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....

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...

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.

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...

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...