Specific budget rules and independent financial watchdogs will ensure effective consolidation measures, according to the OECD.
According to the OECD, governments should seek to strengthen the cost-effectiveness of expenditures that enhance growth, in areas such as healthcare, education, innovation and infrastructure development. However, the challenge for monetary authorities will be to exit the exceptional stimulus without exacerbating the fragility of financial markets.
The pace of global recovery has slowed in the second half of 2010 and public debt in most countries is set to hit an all time high, the OECD notes in its economic assessment, published today ahead of the G20 Summit in Seoul.
The report projects that average GDP growth across OECD countries will be between 2.5 and 3pc in 2010 – marking a trimming of its original expectations. In 2011, growth is likely to be between 2 and 2.5pc and back to 2.5-3pc in 2012. However, growth will vary widely across countries – particularly in the euro area.
The financial crisis continues to push public deficits and debt to unsustainable levels. Stabilisation of the debt would require a massive consolidation effort of 6 to 9pc but even more would be needed to bring back debt to sustainable levels, remarked Angel Gurría.
Using interest rates
In the report, the OECD has warned governments against unilateral currency interventions.
“Because of weak growth in the US and euro area, and provided that inflation expectations remain well anchored, the normalisation of interest rates should only proceed in earnest from the first half of 2012, at a pace that allows monetary policy to remain accommodating, advised the organisation.
“If growth turns out to be weaker than projected, the normalisation of interest rates should be delayed further,” the report said.
Countries should reach a mutual understanding on how global imbalances are to be reduced without resorting to unilateral interventions in foreign exchange markets resulting in volatility and protectionist responses, continued the OECD.
“The task of policy makers is to move from crisis mitigation towards rebuilding confidence and stability. All the main strands of economic policy – fiscal, structural, financial and monetary – need to contribute in a coherent and consistent manner,” concluded the economic organisation.