OECD says public will not accept austerity post-Covid-19

6 Jan 21

Unprecedented stimulus measures taken by governments to fight the pandemic have changed the public perception of spending and debt, meaning sharp tax hikes or spending cuts would risk popular backlash, the OECD’s chief economist has said.

 

Laurence Boone told the Financial Times that public officials will struggle to argue for austerity during the recovery from Covid-19, and may not be in a position to pay for certain measures – such as those to combat climate change.

“People are going to ask where all this money has come from,” she said, referring to the programmes rolled out by governments to address the coronavirus pandemic.

She said countries should continue to use higher spending and low taxes to help their economies throughout the recovery period, taking a lesson from the last global financial crisis.

“The mistake that we made was not a lack of stimulus during the trough in 2009… the mistake came later in 2010, 2011 and so on, and that was true on both sides of the Atlantic,” she told the newspaper.

“The first lesson is to make sure governments are not tightening in the one or two years following the trough of GDP.”

Boone said policymakers should accept that public debts are going to rise until the economy returns to normal, and that countries should abandon debt and deficit targets in the short term – and instead adopt longer-term goals to achieve sustainability.

“We have to think about sustainability in a more discretionary way over a longer time period, and also a more democratic way in the sense that if the target is set at the political level then it has to be assessed with enhanced transparency,” she said.

This would give governments more say over stabilising the economy – a role often given to independent central banks, which set interest rates and handle the buying and selling of government bonds.

“It’s not healthy to have just monetary policy run by independent people, accountable but not democratically elected, in charge of all the stabilisation policies,” she said.

Boone added that governments should pursue fiscal policy to drive the recovery, rather than monetary policy. “[Monetary policy] has distributional impacts and it’s not meant to,” she explained.

“Fiscal policy has a distributional effect and it’s meant to have a distributional effect, and it’s implemented by people who are democratically elected and are directly accountable.”

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