OECD Economic Outlook

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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, government spending, 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 such as housing, and an extensive statistical annex with a wide variety of variables including general debt.
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OECD Economic Outlook, Volume 2004 Issue 2

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12 Jan 2005
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OECD's December 2004 assessment of economic developments and prospects.  In addition to the regular economic assessments and statistical information, this issue includes articles examining oil price developments and savings behaviour and the effectiveness of fiscal policy.
Also available in French, German
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  • Regaining Momentum Despite Oil Turbulence
    Since the 2001 slowdown, the world economy has moved in fits and starts and economists as well as the general public are now longing for a smooth and sustained recovery, undisturbed by chronic geopolitical risks or abrupt gyrations in oil prices and financial markets. Although economic fortunes have been contrasting over the past few quarters, with the United States forging ahead, East Asia slowing but from a rapid pace, and Continental Europe plodding along, households seem to have been lacking confidence OECD-wide. This pervasive sense of uncertainty has proved somewhat contagious since after a year of record growth in world trade, business confidence has fallen back to just above the historical average in the United States and Europe, dashing hopes that GDP would keep growing above trend over the next few months. Compared to cautiously upbeat assessments that could be made even two months ago, this turnaround ...
  • General Assessment of the Macroeconomic Situation
    This volume analyses the major trends that will mark the next two years. It provides in-depth coverage of the main short-term economic challenges as well as the measures required to foster growth in each member country. Forthcoming developments in major non-OECD economies are also evaluated in detail.
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  • Expand / Collapse Hide / Show all Abstracts Developments in individual OECD countries

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    • United States
      The expansion has lost some momentum, in part as a consequence of the energy price increases. These have already held back real disposable income gains and, with household savings near zero, are likely to weigh on consumption. Core inflation, which rose earlier in the year, has since fallen back towards the lower end of the desirable range. Productivity has decelerated towards trend growth, but profit margins remain high, supporting future investment. The economy is expected to keep growing above potential. However, further sustained increases in energy prices, weakness in the labour market, or a sharper than projected rise in long-term interest rates pose downside risks. Although some stimulus has been removed, monetary policy remains supportive. Future tightening can afford to be gradual, as higher energy prices are restraining activity more than boosting inflation expectations. Government finances have improved more than expected, but faster revenue growth has been partly offset by higher spending, especially on defence and homeland security. Projected deficits thus remain large, underlining the need to adjust tax and spending levels to rein in the debt accumulation and prepare for impending demographic pressures. This might also lessen the record external imbalance. ...
    • Japan
      The economic expansion remains on track, though at a more moderate pace as a result of a slowdown in export growth. The resilience of domestic demand, reflecting the increased profitability of the corporate sector and employment gains, should help sustain growth at an annual rate of around 2¼ per cent through 2005 and 2006. The expansion, the strongest since the 1980s, is expected to bring an end to deflation, as measured by the consumer price index, in the course of 2005. The Bank of Japan’s policy of quantitative easing and zero interest rates should continue until inflation is sufficiently high to make the risk of renewed deflation negligible. A detailed and credible consolidation plan to achieve the government’s goal of a primary budget surplus by the early 2010s is necessary for confidence in fiscal sustainability. Further progress in reforming the banking sector is important to sustain the recovery and should be accompanied by an acceleration of a broad structural reform programme to increase productivity. ...
    • Euro Area
      The recovery is facing headwinds because of higher oil prices and a recent renewed appreciation of the euro. Even so, spurred by still robust world trade, GDP should accelerate from a growth rate of just below 2 per cent in 2004 to 2½ per cent in 2006. This would not suffice, however, to fully absorb the economic slack and the unemployment rate would remain high at about 8½ per cent. Inflation is expected to recede once the impact of the oil price hike peters out. Monetary policy should be kept easy as long as the medium-term inflation outlook remains favourable. The closer integration that monetary union was seen as bringing has not yet translated into any visible strengthening of trend growth or increased dynamism. The structural reform agenda, required to move the euro area economy towards the ambitious targets set by the Lisbon summit in 2000, needs to be reinvigorated. Greater dynamism would also help in achieving fiscal consolidation and thereby make fiscal policy more consistent with the requirements stemming from ageing populations. ...
    • Germany
      Based on strong export growth, the German economy is recovering from three years of stagnation. Weak domestic demand is still weighing on activity although there are signs that investment is strengthening. The upswing should broaden in 2005, as consumer confidence gradually improves. In 2006 GDP is projected to grow by 2¼ per cent, above potential. The general government deficit is likely to remain between 3½ and 4 per cent of GDP this year and next, not falling below 3 per cent before 2006. Significant steps to reform labour and product markets are being phased in. While the short-run impacts on confidence and growth are ambiguous, it is clear that for economic performance to be raised in a durable way these reforms need to be continued and deepened within a coherent framework. Fiscal consolidation needs to be linked to more fundamental spending reform, requiring, inter alia, the untangling of responsibilities across different levels of government, more determined reductions in both subsidies and tax expenditures and continued reform of the social security system. ...
    • France
      Having slowed in the second half of 2004, the upswing should pick up again in 2005 once the effects of oil price increases begin to wane. Both foreign and private domestic demand remain robust so that employment growth is likely to pick up during 2005 and unemployment should fall. Productivity growth and continued wage moderation allow core inflation to remain low. Public finances are set to improve slowly, in part reflecting inclusion of a large capital transaction as revenue in the 2005 budget. The 2005 deficit may exceed government plans. Nevertheless, an improvement in government finances should follow from reforms in central government spending control and health care expenditure management. These reforms will require sustained efforts to change underlying incentives if good intentions are not to be undermined. Having shown that lower employers’ contributions can improve employment prospects, the government should seek to extend these and other labour market reforms. ...
    • Italy
      Exports and investment activity rose markedly in the first half of 2004, ending their protracted slump. Domestic demand will sustain the recovery, though the pass-through of higher oil prices may restrain demand growth temporarily. GDP growth of 1½ to 2 per cent is projected over 2005-06, which would be above the estimated rate of potential. Inflation could start to rise again as the output gap closes. A planned tax cut in 2005-06 and a pension reform as of 2008 could improve the conditions for growth, but a sustained public debt decline will be a sine qua non for building private agents’ confidence, so that more and earlier public spending reforms are needed. Competition reforms in service sectors, including energy, transport, finance and education, could help to narrow the inflation gap with euro area partners, while also spurring innovation and a more competitive export structure. ...
    • United Kingdom
      Recent signs that growth is slowing from above-trend rates are welcome as the economy is probably operating close to capacity. Future growth is likely to be less reliant on consumption and more driven by investment, with net exports being much less of a drag. Instability stemming from the housing market remains a risk, although it may be smaller than at previous house price peaks. The slowdown and continuing low inflation warrant a pause in monetary tightening, although further tightening may be needed during 2005, in particular due to increasing pressures from the labour market. The government deficit is likely to be above 3 per cent of GDP in 2004 and, in the absence of a spontaneous rise in taxes, additional action may be required to achieve a decisive and sustainable reduction. ...
    • Canada
      Growth has been higher than expected so far this year, and the economy is now estimated to be operating close to full capacity. The pace of activity should remain buoyant up to the beginning of 2005, before cooling down to near potential rates of around 3 per cent. With soaring oil prices and easing capacity constraints, inflation is expected to hover above the mid-point of the target range until next year. The Bank of Canada needs to continue raising interest rates toward their neutral level to ensure adherence to the inflation target. The government should avoid any easing of the fiscal stance at this juncture, despite the unexpectedly large surplus recorded for the last fiscal year. Great vigilance should be exercised over spending, in particular with regard to additional transfers from federal to lower levels of government. ...
    • Australia
      Economic growth remained robust in the first half of 2004, boosted by domestic spending, and despite the ongoing drag from the foreign balance. Continued strong growth is expected in 2005 and 2006, with improving net exports offsetting the projected weakening in household consumption and residential investment. This should be accompanied by further employment gains and inflation staying within the Reserve Bank’s 2 to 3 per cent target band, underpinned by moderate wage increases and solid productivity growth. The upbeat economic outlook should allow the removal of the remaining monetary stimulus, to safeguard price stability. The projected small fiscal surpluses over coming years are appropriate, leaving room for automatic stabilisers to operate if the global recovery weakens or another drought develops in rural areas. ...
    • Austria
      Output growth is projected to increase gradually, in line with the recovery in the euro area, allowing unemployment to fall in 2006. Notwithstanding progress in reducing the relatively high level of government spending, tax reductions in 2005 and 2006 will be mostly deficit-financed, providing a comparatively large stimulus to growth. While the planned pension harmonisation will damp ageing-related spending in the future, substantial further reductions in general government outlays are necessary to ensure the long-run sustainability of government finances, while further steps to improve incentives to work among older workers and women would help offset the adverse economic impact of ongoing demographic change. ...
    • Belgium
      Economic growth is expected to ease somewhat in 2005 but strengthen to 2¾ per cent in 2006 as export markets remain buoyant and business investment picks up. The unemployment rate should fall to 7¼ per cent by 2006 with the underlying inflation rate remaining at around 1¾ per cent as the unfavourable effects of the increase in energy prices fade but the economy moves from below to above-potential growth. If the euro were to be stronger than assumed, growth and inflation would be lower. Further efforts are needed to ensure that the budget remains balanced. Measures should focus on expenditure restraint, as planned, since the high tax burden on labour discourages work effort. Further reforms are also needed to reduce incentives for early retirement and raise the participation rate. ...
    • Czech Republic
      Driven by buoyant exports and strong private investment, output growth has gained momentum and should reach about 4 per cent this year and also in 2005 and 2006. Employment growth is likely to be muted, but nevertheless allow for a slight decline in unemployment. Inflation will remain close to 3 per cent. The momentum of fiscal reform needs to be boosted. A new budgeting framework has been introduced and needs to be effectively implemented. Also, concrete progress is needed on pension and healthcare reform. Monetary policy looks set to remain neutral in the near term although there are upside risks to inflation. Structural reforms to improve the business environment are needed to enable rapid real convergence. ....
    • Denmark
      The economy has continued to recover in 2004 due to a strong pick-up in private consumption and exports. Prospects look bright for 2005 and 2006, as business investment should add to activity on top of continued solid household spending and fast-growing export demand. The labour market is gradually improving, but inflationary pressures are likely to remain contained until 2006 when labour- and product-market slack is expected to disappear. The outlook is very much shaped by the 2004 fiscal easing, which provided a large boost to household disposable income. Monetary policy settings are currently supportive of growth, but will become less so by 2006 as the European Central Bank gradually raises interest rates and Denmark follows suit. Further initiatives to increase labour force participation would help to sustain the upturn and bring employment closer to the government’s medium-term target. ...
    • Finland
      With output close to its potential, Finland is in a more favourable cyclical position than the euro area on average. The pick-up in world trade and a revival in business investment are expected to become increasingly important as drivers of growth, which should average about 3 per cent a year to 2006. A moderate wage settlement would allow cuts in labour taxation without compromising aggregate fiscal objectives. However, efficiency gains in the public sector and greater private service provision are required to create room for further tax cuts. Additional reforms, particularly a tightening of conditions applying to early retirement schemes, are needed to achieve the government’s employment target. ...
    • Greece
      Buoyant domestic demand enabled Greece to maintain brisk growth in the first three quarters of 2004. GDP growth is set to ease to 3¼ per cent in 2005, as strong Olympics-related investment comes to an end and fiscal policy tightens, but it should pick up again in 2006. Inflation is expected to increase, reflecting strong demand and higher oil prices, averaging around 3¼ per cent over the next two years. The recently-revealed sharp deterioration in the fiscal position underlines the need for substantial retrenchment in public expenditure to put public finances on a sustainable path. This should be complemented by improved administrative efficiency and decisive reforms of the pension and health systems. Measures to enhance labour market flexibility and increase product market competition are also required to reduce the inflation differential with the euro area. ...
    • Hungary
      Output growth of close to 4 per cent is expected in 2004, easing to around 3½ per cent in 2005 and 2006, with some reduction in the exceptionally rapid pace of export growth and a further slowdown in consumption growth. Inflation is expected to come down rapidly in the near term, as the impact from one-off increases in indirect taxes fades; it is expected to continue to fall, though at a slower pace, in 2005 and 2006, despite higher oil prices Although a substantive reduction in the government's budget deficit is expected this year, a big gap between ambitions and outcomes in fiscal policy remains, making co-ordination of macroeconomic policy more difficult and raising risk premia. The new government should switch to a more credible fiscal strategy that sets more realistic targets and backs them up with a stronger commitment to sustainable spending cuts. ...
    • Iceland
      The economic expansion has continued to gather momentum, broadening from buoyant domestic demand to exports. Even though the economy has not yet entered the most intensive phase of the large-scale aluminium-related investment projects and the labour market is still relatively weak, a sizeable external deficit and inflation pressures have re-emerged. Further substantial interest-rate increases will be needed to prevent a recurrence of the overheating that took place at the turn of the century. A tight fiscal stance during the investment boom is essential, as it would alleviate the burden on monetary policy to safeguard price stability without the need for excessively high interest rates, upward pressure on the exchange rate and a squeeze on the exposed sector of the economy. Planned tax cuts should therefore be postponed. ...
    • Ireland
      Output is estimated to rise by 5 per cent in 2004 and is set to expand roughly at that pace in 2005 and 2006, driven by buoyant net exports and consumption. With excess demand persisting, inflationary pressures are expected to rebuild gradually. The economy is vulnerable to a rise in the euro exchange rate or in interest rates. Curbing inflation pressures in the medium term should rely on unleashing market forces in services, including in network industries and the liberal professions, and easing regulations in retail trade. Wage moderation should also be encouraged. ...
    • Korea
      Exports, driven in large part by China, are sustaining the expansion during a period of weak private consumption in the wake of the household credit bubble. Although export growth is now moderating, a pick-up in domestic demand, led initially by investment, is expected to maintain economic growth in the 4 to 5 per cent range in 2005 and 2006. A slowdown in world trade growth before domestic demand revives would pose a threat to a continued expansion. Given the structural causes of weak domestic demand, further progress in the reform agenda, notably by increasing flexibility in the labour market and addressing the problems of the credit card companies, should be the top priority. Monetary policy should maintain its expansionary stance until domestic demand recovers, while automatic fiscal stabilisers should be allowed to function. ...
    • Luxembourg
      Export-led growth has resulted in a brisk economic upswing with GDP growth rates expected to exceed 4 per cent in 2004 and the following two years. The trend rise in unemployment is likely to come to an end as of early 2005. The government should take advantage of the economic upturn both to revise its spending programmes in line with more moderate medium-term growth prospects and to tackle structural unemployment. ...
    • Mexico
      A strong recovery is finally under way, fuelled by the upturn in the US manufacturing sector and high oil prices. Growth prospects are expected to remain bright as domestic demand offsets the projected slowdown of foreign demand. Headline inflation has risen, mostly reflecting erratic factors, but core inflation has also turned up. Faced with rising inflation expectations, the successive moves to tighten the monetary policy stance during 2004 have been appropriate. On the fiscal front, the 2004 budget target will be easily met, thanks to higher-than-projected oil revenues. The supportive revenue environment should continue to be used to consolidate public finances. A revenue-enhancing tax reform is required to reduce the vulnerability of public finances to oil price changes. ...
    • Netherlands
      The economy is gradually recovering from a long and severe recession. Real GDP is likely to grow by 1¼ per cent in 2004 and 2005, accelerating to 2¼ per cent in 2006, which would still leave a large negative output gap. Modest wage growth, needed to restore international competitiveness, and only gradually accelerating employment account for the delayed return of private consumption to trend growth. The unemployment rate will increase temporarily as a consequence of supply-side reforms, helping core inflation to edge down further. There is a risk that the additional labour supply resulting from the current social benefit reforms may not be fully absorbed at current wage rates. Hence, the government should complement these reforms with measures increasing wage flexibility, aimed at enhancing employment prospects for low-skilled workers. ...
    • New Zealand
      The economy grew very rapidly in the first half of the year, adding to an already positive output gap and inflation pressures. However, the pace of activity is now starting to slow, as higher interest rates damp domestic demand and the effects of exchange rate appreciation continue to spread through the economy. Labour shortages persist and real wage growth may accelerate, although capacity constraints will be eased through high rates of investment. The economy is on track for a soft landing, and successive moves taken to tighten monetary policy during 2004 should prove to be sufficient. Additional fiscal stimulus at this point in the cycle would be unhelpful and would anyway need to be offset by higher interest rates in order to bring the economy back onto a sustainable growth path. ...
    • Norway
      A domestic-demand-led recovery is gaining momentum, based on strengthened oil investments, low interest rates and an expansionary fiscal policy. The negative output gap is expected to reverse in 2005. The external sector should start contributing positively to growth. Core inflation is projected to rise as a result of excess demand but is expected to reach the middle of the range targeted by the Central Bank only by end-2006. Monetary policy should be geared towards reaching the inflation target by maintaining low interest rates throughout the projection period. Fiscal policy should return rapidly to the fiscal rule to help avoid overheating and Krone appreciation, and to contribute to a more equitable use of oil resources over time. ...
    • Poland
      GDP increased markedly in the first half of 2004, driven by strong increases in inventories and exports. Activity should continue to be robust in 2005, although less so than in the beginning of 2004. Export growth should decrease slightly, in part due to recent zloty appreciation. An investment recovery is under way but is likely to gain force only in 2006. Employment is expected to expand moderately in 2005 and more robustly in 2006 as investment picks up. The effect on the budget deficit of a relaxation of government spending in 2004 has been partly offset by robust growth; with the moderation of GDP growth projected by the OECD, public expenditure targets will need to be monitored closely and even reinforced if medium-term fiscal sustainability is to be preserved. Although the upturn in headline inflation may be only temporary, increases in central bank interest rates have been appropriate in the light of wage growth and the budgetary position. Further increases may be necessary if inflationary pressures continue. ...
    • Portugal
      The Portuguese economy emerged from recession in 2004, driven by exports and private domestic demand. Real GDP growth is expected to pick up further and reach 2¾ per cent in 2006. By any measure, the economy would still not be operating at its potential at the end of the projection period. As a result the inflation differential vis-à-vis the euro area should remain small. Fiscal consolidation remains a challenge for policymakers. Reliance on large one-off measures to keep the deficit below 3 per cent of GDP has become the norm since 2002. These should be replaced by strict controls on spending and the implementation of already-approved reforms should be accelerated. A radical reform of the pension system is also needed to ensure the long-term sustainability of public finances. ...
    • Slovak Republic
      Activity is broadening and growth close to 5 per cent over the projection horizon is exceeding previous expectations. Headline inflation will drop significantly from currently high levels once the effects of administered price adjustments, tax reform and European Union accession-related food price increases start to fade in 2005. Unemployment will also begin to fall to a rate of 16 per cent by the end of 2006. For fiscal policy to remain credibly committed to the adoption of the euro in 2009, the substantial government spending cuts already budgeted should be implemented as planned. The monetary authorities should specify and communicate their strategy for euro-area entry as soon as one-off effects on inflation dissipate. ...
    • Spain
      Domestic demand sustained activity during the first half of 2004, but net foreign demand weakened. Inflation has risen due to the oil price shock leaving the positive differential with the euro area at around 1 percentage point. Although some weakness can be expected in the short term because of the oil price hike, activity should accelerate again to close to 3 per cent over the projection period. Monetary conditions remain relaxed, while the budget for 2005 implies a broadly neutral fiscal stance. Reforms to raise competition in some sectors and to improve the wage bargaining system should be adopted with the aim of raising productivity growth and reducing the inflation differential with other countries. ...
    • Sweden
      The economic expansion is gathering pace, with output growing faster than its potential rate, driven by strong exports and a rebound in investment. Export growth is projected to remain robust, and household consumption will be boosted by tax cuts and rising house prices. Those factors should drive the long-awaited improvement in employment, which will also support domestic demand. Inflation is likely to pick up, as spare capacity will be absorbed by the end of this year. The central bank will therefore need to begin raising interest rates soon. In September, the government added a substantial fiscal stimulus to an already-buoyant economy. This will make the job of monetary policy more difficult and risks jeopardising the government’s medium-term fiscal target. ...
    • Switzerland
      Underpinned by relaxed monetary and fiscal policies, the economy picked up in 2004, with GDP growth set to be close to 2 per cent. The expansion should continue through 2005 and 2006 at much the same pace, slightly above potential, thanks to the more dynamic external environment. These developments, which should contribute to an improvement in the labour market as of 2005, are likely to be accompanied by continuing moderate inflation. Continuing gradual monetary tightening is projected, with financial conditions becoming more neutral as spare production capacity is reduced. The consolidation of Federal finances as of 2005 remains necessary, even if budget outturns in 2004 prove better than expected. The improved cyclical situation must not lead to a weakening of the efforts made to stimulate domestic competition and increase potential growth. ...
    • Turkey
      Driven by buoyant private business investment and household consumption, GDP growth reached nearly 12 per cent at an annual rate in the first half of 2004 and should approach 10 per cent for the year. It is likely to slow to a more sustainable rate of around 6 per cent in 2005 and 2006, with exports and domestic demand remaining robust. The authorities should adhere to their strict monetary and fiscal policies and fully implement their ambitious structural reform agenda, continuing to improve domestic and international confidence. Fiscal gains from strong growth should be devoted to public debt reduction in order to improve fiscal sustainability and rein in the growing current account deficit. ...
    • Developments in Selected Non-member Economies
      The growth of foreign trade in the Asian area slackened markedly in the first half of 2004 under the influence of a tightening of economic polices in China but recovered somewhat in the second half of the year. The rebound has been sufficiently strong to ensure that output growth in China is unlikely to slow this year. In 2005, the increase in oil prices will weigh particularly heavily on this group of economies. At the same time, inflation may pick up somewhat, especially outside of China -- a development that adds to the pressure for a change in the exchange rate policies of a number of economies. South America is set to grow by more than 4 per cent in 2004. Growth in Brazil remains particularly robust and the economy has become less vulnerable to external shocks. Area-wide growth has become more balanced across sectors. Private investment and consumption are picking up, taking over from net exports as the main drivers of growth. Inflation is expected to remain tame. Imports surged in the first half of the year in the major economies, albeit from a low level, and are likely to continue to grow more rapidly than exports. The external current account surplus is therefore expected to shrink in 2005-06. Russia’s oil-driven growth is set to continue at relatively high rates, boosted by very strong domestic demand and expansionary fiscal policy. However, growth will slow over the projection period, owing partly to slower growth of export volumes while imports continue to rise rapidly. A loss of confidence in the future course of structural policy reform, could also weaken investment growth. Nonetheless, prices of oil and other commodities will benefit Russia and other hydrocarbon producers among the Newly Independent States. Russian growth will also benefit other states in the region, which depend largely on trade with, and, in some cases, remittances from, Russia. Growth in South-eastern Europe, which largely depends on developments in the European Union, is set to continue, but at rates well below those found among the Newly Independent States. ...
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  • Oil PriceDevelopments Drivers, Economic Consequences and Policy Responses
    The oil price has more than doubled in dollar terms since the late 1990s, while increasing substantially, though somewhat less, in terms of the other major currencies. The chapter begins by investigating the fundamentals driving longer-term oil market developments and the implications for the long-run equilibrium price. It then identifies short-term influences which may have caused risk premia to rise, volatility to increase, and the oil price to diverge from its equilibrium. It concludes with an assessment of the impact of higher oil prices on OECD growth and inflation and the implications for economic policy.
  • Saving Behaviour and the Effectiveness of Fiscal Policy
    Fiscal policy has been used as an antidote to weak activity during the most recent downturn and fiscal consolidation has been delayed in some countries because of its perceived costs in terms of lower activity. However, the impact of fiscal policy on aggregate demand depends on the responses of private saving to changes in fiscal stance. In certain circumstances budget deficit shifts can be offset by simultaneous compensating changes in private saving. This chapter examines the possible extent of such offsets, focusing on the case where co-movements in private and public saving may be related to uncertainties about how long a budget deficit can be sustained and the consequent need to provide against future tax "surprises".
  • Statistical Annex
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