12.04.2012
By Simon Miller
Debt-ridden countries must bring their deficit down to 50% if they are to protect against future crises according to the OECD.
The organisation said that just stabalising debt, "let alone bringing it down to a sustainable level", would be a major challenge for those countries where public indebtedness has risen above 100% of GDP such as in Ireland, Greece and Japan.
It added: "The poor state of public finances will require wide-ranging fiscal consolidation in most countries, particularly in those whose pre-existing imbalances have been aggravated by the crisis, as well as in those facing rapidly rising spending on health and long-term care."
Japan faces fiscal tightening of up to 12% of GDP, while consolidation in the United States, the United Kingdom and New Zealand is projected at more than 8% of GDP according to the OECD.
The organisation warned that the pace of consolidation needed to be balanced with the effects of fiscal retrenchment on growth and that trade-off would "depend on the choice of fiscal instrument, the size of the multiplier (which is highly uncertain) and whether monetary policy can offset the adverse demand effect. Even so, other things being equal, slower consolidation will ultimately require more effort to meet a given debt target."
The OECD estimated that a fiscal consolidation of 7% would be acheivable from the cumulative impact of spending and revenue measures.
"However," it continued, "flanking measures to cushion the blow to those most exposed to additional hardship will add spending, and thereby offset some of the potential budgetary gains."
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