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International Labour Conference The effectiveness and scope of fiscal stimulus in response to the crisis Jonathan Coppel Counsellor, Office of the OECD Chief Economist Geneva, 4 June 2009 Outline A bleak economic outlook Fiscal measures in response to the crisis Medium-term fiscal sustainability Growth will collapse this year and stagnate in 2010 Average 1996-2005 OECD area, unless noted otherwise 2006 2007 2008 2009 2010 2008 q4 2009 q4 2010 q4 ECONOMIC OUTLOOK Per cent Real GDP growth1 2.7 3.1 2.7 0.9 -4.3 -0.1 -1.5 -3.4 1.1 United States 3.2 2.8 2.0 1.1 -4.0 0.0 -0.8 -3.5 1.1 Euro area 2.1 3.0 2.6 0.7 -4.1 -0.3 -1.4 -3.5 0.8 Japan Unemployment rate3 1.1 2.0 2.4 -0.6 -6.6 -0.5 -4.3 -4.4 0.4 6.6 6.0 5.6 6.0 8.4 9.9 6.5 9.3 10.1 Fiscal balance4 -2.2 -1.3 -1.4 -3.0 -7.2 -8.7 World real trade growth 7.0 9.5 6.9 2.5 -13.2 1.5 World real GDP growth5 3.4 4.3 4.1 2.2 -2.7 1.2 Memorandum Items 1. Year-on-year increase; last three columns show the increase over a year earlier. 2. Per cent of potential GDP. Estimates of potential have not been revised and therefore do not incorporate a possible reduction in supply implied by the downturn. 3. Per cent of labour force. 4. Per cent of GDP. 5. OECD countries plus Brazil, Russia, India and China only, representing 82% of world GDP at 2000 purchasing power parities. Source: OECD. The recession is the most synchronised in post-war history ECONOMIC OUTLOOK Proportion of all OECD economies experiencing at least two consecutive quarters of downturn¹ 1. The last historical observation is for 2008q4. Source: OECD. Unemployment will rise substantially ECONOMIC OUTLOOK (In percentage of labour force) Source: OECD. Certain categories of employment are more Figure 5. Employment by type of contract in Spain, 2005Q1-2009Q1 vulnerable* Base 100=2005Q1 Employment Self-employed Permanent workers Temporary workers ECONOMIC OUTLOOK 120 115 110 105 100 95 90 85 80 Source: INE, Encuesta de Población Activa. * Employment by type of contract in Spain ECONOMIC OUTLOOK A slow recovery is foreseen Source: OECD. Fiscal policy is expansionary (Cumulative impact on net lending, % of GDP, 2008-2010) FISCAL POLICY RESPONE Fiscal packages 1. Simple OECD average. 2. Weighted OECD average. Source: OECD. Automatic stabilisers FISCAL POLICY RESPONE The size of discretionary fiscal packages varies inversely with the automatic stabilisers Source: OECD. FISCAL POLICY RESPONE The size and composition of fiscal packages* * Cumulative impact of fiscal packages over the period 2008-2010 on fiscal balances as a per cent of 2008 GDP. Source: OECD. The size and composition of fiscal packages Table 2. period Composition packages (Total over 2008-2010 asofafiscal % of GDP in 2008) Total over 2008-2010 period as % of GDP in 2008 Tax measures Spending measures Net effect FISCAL POLICY RESPONE Total Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece 1 Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico 1 Netherlands New Zealand Norway 1 Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States -4.7 -1.1 -1.7 -2.5 -3.0 -2.2 -3.1 -0.6 -2.7 na 5.2 9.4 4.7 0.0 -1.7 -4.9 -3.3 -1.2 -0.5 -4.3 -0.8 -1.0 -0.8 -1.1 -3.9 -2.7 -0.5 na -1.2 -5.6 -1.3 -1.0 -1.0 -0.8 -2.5 -0.3 -2.7 -0.1 -1.4 na 0.0 na 3.8 0.1 -0.5 -3.2 -1.7 0.8 -0.4 -4.2 -0.1 -0.4 na -0.6 -2.6 -1.7 -0.2 na -1.0 -3.2 Note: Cut-off date for information is 6 March 2009. 1. Data not available for 2010 Individuals -1.1 -0.9 0.0 -0.6 0.0 0.0 -1.9 -0.1 -0.4 na -0.1 1.0 2.1 0.0 -0.1 -1.4 -1.2 0.0 na -4.3 0.0 0.0 na -0.6 -1.8 -1.3 -0.2 na 0.0 -2.4 Businesses -0.3 -0.1 -0.4 -0.1 -0.4 0.0 0.0 0.0 -0.3 na -1.5 na 0.0 0.2 -0.1 -1.2 -0.5 0.0 -0.4 0.1 -0.1 -0.1 na -0.1 0.0 -0.2 0.0 na -0.1 -0.8 Consumption Social contributions Total Investment Transfers to households Transfers to businesses 0.0 0.0 -0.1 0.0 -0.1 0.0 -0.3 0.0 -0.1 na 1.6 na 0.5 -0.1 -0.1 -0.2 0.0 -0.4 na 0.0 0.0 -0.2 na 0.0 -0.8 0.0 0.0 na -0.9 0.0 0.0 0.0 -0.2 -0.2 -2.0 0.0 -0.4 0.0 -0.7 na 0.0 na 1.2 na -0.2 0.0 0.0 0.0 na 0.0 0.0 0.0 na 0.0 0.0 -0.2 0.0 na 0.0 0.0 3.3 0.1 0.7 1.7 0.5 1.9 0.4 0.4 1.4 na -5.2 na -0.9 0.1 1.2 1.7 1.6 2.0 0.1 0.1 0.7 0.6 na 0.5 1.3 1.0 0.3 na 0.2 2.4 2.6 0.0 0.1 1.3 0.1 0.8 0.3 0.2 0.8 0.1 0.0 -1.7 -0.2 0.1 0.3 0.9 0.7 1.1 na 0.7 0.3 1.3 0.4 0.0 0.7 0.3 0.0 na 0.0 0.3 0.8 0.0 0.5 0.3 0.0 0.4 0.1 0.1 0.3 0.4 -1.1 -1.7 -0.1 0.2 0.5 0.1 0.7 0.3 0.1 -0.6 0.0 0.1 0.0 0.0 0.1 0.1 0.0 na 0.1 0.5 0.0 0.0 0.0 0.1 0.4 0.0 0.0 0.0 0.1 0.1 na na 0.0 na 0.4 0.5 0.2 0.4 na 0.0 0.0 0.0 0.4 0.5 0.3 0.0 0.0 na 0.0 0.0 Transfers to sub-national governments 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 na 0.0 na 0.0 na 0.2 0.2 0.0 0.0 na 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 na 0.0 0.9 Changes in labour market policy in response to the recession X X X X X X X X X X Spain Sweden Switzerland Turkey X X United Kingdom X United States X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Other training measures Apprenticeship schemes X X Other payments or in-kind support X Social assistance X X X X Generosity or coverage of unemployment benefits X X X X X X X X Income support for job losers Training for existing workers X Training programmes X X X X X Work experience programmes X X Job-finding and business start-up incentives X Activation requirements Short-time work schemes X X Slovak Republic Source: OECD. X X X X X X Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Japan Korea Mexico Netherlands New Zealand Norway Poland Portugal Lower employer social contributions Job subsidies, recruitment incentives or public sector job creation FISCAL POLICY RESPONE Australia Austria Belgium Canada Job search assistance and matching Measures to help unemployed find work or improve prospects Labour demand X X X X X X X X X X X X X X X The effect of fiscal packages on GDP varies across countries FISCAL POLICY RESPONE Effect on level of GDP (%), 2009-10 Note: Bars indicate values based on the reference multiplier case. Crosses show estimates based on a high multiplier alternative. See Box 3.1 (p.114-116 of OECD Economic Outlook interim report) for explanation of the basis for the multiplier assumptions. Countries are arranged according to the size of effect in 2009. Source: OECD. FISCAL SUSTAINABILITY General government gross financial liabilities will rise sharply… Source: OECD. …due to both cyclical and structural factors FISCAL SUSTAINABILITY (Contribution to total cumulative change in budget balance, 2008-2010, % of GDP, preliminary projections) Source: OECD. High government debt tends to raise long-term interest rates FISCAL SUSTAINABILITY (Spread between long term and short term vs. government debt in % of GDP) Note: Bars represent average across all OECD countries for which data is available over the period 1994 to 2007. Short-term interest rates are typically rates on 3-month Treasury bills and long-term interest rates those on 10-year government bonds. Source: OECD. FISCAL SUSTAINABILITY Sovereign bond spreads have increased since last year Source: OECD European unemployment ratchets up following severe downturns 6.0 Rise in unemployment rate (%) FISCAL SUSTAINABILITY UK 80s r = -0.72 5.0 4.0 ITA 80s 3.0 ITA 90s DEU 00s FRA 80s 2.0 DEU 90s FRA 90s 1.0 ITA 70s 0.0 UK 90s -1.0 ITA 00s -16.0 -12.0 -8.0 Cumulative output gap (% pt years) Source: OECD. -4.0 -2.0 0.0 The recession is likely to have reduced potential output -1 -2 -3 FISCAL SUSTAINABILITY 0 (Average cumulative effect of financial crises on potential output,%) 0 2 4 6 8 10 Years Note: The solid line is the average response. The dotted lines are the upper and lower bound of the 99% confidence band. Source: Furceri and Mourougane (2009), OECD Economics Department Working Papers, No. 699 A final word… “The national budget must be balanced. The public debt must be reduced. The arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn’t want to go bankrupt. People must again learn to work, instead of living on public assistance.” …from Cicero in 55 B.C! Thank you [email protected]