‘The Economy, The Public Finances and the Challenges Post Covid’, by Ludger Schuknecht

‘Rein in Public Spending and Debt’, says leading OECD economist in new Politeia analysis  Otherwise we risk damaging economic recovery.

Publication: 29th July 2020
PDF: The Economy, The Public Finances and the Challenges Post Covid

Now that western economies have ended their lockdown, they must put the levers for economic recovery into place, says Ludger Schuknecht,  who is Deputy Secretary-General of the OECD. In a new analysis published by Politeia, The Economy, The Public Finances and the Challenges Post Covid, he explains that governments were right to undertake major stimulus measures. But they must not forget that the public finances will need to be restored to a sound footing. There must also be ‘market friendly’ structural reform and a healthy financial system. Otherwise, says Dr Schuknecht, economic recovery will be impeded. In particular, the analysis explains that:

    1. Stimulus measures by Governments and Central Banks were essential to limit the damage of the Pandemic.They helped to protect demand and jobs in the lockdown and they help to underpin the recovery. But there are formidable challenges ahead.
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    3. Governments will have to get a grip on the public finances, with debt now at its highest levels since the end of World War 2. As he points out:
      According to recent projections, euro area debt will average above 100 per cent of GDP in 2020 (with Italy above 150 per cent), that of the US, 130 per cent of GDP, while Japan’s public debt will exceed 250 per cent of GDP. In fact the G7 public debt will reach a similar level as at the end of World War II, but without the prospect of strong growth.
      • Governments should resist undue demands to take on even more debt, backed by the claim that it will bring higher growth to pay for higher debt. Not only is such a view ‘politically naïve and inter-generationally unfair’ but it would be ‘financially unsustainable’. As Dr Schuknecht explains, it leads to too many risks:
        ‘First measures may become unnecessarily pro-cyclical if they are maintained too long. They may stoke “aid dependence” where support measures perpetuate “zombie firms” that should normally not survive. And we risk mortgaging the future with even more debt…’
      • Governments should also say no to demands for more public spending in general. Data confirms that higher public spending by itself does not make for better public services and public spending ratios are already very high.:
        ‘…the key is…to spend money wisely and in an efficient manner [so] “better government” not “more government’ should be the motto [for the future]. Countries can achieve much better public goods and services if they spend their money wisely.’
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    2. Looking ahead, Dr Schuknecht urges a return to the rules and rules-based policy to achieve economic success and improve the quality of government:
      ‘Fiscal rules on deficit, expenditure and debt allow tailoring the adjustment path for public finances to the needs of sustainability and the economic environment…Medium term budgetary frameworks, spending reviews, financial risk analysis and independent fiscal councils are some of the instruments to attain these objects….’

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The Economy, The Public Finances and the Challenges Post Covid is a Working Paper to be published by Politeia the week beginning 27th July as the working draft and part of a longer analysis which will be published by Politeia in a revised, extended, and updated version in the autumn.

Dr Ludger Schuknecht is Deputy Secretary-General at the OECD. He was Chief Economist at the German Federal Ministry of Finance (2011-2018) advising on the fiscal and economic policy issues, the international economy and responsible for the finance track of the G20 process.

Enquiries:
Series Editor: Sheila Lawlor, Director, Politeia, 0207 799 5034, sheila.lawlor@politeia.co.uk
Politeia: Annabelle Newman, 0207 799 5034, press@politeia.co.uk

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