply. Growth is set to recover to around 3½ per cent in 2004 and nearly 5 per cent in 2005. With the unemployment rate remaining close to 5 per cent, inflation should decelerate to 3 per cent over the next two years. To contain inflationary pressures, competition and regulatory policy should focus on the sheltered sectors (notably construction and business services). Tax incentives that boost the demand for housing in an already overheated residential market should be cut, which would also enable resources to be reallocated towards urgently needed infrastructure development...

    • Click to Access:  Korea

      The economy experienced a sharp downturn in the first half of 2003 following a number of negative shocks. A strengthening of confidence and a pick-up in world trade should lead to a recovery that would lift growth to around 4¾ per cent in 2004 and 5½ per cent in 2005. However, there are risks, including a further appreciation of the exchange rate and some retrenchment by the household sector following a credit boom, which could affect the timing and strength of the recovery. Given the high costs incurred for financial-sector restructuring, the fiscal policy stance should return to neutral in 2004 as the economic recovery begins. Further structural reforms, particularly in the corporate and financial sector and in the labour market, are needed to strengthen confidence and boost Korea’s growth potential...

    • Click to Access:  Luxembourg

      GDP growth has been low for a third year in a row owing to the weakness of financial markets and stagnation in the euro area. It is likely to strengthen in 2004 as exports and business investment pick up. In the wake of the recent sluggish adjustment of the labour market, employment growth is expected to follow the business cycle with a considerable lag. The government should take advantage of the economic upturn to put fiscal policy on a sustainable path, by reducing growth in current public spending in line with lower medium-term growth prospects...

    • Click to Access:  Mexico

      A pick-up in exports to the United States is expected to be the main driver of a recovery which has been delayed by the weakness of the US manufacturing sector. The pace of activity is expected to  gain momentum as business investment starts to increase and employment to expand. Consumer price inflation is falling again and is likely to be on target at the end of the year. The Central Bank has shown its readiness to respond quickly to changes in the inflation outlook. Its current cautious monetary stance is appropriate. On the fiscal front, there is no room for slippage. The government needs to bring the public sector deficit into near balance, and the borrowing requirement down to about 2 per cent of GDP, by 2005. The approval of a strong tax package will be crucial for boosting investor confidence...

    • Click to Access:  Netherlands

      After two years of near-stagnation the Dutch economy contracted in the first half of 2003. GDP is set to decline by ½ per cent for the year as a whole, as consumers are adjusting to weak disposable income and fading wealth effects, business is struggling to restore competitiveness and sound balance sheets and the government has tightened fiscal policy. Although real GDP growth may reach 1 per cent in 2004 and accelerate to 2 per cent in 2005, this would still leave a substantial negative output gap and the unemployment rate is expected to increase to 5 per cent in 2004. This should lead to a further deceleration in wages and prices. Restoring international competitiveness is key for GDP growth to return to rates at or above potential. The government should increase the safety margin in the cyclically sensitive fiscal balance in order to avoid the need for pro-cyclical tightening in the future...

    • Click to Access:  New Zealand

      Activity has been very strong over the past four years. Most recently, buoyancy due to immigration has outweighed the negative impulse from an appreciating exchange rate. This has left productive resources stretched. Rising house prices are providing further impetus to domestic demand. However, the pace of activity should soon cool to more normal rates of growth. The moderate headline inflation rate reflects the net outcome of falling import prices and high domestically-generated inflation. On current monetary policy settings, these factors are likely to continue balancing out and inflation should remain under control. The budget surplus has been surprisingly large, but the government should continue to exercise caution in raising expenditure until the evidence is clear that the revenue surprise is permanent...

    • Click to Access:  Norway

      Large interest rate cuts, exchange rate depreciation, increasing oil investment and expanding export markets are expected to lead to an economic recovery towards the end of 2003. Mainland GDP growth may reach 2¾ per cent in 2004, with the unemployment rate peaking at some 4¾ per cent. Inflation should remain low, reflecting the negative output gap being closed only in 2005. The Government is continually moving away from its fiscal guidelines, thereby posing a threat to fiscal credibility. Long-run fiscal sustainability is conditional on pension reform, as future pension expenditure growth is projected to be extremely rapid in Norway compared to other countries. Reforms to curb public spending and enhance competition in sheltered sectors, in addition to prudent wage settlements, would provide a sounder environment for longer-term growth...

    • Click to Access:  Poland

      GDP increased by 3 per cent year-over-year in the first half of 2003, driven by strong export growth following the depreciation of the zloty. Improved profitability and rising consumer demand are projected to broaden the base of the recovery, allowing growth to strengthen and reach 4½ per cent in 2005. Unemployment is expected to begin falling towards the end of 2004 as employment starts to expand, but the still-large output gap should keep inflationary pressures in check. Substantial cuts in nominal interest rates and the depreciation of the zloty have eased monetary conditions, but real interest rates remain high, indicating scope for further relaxation. For this to happen, and in order to prevent the emergence of an unsustainable current account deficit, an already relaxed fiscal stance needs to be tightened rather than loosened as currently proposed...

    • Click to Access:  Portugal

      Activity is estimated to have contracted in 2003, reflecting a further fall in private domestic demand and weak external markets. However, both have turned around from mid-year and a gradual recovery is projected for 2004 and 2005. The output gap will nevertheless remain large in 2005, and the unemployment rate high. In this context, the inflation differential vis-à-vis the euro area should continue to narrow. The recession brought a halt to the reduction in the fiscal deficit, despite continuing consolidation efforts. Continued forceful implementation of already-approved structural measures is essential to rein in public spending. Additional measures will be needed to reduce the structural deficit further over the medium term...

    • Click to Access:  Slovak Republic

      Output is likely to accelerate in 2004, driven by strong private investment and exports, and growth should reach almost 4½ per cent in 2005. Headline inflation is expected to surge once again in 2004, as administered prices are increased towards cost-recovery levels, but to converge subsequently towards the average inflation rate in the European Union. Unemployment will continue to fall, but remain at a high level. The planned consolidation of public finances is welcome. Compliance with the Economic and Monetary Union fiscal rules in 2006, as envisaged by the government, is within reach and would help balance the policy mix. The ambitious structural reforms under way are commendable and, if pursued, would foster sustained increases in output and employment...

    • Click to Access:  Spain

      Activity has been more resilient in Spain than in most other European Union countries. While foreign demand has suffered from weak activity in Europe and the appreciation of the euro, buoyant consumption and construction demand have sustained growth. Meanwhile, inflation has moderated, partly due to the euro appreciation, although a significant but shrinking inflation differential with the euro area persists. Growth should progressively accelerate to 3 per cent by 2005, with a more balanced contribution across demand components. In 2004, the government foresees a balanced budget once more, thus complying with the Fiscal Stability Law. The fiscal stance will be broadly neutral, which is appropriate given the resilience of the economy and the relatively relaxed monetary conditions. Reforms to improve flexibility in wage bargaining and to further raise competition in sheltered sectors would contribute to reducing the inflation differential with the euro area...

    • Click to Access:  Sweden

      The economy expanded moderately in 2003, with output growth remaining somewhat below its potential rate. Prospects look brighter for 2004 and 2005, when external demand is projected to pick up and household spending and business investment to accelerate. While the immediate risk to inflation from the collective wage negotiations in spring 2004 has abated, the final agreements may end up reducing working hours, thereby restricting potential growth. Further stimulus through fiscal or monetary policy easing would not be warranted. The current structural surplus should be sustained and monetary policy tightened gradually as the expansion gathers steam...

    • Click to Access:  Switzerland

      Switzerland has been hit harder than the majority of other OECD countries by the downturn in international activity. Output is likely to have declined by ½ per cent in 2003, but could pick up  gradually and grow by 1¼ per cent in 2004 as a result of the improved external environment and the fall in the franc. Unemployment is unlikely to recede before the second half of 2004, while inflation  could dip further and lead to virtual price stagnation. Monetary conditions should remain easy until the recovery is firmly established. In the absence of room for interest rate cuts, the Swiss National Bank should stand ready to intervene in the foreign exchange market to head off any unwanted appreciation of the franc to minimise the risk of deflation. Any further relaxation of fiscal policy would, on the other hand, be neither desirable nor effective as a way of stimulating activity. For growth to pick up on a sustainable basis, the scope and pace of structural reforms in the product markets need to be stepped up...

    • Click to Access:  Turkey

      A virtuous cycle of fiscal stabilisation, interest rate declines and increasing confidence should help maintain GDP growth on a strong path. After increasing by 5 per cent in 2003, GDP may decelerate slightly in 2004 as a result of adjustments in stockbuilding, but should rebound in 2005 provided that positive expectations are maintained. The authorities should stick rigorously to the fiscal stabilisation and structural reform programme, pursuing the primary budget surplus target and implementing the new policies regarding social security, banking, privatisation and foreign direct investment. A firm policy stance in the face of pressures emanating from the local elections in spring 2004 would help to preserve the crucial momentum of positive expectations...

    • Click to Access:  Developments in Selected Non-member Economies

      Economic activity in the non-member Asian economies has been rebounding rapidly, following the containment of the outbreak of severe acute respiratory syndrome in June. Growth in the Dynamic Asian Economies is expected to gain momentum during 2004 on the back of strong exports, particularly to China, and a recovery in domestic demand. In China, a surge in capital spending accompanied by a marked acceleration in bank lending is pushing real GDP growth to its fastest pace in several years. The monetary authorities now face the challenge of ensuring that lending growth does not become excessive, a task complicated by the large balance of payments surplus and substantial excess reserves in the banking system. In South America, the economic recovery initiated in the second half of 2002 is gaining momentum, based on favourable export demand, improved terms of trade for commodities, and sizeable fiscal and current account adjustments in many countries in the region. After a recession in the first half of 2003, growth in Brazil is finally picking up. Argentina’s economy is also rebounding, while GDP growth in Chile is accelerating. In contrast, Venezuela remains a dark spot in the region. While growth in South-east Europe slowed somewhat in 2003, it accelerated in the Newly Independent States, led largely by a strong growth pick-up in Russia. Economic activity in Russia was mainly driven by oil and related sectors, as well as sectors oriented to domestic consumption. Growth is set to moderate in 2004, not least as a result of slower investment growth following on from the so-called "Yukos affair"...

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  • Click to Access:  Fiscal Stance over the Cycle

    This chapter describes the extent to which fiscal policy has been a stabilising or destabilising influence on economic activity in the OECD area over the last two decades, and investigates some of the institutional factors which may have led to the observed outcome. The concerns motivating the chapter relate to the fact that discretionary fiscal interventions may be pro-cyclical, as in the case of fiscal tightening during downturns especially. In part, this may be because of unsustainably high government indebtedness. But pro-cyclicality could also be due to implementation problems or to the institutional framework in which policies are designed and managed, including some rules-based approaches to fiscal stability, which may hamper the symmetrical operation of built-in stabilisers over the cycle.

  • Click to Access:  Fiscal Relations across Levels of Government

    OECD economies face the common challenge of raising public sector efficiency, and fiscal relations between central and sub-national governments are coming under increasing scrutiny in this regard. While there are apparent advantages to decentralisation, the choice between central and local provision is not clear-cut and devolution has not proceeded evenly in the OECD area over the past two decades. Decentralisation can make governments more accountable, allowing a better matching of public services to local preferences and needs. It may introduce competition across jurisdictions, thus boosting efficiency in the public sector. But it can also create co-ordination problems and may not deliver efficiency gains in activities where small-scale operation increases provision costs or in cases where the benefits and costs of an activity are felt outside the supplying jurisdiction. Moreover, nationwide policy objectives, notably those related to equity and macroeconomic stabilisation, may be more difficult to achieve with greater sub-national autonomy...

  • Click to Access:  Enhancing the Cost Effectiveness of Public Spending

    Public spending rose steadily as a share of GDP in the three decades to the mid-1990s, but this trend has since abated. The spending pressures stemming from the continued expansion of social programmes have been partly compensated by transient or one-off factors. Pressures on public spending, however, appear likely to intensify, in particular as a consequence of ageing populations. Since most OECD economies have very little scope for raising taxation or debt to finance higher spending, reforms to curb the growth in public spending while raising its cost effectiveness are now required. This process will involve difficult choices as to the allocation of resources, the more so that public spending programmes also have important roles to play in pursuing economic growth and equity objectives. This paper presents a reform strategy for progress in this direction, based on detailed country reviews for over two-thirds OECD countries.1 Three main areas for action are identified: the budget process; management practices and he use of market mechanisms in the delivery of public services...

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