OECD Urges Governments to Target Budget Cuts to Foster Growth

The Organization for Economic Cooperation and Development urged governments seeking to trim budget deficits to target inefficient spending and select tax increases that won’t distort the economy.

“Given that spending cuts are largely unavoidable, a key question is how to maximize the positive and minimize the negative impacts on long-run growth,” the Paris-based OECD said in a report today. “There is scope to increase revenue by measures to broaden the tax base, particularly by bringing so- called tax expenditures -- tax credits and deductions.”

Total government debt in the OECD’s 34 member states has risen to more than 100 percent of their combined economic output in the wake of the financial crisis that began five years ago, the organization estimates. Japan, Greece and Italy are the three countries with the highest debt burden, while Australia, Luxembourg and South Korea are those with the lowest.

“Due to the scale of consolidation needs, most countries will need a sustained period of fiscal tightening, acting on both the revenue and spending side,” the OECD said.

Governments may be able to find “efficiency gains” in spending on health and education that yield savings of between 0.5 percent and 4.5 percent of gross domestic product, the OECD said. Broadening tax bases and eliminating tax breaks may raise revenue equivalent to 1 percent of GDP, it said.

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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