Dusseldorf The industrialized countries association OECD anticipates that the annual economic growth of the OECD and G20 countries could be halved by 2060. On average, the gross domestic product of these countries would then only increase by 1.5 percent per year – instead of the previous three percent. This emerges from a paper published by the organization on Tuesday.
The authors Yvan Guillemette and David Turner mainly blame the slower growth in developing countries for this. Add to this the aging of societies and low productivity gains. At the same time, the costs of pensions and health care are likely to rise and thus put national budgets under pressure, write the economists.
The OECD sees considerable problems looming for the public budgets of the industrialized countries. In order to stabilize the debt ratios at the achieved level, according to the calculation model, additional income and reduced expenditure of eight percent of gross domestic product (GDP) on average would be necessary. However, this has only to do with the Corona additional expenditure to a small extent. These have increased the debts of the industrialized and emerging countries by an average of 20 to 25 percent.
“In the long run, the direct fiscal impact of the pandemic pales in comparison to the additional fiscal pressures determined by long-term trends such as population aging and the rising relative price of services,” said co-author Guillemette in a blog post. In 2018, when the long-term outlook was last updated, he and his colleagues had estimated a need for consolidation of 6.5 percent.
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The largest item, at 2.8 percentage points of GDP, is the assumed increase in pension burdens, followed by the 2.2 percentage point increase in public spending on health and care.
Climate change costs not yet taken into account
However, Guillemette emphasizes in his contribution that expected, very significant additional expenditure is not taken into account in the OECD projection, such as those for the fight against climate change. Three-digit billion amounts of necessary expenditures are currently being discussed for Germany alone.
In order to cushion budget cuts and tax increases, the OECD primarily proposes an increase in working life. This should continuously be increased by two thirds of the increase in life expectancy.
Also, according to the organization, it would be very helpful to increase labor force participation. This was achieved through lower taxes on wages, higher spending on active labor market policies and more maternity leave.
In 2018, the OECD also highlighted the intensification of research and development and higher public investment as important measures to increase productivity and prosperity.
For its long-term projection, the industrialized countries club assumes that the real interest rate on national debt, i.e. interest minus the inflation rate, will rise by a good two percentage points by around 2030 and from then on will be around one percent – the level of inflation-adjusted economic growth. If the interest rate rose by one percentage point more strongly, the consolidation pressure on households would increase by 1.0 to 1.5 percentage points, the OECD estimates. Conversely, the pressure would be two to three percentage points lower if interest rates did not rise at all.
German economy is growing weakly
In the new projection up to 2060, the organization has drastically reduced the long-term expected economic growth per capita almost everywhere. With only 0.9 percent per year from 2030 to 2060, Germany is one of the countries with the lowest increase in material prosperity during this period.
In 2018, the OECD had expected 1.6 percent per year in its main scenario. But also for the euro area and the OECD area as a whole, the growth expectations per capita were drastically reduced from 1.7 percent to 1.1 percent.
This is mainly due to the fact that the increase in labor productivity, i.e. how much more is produced per hour worked or manpower, and the capital endowment of the workforce grow less rapidly in the new projection. Both are usually due to insufficient or misdirected public and private investment.
The report does not provide an explanation or a clear indication of the major changes in the growth projection. Co-author Guillemette downplayed the importance of the change in response to a Handelsblatt request. He pointed out that the change in the growth assumptions was indeed mentioned – in a footnote.
“Only assumptions, no forecasts”
“These are only assumptions, not forecasts,” said Guillemette and added: “We have made the assumption for this specific projection.” The reason for this was the low increase in productivity since the financial crisis of 2008/09. However, this was already known in 2018 when the long-term outlook was last revised.
What the OECD is looking for in these projections, the assessment of the long-term pressure on public finances, will only be slightly influenced by the drastic lowering of the long-term growth assumption, said the OECD economist.
Because with lower productivity, according to the usual assumptions of such macroeconomic calculation models, wages would also rise less sharply. This means that the state is saving on expenditure for public employees and for many social spending, which largely compensates for the lower state income.
In contrast, the prevailing view among economists is that high economic growth is very good for the state of public finances and vice versa.
More: Rising prices, weak growth: Germany is threatened with green stagflation