Governments must bite the bullet in the next three months and announce action to cut back huge debt and budget deficits, or dig themselves deeper into trouble, the OECD warned on Tuesday. They have to begin withdrawing crisis stimulus for their economies in 2011 so as to crack down on budget deficits which are running at record high levels and fuelling huge piles of debt, the Organisation for Economic Co-operation and Development said.
The OECD, a policy forum for 30 top advanced countries, forecast that debt would exceed 100 percent of gross domestic product in the OECD area in 2011. This is about 30 percentage points higher than the debt level before the economic crisis emerged in 2008.
This latest alarm signal about the dangers posed by over-strained public finances comes two days before a European Union summit meeting which is set to be dominated by a deep crisis in the eurozone triggered by a debt crisis in Greece.
It warned: "Without significant action, debt levels would continue to rise in the medium term from already high levels in a number of countries, including Japan, United States and United Kingdom." With underlying annual public deficits of OECD countries set to exceed eight percent of GDP this year, governments must begin to announce their so-called exit strategies, it urged.
"Consistent with ongoing fiscal support and the cyclical downturn, budget deficits are expected to reach historical highs in 2010 in several countries," the OECD said in a report prepared for the G20 group of developed and emerging economies. The report said governments should announce this year clear fiscal consolidation plans that are contingent on the health of the recovery, but fewer than half of OECD countries had announced detailed strategies so far.
"Because there are lags in the budget process, consolidation strategies and plans will need to be decided by mid-2010 if they are to be implemented in 2011 budgets," the OECD said. "If the start of consolidation is postponed, the required improvement in budget positions will increase, which may undermine confidence and endanger the recovery," it warned.
Clear plans need to be spelled out to anchor expectations, avoid a rise in government bond yields and allow flexibility in the implementation of the programmes if the economic conditions change, the report said. Because of big budget deficits, government indebtedness is set to reach "all-time highs" in several countries in the near term, the OECD said. Japan's debt-to-GDP ration is expected to exceed 200 percent in 2011. But debt levels are expected to remain high for the next seven years despite budget cuts, it said.
"Even under the assumption that consolidation is sufficient to bring budgets back to balance by 2017, debt-to-GDP ratios would still exceed pre-crisis levels in several countries," the report said.
Comments
Comments are closed.