Economic policy

This paper describes the latest update of the OECD’s long-term scenarios, which are done every 2-3 years to quantify some of the most important long-term macroeconomic trends and policy challenges facing the global economy. The focus is on illustrating the output trade-off associated with transitioning to low-carbon energy sources, between the shorter-run costs of carbon mitigation and the longer-run benefits of avoided climate damages. Both are subject to considerable uncertainty, which is illustrated using several scenarios that vary according to the steepness of the climate damage curve and how quickly carbon mitigation costs decline. The paper includes two annexes detailing the changes that have been made to the projection framework, the first on the expanded country coverage and revised productivity convergence framework and the second on the new climate damage channel.

Global temperatures continue to rise despite strengthened climate mitigation efforts, increasing the likelihood of climate disasters and posing significant risks to economies. The physical risks from climate change threaten public finances, investment, inflation, international trade, and overall economic growth, underscoring the urgent need for effective climate adaptation. This paper offers several considerations for designing and implementing effective climate change adaptation strategies and policies. Specifically, it develops a practical multi-step framework that can be used to integrate adaptation into broader economic policy, consisting of three key steps: (1) identifying climate-related risks and impacts, (2) identifying adaptation actions, (3) planning and implementing adaptation. Additionally, the paper highlights various technical and institutional tools to facilitate effective adaptation, thereby promoting resilience in the face of escalating climate challenges.

The paper contributes to renewed debates about industrial policy in the context of recent initiatives in several OECD economies. It discusses the pros and cons of industrial policies motivated by environmental, national security and place-based/inclusiveness objectives. The paper also considers implementation and design issues, and how to respond to industrial policies in other countries. There are well-grounded economic, social and environmental justifications for some industrial policies. However, there are legitimate concerns that the benefits of such policies could be limited and the costs high. This mainly relates to measures curbing domestic and international competition and the practical and political challenges in designing and implementing effective measures. Thus, while governments may want to experiment with future and welfare-oriented industrial policies, they should exert moderation in scope, exercise caution in design and implementation, and be mindful of possible negative international implications.

This paper describes the latest update of the OECD’s long-term scenarios, which are done every 2-3 years to quantify some of the most important long-term macroeconomic trends and policy challenges facing the global economy. For the first time, this update incorporates the effect of the low-carbon energy transition. The study first presents a baseline projection that acts as a business-as-usual scenario against which the economic effects of the transition can be gauged. Next, it outlines extensions to the OECD global long-term model (LTM) to consider energy use and associated CO2 emissions and describes an alternative stylised scenario in which OECD and non-OECD G20 countries successfully transition to low-carbon energy in a way broadly consistent with a net-zero target for greenhouse gas emissions by 2050. These extensions rely on a variety of sources, but most crucially on simulations of CO2 mitigation costs with the OECD’s ENV-Linkages model. Finally, the model’s extensions are used to explore some fiscal implications of the energy transition, in particular how the negative economic effects of carbon mitigation could be alleviated by fiscal or other structural reforms.

Governments rapidly provided large support to help households and firms face the 2021-22 energy price crisis. Drawing on the OECD Energy Support Measures Tracker and country case studies, this paper documents countries’ policy responses and draws lessons for enhancing countries’ preparedness to future energy price shocks. Support implemented or announced by countries so far has been largely untargeted and often fiscally costly. As such it might add to inflationary pressures and in many cases reduce incentives to save energy and transition away from fossil fuels. Reliance on imported energy, technical obstacles to implement a targeted approach and political economy constraints help explain the type of support countries provided. There is now a case for withdrawing broad-based energy support, given the recent moderation in energy prices and ongoing or planned minimum-wage and welfare-benefit increases to compensate for high inflation. Digitalisation would help improve the quality of support countries can provide to face a future energy or other crisis by speeding up payment delivery and facilitating a more targeted approach based on vulnerability factors beyond low income, such as the inability to renovate an energy-inefficient home. Ensuring that support measures maintain incentives for energy savings and encourage energy diversification, combined with investments to accelerate the green transition, is key to reducing vulnerability to energy price shocks.

Stochastic debt sustainability analysis (SDSA) is a key tool for assessing risks in modern fiscal policymaking. Yet, designing and calibrating these models poses significant challenges. Using a panel of up to 24 OECD countries with data spanning from 1980, this paper argues that pooling data across countries provides a more representative reflection of fiscal risks, effectively extends sample periods, and a trend-cycle approach better accounts for structural changes. The choice of calibration method is policy relevant as it substantially alters the required primary balance adjustments to stabilise the debt ratio implied by the models. Given that real-time macroeconomic risks are skewed to the downside during economic upswings, the paper proposes a state-contingent (SC-SDSA) approach conditioned on contemporaneous output gap estimates. This suggests that risks are greater during economic booms than conventional approaches and that larger structural primary balances are required than in normal times to ensure adequate fiscal buffers.

This paper provides new evidence on the prevalence and potential effects of non-compete and related clauses in Canada using OECD surveys of workers and firms. It finds that these clauses are widespread, increasingly used, and often applied beyond roles where they are most justified. Many appear overly broad and legally weak, yet a substantial share of workers report having been prevented from changing jobs or starting a business. Their impact is reinforced by behavioural factors, including reputational and ethical concerns. The findings also bring into closer focus the use of (firm-to-firm) no-poaching and wage fixing agreements that restrict labour market competition and, thus, raise broader concerns for the Canadian Competition Bureau.

Demographic headwinds are set to weaken economic growth in OECD countries over the coming decades. At the same time, artificial intelligence (AI) provides opportunities for productivity gains, potentially alleviating labour shortages and boosting economic growth. However, little is known about how exposure to AI varies over the life cycle and what this may imply for AI deployment in ageing societies. This paper shows, using OECD Programme for the International Assessment of Adult Competencies (PIAAC) data, that workers’ overall exposure to AI (automation and augmentation) exhibits an inverted U-shaped pattern across age groups, albeit less pronounced when controlling for education, occupation and country. Exposure to automation is higher in younger age groups and declines rapidly with age, as experience tends to complement AI. Nevertheless, as a general-purpose technology, AI is bound to be disruptive. Reaping its benefits will require labour market reallocation, reskilling and upskilling, and business dynamism and innovation, which may all be weaker in ageing societies.

Current account imbalances have re-emerged in global policy debates amid renewed widening, persistence and trade tensions. This paper reviews stylised facts on global imbalances, lessons from past rebalancing episodes, and policy implications. It shows that global imbalances remain persistent and concentrated in a few economies, are shaped more by differences in saving than in investment, and that net international investment positions are strongly influenced by valuation and nominal growth effects. Deficit narrowing is typically accompanied by export growth and higher private saving‑investment balances, especially in firms, while surplus narrowing is more often associated with higher imports and lower net lending across sectors. Larger initial imbalances – especially deficits – are associated with a higher probability of subsequent narrowing. Overall, durable rebalancing is unlikely to be achieved through trade measures or any single policy instrument. Instead, it could benefit from domestically grounded reforms, including fiscal adjustment where needed, and structural measures to reduce excess saving and support investment. Stronger prudential oversight, especially of non-bank financial institutions, would mitigate financial risks. Industrial policy may affect trade balances for individual goods but is unlikely to durably alter aggregate current account positions.

This paper analyses the impact of introducing progressivity into the Hungarian personal income tax (PIT) system on tax revenues, growth and inequality. This reform would strengthen labour market participation by reducing the labour tax wedge for low-income earners and improve the responsiveness of tax revenues to economic growth. Using a framework combining static effects and behavioural responses along both the extensive margin (employment effects) and the intensive margin (substitution and income effects), and accounting for tax buoyancy, the analysis shows that the reform becomes revenue-enhancing once these dynamic effects are considered. Aligning capital income taxation more closely with labour taxation further strengthens tax revenues. The comprehensive reform would raise the tax-to-GDP ratio by 0.4–0.8pp by 2040, depending on the specific reform scenario and assumed parameters. By stimulating employment among low- and middle-income workers and despite moderate disincentives for higher-income earners, the reform would boost potential GDP in all scenarios. The reform would also significantly reduce income inequality and strengthen redistribution.