By Nick Mann | 12 April 2012

Governments must reduce debt levels to 50% of gross domestic product or lower to provide a safety margin against future economic shocks, the Organisation for Economic Co-operation and Development said today.

In Fiscal consolidation: how much, how fast and by what means? the OECD said reaching this goal by 2050 would require a fiscal tightening of more than 8% of GDP in countries such as the UK and United States. Japan would face fiscal tightening of up to 12% by the same point.

However, in light of the current weak economic situation, measures such as cutting spending and raising taxes or charges would have to be balanced with the effects they would have on growth.

They should be implemented ‘flexibly’ and their ‘speed and intensity’ changed as and when new information became available, the report said. 

Governments could also consider policy changes that have less of an impact on growth and demand in the short run, the report said. They should also steer clear of increasing already high taxation levels and instead ‘probably’ focus on cutting public spending and addressing the drivers of future spending pressures.

Pension reforms, for example, could have ‘large effects on long-term sustainability’ but ‘little negative effect in the short term’.

‘Efficiency gains’ in public spending on health and education could yield savings of between 0.5% and 4.5% of GDP in the longer-term, it added. Eliminating tax reliefs could also have a part to play. In some countries, a single tax credit or deduction can account for 1% or more of GDP, the OECD said.

Introducing environmental taxes, user fees for government services and ‘well designed’ levies on the financial sector could also support fiscal consolidation, it added.