Governments around the world should not cut spending and raise taxes until after their economies have recovered from the Covid-19 crisis, according to the global think tank.
The Organisation for Economic Co-operation and Development (OECD) believes governments should continue further borrowing into 2021 to ensure that the poorest households and worst affected businesses receive the necessary support.
Having fallen into an economic recession in the summer, some in the UK have started to turn their attention to how the country is going to pay for the massive increase in public borrowing, which is likely to hit nearly £300 billion this year. Some Conservative backbenchers are putting pressure on the Chancellor to cut back on government spending and raise taxes, something Rishi Sunak said he would not rule out for the Budget Statement in November.
“The aim must be to avoid premature budgetary tightening at a time when economies are still fragile,” the OECD warned.
The organisation’s chief economist, Laurence Boone, insisted that spending deficits would need to continue as long as local or national lockdown measures are still in place.
“This is not asking governments to be profligate or calling for a spending spree when we say that support is needed next year. We are concerned about the people hit hardest by the pandemic and how they need support to find a new job,” she said.
The OECD’s report said: “The extensive policy actions undertaken as the pandemic developed have helped to prevent an even larger collapse and buffer the incomes of households and companies.
“With the recovery remaining hesitant, sporadic outbreaks of the virus still occurring, and many sectors still struggling to adjust, fiscal and monetary policy support needs to be maintained to preserve confidence and limit uncertainty.
“At the same time, a delicate balance has to be struck between facilitating the immediate recovery by supporting viable jobs and companies and ensuring that policy allows sufficient flexibility for necessary reallocation across sectors to occur over time. This calls for flexible and state-contingent policy support that can evolve as the recovery progresses.”