OECD warns against pivot to austerity

By on 04/01/2021
Laurence Boone says political leaders should use fiscal policy to revive their economies. Credit: OECD/Victor Tonelli

The chief economist of the OECD has urged governments not to rush to cut public spending deficits, setting out a very different position from that taken by the organisation in the wake of the 2008 financial crisis.

In an interview with the Financial Times, Laurence Boone – who runs the Organisation for Economic Cooperation and Development’s Economics Department – also said that political leaders should use fiscal policy to revive their economies, rather than leaving central banks and monetary policy to do all the heavy lifting.

Looking at the aftermath of the financial crisis – when the OECD pressed states to cut public spending quickly – Boone said that governments had been correct to invest in stimulus packages during 2009: “The mistake came later in 2010, 2011 and so on, and that was true on both sides of the Atlantic,” she commented. “The first lesson is to make sure governments are not tightening in the one to two years following the trough of GDP.”

This time round, said Boone, governments should “get out of the mindset that we have one-size-fits-all fiscal rules to get debt back to a target.” She added that “interest rates are set to remain low for a time long enough that we can reconsider what we do with fiscal policy” over the coming years.

While cutting public spending after 2008, governments propped up growth with monetary policy – slashing interest rates and pumping liquidity into the banking system. But Boone argued that monetary policy “has distributional impacts” – it can for example drive up asset prices, favouring the wealthy – and could lead to a public backlash. “If we thought there was popular resentment because the quality of jobs was going down [before COVID-19], then it’s going to be much worse after this pandemic,” she said.

With interest rates on the floor, Boone told the FT, monetary policy isn’t as potent as it was in 2010. And she argued that “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.” Fiscal policies are “implemented by people who are democratically elected and are directly accountable,” she said, suggesting that advanced economies should fundamentally rethink the relationship between fiscal and monetary policymaking.

About Matt Ross

Matt is a journalist and editor specialising in public sector management, policymaking and service delivery. He was the editor of Civil Service World 2008-14, serving an audience of senior UK officials; and the features editor of Regeneration & Renewal 2002-08, covering urban regeneration, economic growth and community development. He has also been a motoring and travel journalist, and now combines his role as editorial director of Global Government Forum with communications consultancy, marketing and journalism work for publishers, public sector unions and private sector suppliers to government.

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