OECD urges Chancellor to ramp up investment spending

The OECD has urged the UK, along with other countries, to boost government spending on infrastructure in order to stimulate a global economy where growth prospects “have practically flatlined”.

The Paris-based think-tank’s alarming Interim Economic Outlook report cut the global growth forecast for this year to 3 per cent, from the 3.3 per cent it forecast just three months ago. It also slashed the UK’s GDP growth outlook for 2016 from 2.4 per cent to 2.1 per cent. Growth prospects for the UK in 2017 were slashed from 2.3 per cent to 2 per cent.

The OECD warned that fiscal policy is “contractionary in many major economies” and called for a “stronger collective policy response… to support growth”.

Adding that “governments in many countries are currently able to borrow for long periods at very low interest rates, which in effect increases fiscal pace”, it urged them to increase spending on public investment projects.

The UK’s 10-year gilt yield – an indication of the Government’s own borrowing rate – hit an all-time low of 1.225 per cent earlier this month.

Despite including a chart in its latest document showing the UK imposing the second-largest discretionary budget squeeze between 2014 and 2016 of any major economy except Japan, sources at the OECD said they were not calling for George Osborne to tear up his contentious fiscal consolidation timetable. Rather, they said they were hinting at a reconfiguration of its balance.

This would imply the Chancellor cutting deeper into other areas of government spending or raising taxes to make room for more infrastructure investment, in a so-called “balanced-budget multiplier”.

Yet Catherine Mann, the OECD’s chief economist, did admit in an interview with The Independent that the UK was one of those countries with sufficient “fiscal space” to stimulate the domestic economy.

“It [the UK] has a debt to GDP ratio that is not out of line with other economies. It has the capacity to borrow at very low interest rates. And its current consolidation of over 0.5 percentage points [of GDP] suggests that there is room,” she said.

The report also featured estimates that a 0.5 per cent of GDP investment in infrastructure by the UK – around £9bn – could boost GDP by almost 0.6 per cent as well as knocking 0.2 per cent off the nation’s debt as a share of GDP. This implies that the OECD’s so-called “fiscal multipliers” for investment expenditure are currently higher than one. This means such a stimulus in effect pays for itself.

The OECD has been a supporter of Mr Osborne’s fiscal course since 2010, so its call for a rethink on the composition of further austerity could be embarrassing for him.

Mr Osborne’s next Budget is due on 16 March. His self-imposed “Charter for Budget Responsibility” compels him to run an absolute budget surplus by 2019-20.

A Treasury spokesperson said: “The OECD’s advice to the UK has not changed: we have the right economic strategy and have made significant progress over the past five years. Today’s OECD forecasts are another demonstration of the cocktail of risks facing the world this year. In a turbulent economic climate, we need to show resilience and ... keep taking the action necessary to restore order to the public finances and deliver economic security for working people.”