1. Macroeconomic background

This chapter is mainly intended to provide background on the context in which the tax reforms adopted before the COVID-19 crisis were undertaken. The COVID-19 global pandemic in 2020 is significantly changing future global economic prospects, but focusing on 2019 macroeconomic conditions helps understand preceding reforms. The chapter covers trends in growth, inflation, productivity, investment, the labour market, public finances and inequality. While the chapter is largely backward looking and focused on macroeconomic trends in 2019, Box 1.1 provides an overview of the rapidly evolving macroeconomic environment given the unprecedented nature of the economic impact from the COVID-19 crisis.

The COVID-19 pandemic, a global public health crisis without precedent in living memory, has resulted in a sharp and sudden contraction of output around the world in the first half of 2020. To contain the spread of the virus, most governments throughout the world imposed containment measures that led to the shutdown of many sectors and significant impairment of travel and mobility. These necessary measures have succeeded in slowing the spread of infections and reducing the death toll, but have resulted in large short-term economic disruption and job losses, compounded by falling confidence and tighter financial conditions. The global economy is now experiencing the deepest recession since the Great Depression in the 1930s, with GDP declines of more than 20% in many countries during shutdowns and a surge in unemployment (Box 1.1).

Already, prior to the pandemic, the global outlook was becoming increasingly fragile through 2019, with rising signs of a downturn becoming entrenched as global trade policy tensions and policy uncertainty weighed on investment, trade and output. Global GDP growth slowed further to 2.7% in 2019, from 3.4% in 2018, and remained well short of the longer-term average of 3¾ per cent seen in the two decades prior to the global financial crisis (Figure 1.2). Wage growth remained modest, despite tighter labour market conditions, checking consumer spending growth (OECD, 2019[2]). The effects of prolonged sub-par growth after the global financial crisis also continued to be reflected in subdued productivity and modest capital stock growth. Per capita GDP growth slowed in the majority of OECD economies in 2019, with the post- global financial crisis shortfalls in living standards relative to prior expectations becoming entrenched (Figure 1.3).

The slowdown in activity was broad-based among advanced economies (Figure 1.4). In the United States, GDP growth remained at an above-trend rate in 2019, at 2.3%, supported by solid labour markets, real wage growth and high asset prices, but rising trade tensions, waning fiscal stimulus and weaker growth in trading partners all weighed on activity and investment. GDP growth remained subdued in Japan, with the consumption tax increase in October and a series of heavy typhoons strongly affecting private domestic demand. In the euro area, GDP growth eased to 1¼ per cent in 2019, with significant policy uncertainty, including about Brexit, and export market volatility damping exports and investment (OECD, 2019[2]). The manufacturing sector was hard hit by these developments (OECD, 2019[3]) and growth in countries in which the sector represents a relatively large share of the overall activity, such as Germany and Italy, was especially affected. In Germany, the relative importance of exports and difficulties of adjusting to structural challenges in the car industry added to these factors.

Growth also weakened in many major emerging market economies. In China, GDP growth continued to ease slowly reflecting ongoing deleveraging efforts and escalating trade tensions with the United States. Both effects led to a sharp slowdown in Chinese import demand. Recovery in the countries strongly affected by financial turmoil in 2018 was uneven. In Turkey, growth rebounded in 2019, supported by a large fiscal and quasi-fiscal stimulus that helped strengthen private consumption. In contrast, output contracted further in Argentina, with large political uncertainty and the associated sharp depreciation of the peso weighing on domestic demand. The recovery continued in Brazil, albeit at a subdued pace with high employment falling only slowly. In Mexico, growth came to standstill as policy uncertainty and tight monetary conditions weighed on domestic demand and manufacturing activity slowed. Growth remained robust in Indonesia in 2019, but slowed in India, with stress in the shadow banking system affecting the financing of many small businesses and weighing on domestic demand.

Labour market conditions remained strong in 2019 despite moderating output growth, with record low unemployment rates (Figure 1.5) in several OECD economies. However, some signs of easing labour market pressures became apparent towards the end of the year. In the OECD as a whole, the harmonised unemployment rate fell to 5.3% by the fourth quarter of 2019, 0.4 percentage point below the level prior to the global financial crisis and the lowest rate since 1980. Unemployment rates were below estimated longer-term sustainable rates in many economies, pointing to tight labour market conditions. However, unemployment remained high in a few countries, particularly in some euro area member countries (Figure 1.5) even after the significant declines in recent years. Employment growth slowed, especially in the United States and Japan (Figure 1.6, Panel A), hours worked started to ease and job vacancy rates started to turn down in some countries, albeit from a high level (OECD, 2019[2]). In many advanced economies, employment and labour participation rates rose above the levels prior to the global financial crisis for prime age workers (in the 25-54 age group) but remained below these levels for the youngest ones (15-24 age group).

Long-term unemployment and the incidence of involuntary part-time employment remained elevated in some OECD economies despite declines in 2019. Long-term unemployment (over one year) declined to represent about a quarter of total unemployment on average in the OECD economies, a level close to its pre-crisis level but it remained significantly larger in some countries, standing at 71% in Greece and 57% in Italy in 2019. The persistently high share of long-term unemployed people raises the chances of workers becoming discouraged and dropping out of the labour force. The share of involuntary part-time workers in total employment also declined in 2019, but remained above its pre-crisis level in many OECD countries. In Greece, Italy and Spain, it was still 3 to 7 percentage points above its pre-crisis level.

Real wage growth generally remained moderate in the euro area and Japan, despite tighter labour markets but picked up in the United States where the unemployment rate fell to a fifty year low (Figure 1.6, Panel B). In most countries, weak productivity growth and low inflation remained a drag on nominal wage developments. Longer-term factors also played a role with the spread of low-pay, non-standard jobs checking overall wage growth. In particular, there has been a significant reduction in the average earnings of part-time jobs relative to that of full-time jobs (OECD, 2018[2]; MacDonald, 2019[4]).

Private consumption growth slowed in the OECD area as a whole in 2019 (Figure 1.7, Panel A). Strong labour market outcomes, supportive financial conditions and, for some countries fiscal and regulatory measures, such as sizable increases in minimum wages in Spain, Korea, Turkey and Mexico supported household incomes. However, strong asset price growth did not result in sizeable declines in household saving ratios and soft real wage growth thus resulted in modest household spending growth in 2019 in most advanced economies. There are various possible explanations for the subdued impact of wealth effects on consumption. One possibility is that the impact of wealth effects is now much weaker than prior to the global financial crisis. This could be associated with greater wealth inequality, with wealth gains becoming more concentrated in households with a lower propensity to consume, or changes in prudential regulation that have reduced the ability of households to rising housing values as collateral for additional borrowing to finance consumption. An alternative explanation is that other factors have offset the positive effects from stronger asset prices. In particular, uncertainty about future income and employment prospects may have resulted in higher precautionary saving in some economies.

Headline inflation eased in most OECD economies in 2019, helped by a downturn in energy price pressures (Figure 1.7, Panel B). Oil prices declined by about 10% in 2019 to USD 64.4 per barrel on average. Supply restrictions by the Organisation of the Petroleum Exporting Countries (OPEC) and Russia, and sharp decline in production Venezuela and Iran helped to underpin prices but this effect was more than offset by weakening oil demand. In the context of moderate wage growth, underlying inflation (i.e. excluding food and energy) generally remained subdued in the major OECD economies and below official medium-term inflation objectives. In most emerging-market economies, headline inflation remained moderate as well but swine flu and adverse weather conditions kept food prices elevated in some countries, particularly in China, where annual consumer price inflation rose to 4½ per cent by the end of 2019.

Fixed capital investment slowed in most OECD economies in 2019 amid persistent trade tensions, heightened policy uncertainty and a continued decline in business confidence (Figure 1.8). Total investment in the OECD area rose by 1.4% last year compared with 2.4% in 2018. After a decade of subdued investment, this rate remained weaker than necessary to help bring the growth of the productive capital stock back to pre-crisis levels, limiting prospects for productivity growth (OECD, 2017a). Long-term factors holding back investment include diminished long-term growth expectations and a lack of business dynamism in some economies (Calvino and Criscuolo, 2019[4]). Resources trapped in unproductive firms (Andrews, Criscuolo and Gal, 2016[5]), high corporate hurdle rates, and a slowdown in the implementation of new reforms to raise product market competition (OECD, 2019[6]) also continued to dampen investment.

Global foreign direct investment (FDI) flows increased by 12% in 2019 (OECD, 2020c). Nonetheless, at 1.6% of global GDP in 2019, total global FDI flows remained around 1 percentage point weaker than in 2015.1 The 2019 rise in FDI flows was partly due to a return to positive outward FDI flows from the United States. In 2018, the end-2017 US corporate tax reform led to US parent firms repatriating earnings from foreign affiliates, resulting in large negative reinvested earnings (one component of total FDI flows) (OECD, 2020[7]). While the majority of investment policy measures taken worldwide in 2019 were designed to create more favourable conditions for both foreign and domestic investors, the usage of measures related to the screening of foreign investment for national security reasons rose (UNCTAD, 2020[8]), which may have deterred some investment. The aggregate stock of inward FDI in the OECD economies rose to a new high of 46.6% of GDP in 2019, roughly twice the size in the years immediately prior to the global financial crisis. New FDI inflows increased by 6% in 2019, largely driven by Ireland and to a lesser extent Switzerland, which both recorded negative inflows in 2018 in the aftermath of the US corporate tax reforms. In contrast, new FDI inflows declined by about 9% in the non-OECD G20 economies, notably in China.

Labour productivity growth remained sluggish, at 0.8% in 2019 in the OECD economies, reflecting the weak growth of productive capital per worker and the low diffusion of new ideas and technology embodied in new equipment. Labour productivity growth (output per employee) in OECD countries since the global financial crisis has generally fallen significantly below that seen in the decade prior to the crisis, checking future potential growth (Ollivaud, Guillemette and Turner, 2018[2]; Figure 1.9). Moreover, in the post-crisis period, there has been relatively weak growth in multi-factor productivity, which reflects the efficiency with which inputs are used (OECD, 2015[9]). Productivity gaps between firms have widened as frontier firms have continued to make gains but laggard firms have under-performed, contributing to rising inequality (Andrews, Criscuolo and Gal, 2016[5]). Moreover, in many countries, recent employment growth has been in activities with relatively low labour productivity, and below average wages, such as accommodation and food services, and health and residential care activities, dragging down overall labour productivity (OECD, 2019[10]). In addition to the direct drag on demand, the disruption to trade and cross-border investment and supply chains from the rise in US-China trade tensions in 2018-19 also began to harm supply and weaken medium-term growth prospects, with the induced reallocation of activities across countries and adjustment to supply chains reducing productivity. These trends, and the associated impact on wages, have led to low income growth for many households, particularly at the bottom of the income distribution, which has in turn held back aggregate consumption growth.

After rising rapidly in the aftermath of the global financial crisis, general government gross debt as a share of GDP has stabilised in the OECD area at a high level. The aggregate OECD gross debt-to-GDP ratio was 110% in 2019, up from 74% in 2007 (Figure 1.10, Panel A). Across the OECD, there were wide differences in the gross debt ratio between countries in 2019, with gross general government financial liabilities (on a common national accounts definition) ranging from 13% of GDP in Estonia to an estimated 225% of GDP in Japan (Figure 1.11).

In 2019, the overall budget deficit as a share of GDP rose for OECD economies as a whole (Figure 1.10, Panel B) to 3.3% of GDP from 2.9% in 2018. This evolution mostly reflected a further deficit increase in the United States, to 7.3% of GDP in 2019 (from 6.7% of GDP in 2018), but deficits also rose slightly in the euro area as a whole and in Japan to respectively 0.7% of GDP and 2.6% of GDP. The overall fiscal stance, as measured by the year-on-year change in the underlying primary balance,2 became more expansionary in 2019, by about 0.4% of GDP, in the median OECD economy. Among non-OECD G20 countries, budget deficits are also estimated to have increased in 2019, in South Africa and China but to have declined in India, Indonesia and Russia.

Government bond yields declined in most economies in 2019 from already low levels. This reflected strong demand for safer assets and expectations of monetary policy easing prompted by heightened uncertainty and a higher perceived risk of a sharp global economic slowdown. In most advanced economies, the share of outstanding government debt traded at negative yields increased further in 2019 (OECD, 2019[2]). As shown in Figure 1.13, gross government interest payments as a share of GDP generally remained below levels seen following the global financial crisis in OECD countries, despite higher debt levels, increasing fiscal space in many countries. Financial market developments varied across large emerging-market economies, but in most of them yields on long-term governments bonds in local currencies declined, helped by cuts in monetary policy interest rates. Following the severe financial shock in 2018, financial conditions improved in Turkey and interest rates declined, but the financial crisis intensified in Argentina amid increased political uncertainty.

Inequality in many OECD countries remained high by historical standards. High income inequality compounds the drag on economy-wide household spending from weak income growth, as the higher-income households in which income growth has been concentrated typically have a lower marginal propensity to consume. While cross-country patterns of income inequality depend to some extent on how inequality is measured, the most widely used measure is the Gini coefficient. On this basis, inequality of market incomes (before taxes and transfers), after having increased in the aftermath of the global financial crisis, had returned to a level close to its immediate pre-crisis level in many OECD economies by end-2018 supported by strong labour market outcomes. However, inequality remained high, reflecting significant increases in most OECD economies during the three decades preceding the global financial crisis (Figure 1.14).

Taxes reduce income inequality, but less so than transfers: on average, over two-thirds of the reduction in inequality is due to transfers and the remaining portion is due to taxes (Figure 1.15). There are considerable differences across countries, however, with the highest redistribution in Finland and the weakest in Mexico. The impact of redistribution is even higher if non-cash transfers from governments, such as education and healthcare, are taken into account (OECD, 2016[11]). After adjusting for the impact of redistributive policies, around two third of the 28 countries for which data is available had returned to levels of disposable income inequality by 2018 that are similar or lower than immediate pre-crisis levels but inequality remained, in most cases, higher than three decades ago (Figure 1.16). The extent of redistribution via taxes and transfers has declined in many OECD countries since 2010, in part reflecting some reduction in transfers as part of post-crisis fiscal consolidation and the reduced progressivity of tax systems. In around half of the major emerging market economies, including Brazil, South Africa and China, disposable income inequality has decreased or levelled off since the mid-2000s (Balestra et al., 2018[2]). On the other hand, it has increased in India, Indonesia and Russia and generally, disposable income inequalities remained significantly larger in emerging-market economies than in the OECD countries (OECD, 2019[6]).

Many households have seen little growth, if any, in real disposable incomes over the past decade. Across the income distribution, some specific segments of the population may have been affected by the growing share of non-standard jobs, such as part-time work, temporary work or self-employment. Such jobs are more likely to be occupied by women and youth and pay on average less, on an hourly basis, than permanent jobs. They are also associated with poorer job quality (OECD, 2015[12]).


[5] Andrews, D., C. Criscuolo and P. Gal (2016), “The Global Productivity Slowdown, Technology Divergence and Public Policy: A Firm Level Perspective”, The Future of Productivity: Main Background Papers.

[4] Calvino, F. and C. Criscuolo (2019), “Business dynamics and digitalisation”, OECD Science, Technology and Industry Policy Papers No. 62, https://doi.org/10.1787/6e0b011a-en.

[7] OECD (2020), FDI In Figures: April 2020, OECD Publishing, http://www.oecd.org/investment/FDI-in-Figures-April-2020.pdf.

[1] OECD (2020), OECD Economic Outlook, Volume 2020 Issue 1, OECD Publishing, Paris, https://dx.doi.org/10.1787/0d1d1e2e-en.

[6] OECD (2019), Economic Policy Reforms 2019: Going for Growth, OECD Publishing, Paris, https://dx.doi.org/10.1787/aec5b059-en.

[10] OECD (2019), OECD Compendium of Productivity Indicators 2019, OECD Publishing.

[3] OECD (2019), OECD Economic Outlook, Volume 2019 Issue 1, OECD Publishing, Paris, https://dx.doi.org/10.1787/b2e897b0-en.

[2] OECD (2019), OECD Economic Outlook, Volume 2019 Issue 2, OECD Publishing, Paris, https://dx.doi.org/10.1787/9b89401b-en.

[11] OECD (2016), Income inequality update, https://www.oecd.org/social/OECD2016-Income-Inequality-Update.pdf (accessed on 17 July 2019).

[12] OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264235120-en.

[9] OECD (2015), The Future of Productivity, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264248533-en.

[8] UNCTAD (2020), Investment Policy Monitor, https://unctad.org/en/PublicationsLibrary/diaepcbinf2020d3_en.pdf.


← 1. Global FDI flows refer to the average of inward and outward FDI flows worldwide. In theory, global inward and outward FDI flows and stocks should be equal but in practice, there are statistical discrepancies between them.

← 2. The underlying primary balance is the fiscal balance excluding net interest payments and adjusted for the economic cycle and for budgetary one-offs.

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