OECD economists have called on member countries to boost public spending to crank up economic growth. They insisted such a policy made sense even if it meant higher government budget deficits in the short term.
Prereleasing a chapter in its biannual Economic Outlook, the Organization for Economic Cooperation and Development (OECD) said Thursday governments needed to get over their fixation with debt levels, and ramp up public spending to increase the pace of economic activity.
The message offered support to a growing number of governments among the OECD's 35 member countries which have been looking to fire up growth by fresh borrowing and moderate tax cuts.
After years of low growth in most developed economies, governments could scarcely afford to ignore the opportunity to finance growth-boosting investments at a time of record-low interest rates, the report said.
Don't save for the sake of saving
The OECD added that letting deficits rise to finance investment and ease tax burdens could raise medium-term economic output by more than it increased debt, leading to a medium-term decrease in public debt-to-GDP ratios.
It estimated that increasing budget deficits by half a percent of GDP by borrowing money to spend on investment could increase output by 0.4-0.6 percent in the first year, on average, across the organization's member states - which include all the world's most wealthy countries.
That, in turn, turn could ultimately reduce debt ratios without the economic pain associated with reducing total public debt through fiscal austerity, the OECD argued.
"What we are saying is that by borrowing at very low interest rates and investing in the right initiatives, you can improve your growth rate," OECD Chief Economist Catherine Mann told Reuters.
But she added it was crucial that extra spending must be invested in productivity-boosting areas like infrastructure construction, education and research, while any tax reductions should carefully target specific taxes that are holding back growth.
hg/nz (Reuters, OECD)