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OECD Urges Fiscal Policy Shift

Friday, March 12, 2010

Governments must now gear their economies towards jobs, international competitiveness and increasing the tax-take, the Organization for Economic Cooperation and Development (OECD) has said in its latest ‘Going for Growth’ report, analyzing the next step for recovering economies.

“Governments have already started removing some of the emergency measures brought in to save the global economy from collapse. They must now ensure that the policies which remain – and new action in the months ahead - boost growth and living standards for the long-term,” the OECD says.

“The global recession has left deep scars,” OECD Secretary-General Angel Gurría commented. “The only way to begin healing them is by taking effective action now to help our economies recover their lost potential.”

For each OECD country the report identifies five priority areas for reform in order to maintain decent standards of living and strengthen economic activity. Common to many is the need for urgent action on jobs, competition and taxes. In the current economic climate, the benefits could not only boost long-term living standards and speed up the jobs recovery, but also help strengthen public finances, the report says.

On tax policy, the OECD says that some of the tax measures taken in response to the crisis could prove beneficial to long-term growth and should be left intact. For instance, tax credits and direct grants for R&D can help counter a slump in innovation and, if well focused, can promote green initiatives. However, because the crisis has wreaked havoc with public finances, some taxes which were cut will need to be raised, the OECD argues.

The report recommends in general shifting the composition of taxes away from income and toward consumption and land. For instance, to strengthen growth, the US could introduce a form of value-added tax, potentially making up for the loss of tax revenue as a result of extending previous income tax cuts to the majority of taxpayers.

Going for Growth also identifies for the first time priority reforms needed to sustain strong growth in Brazil, China, India, Indonesia and South Africa, the five countries with which the OECD has developed a policy of “enhanced engagement”. Beyond strengthening social welfare and education systems, the report recommends relaxing highly stringent regulations in product markets, strengthening property rights and contract enforcement, deepening financial markets and reducing the size of informal sectors.