Longer-term forecastings - David Turner, Economics Department, OECD
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This presentation was made by David Turner, Economics Department, OECD, at the 11th Meeting of OECD PBO & IFIs held in Lisbon, Portugal, on 4-5 February 2019
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Longer-term forecastings - David Turner, Economics Department, OECD
- 1. THE LONG VIEW: SCENARIOS FOR THE WORLD ECONOMY TO 2060 OECD Economic Policy Paper #22 by Yvan Guillemette and David Turner 11th Annual Meeting of the OECD Network of Parliamentary Budget Officials and Independent Fiscal Institutions (PBO) 4 – February Lisbon Portugal
- 2. SHORT 1-2 Quarters MEDIUM 2-3 Years LONG 3-4+ Decades Accuracy Policy relevance/ Interest 2 The merits of forecasting at different horizons Good & Improving ? For Nerds! Poor & Little Improvement Usually Miss Downturns Fiscal & mopo credibility Quantifying uncertainty … tricky Planning rather than the Plan Timing of cycle less important Natural horizon: • Structural reforms • Mega-trends like ageing • Debt sustainability
- 3. • All OECD + non-OECD G20 countries • Core is production function for potential output • Linked to short-term Economic Outlook projections • Saving & Investment equilibrated through R Long-term scenarios model: key features 3
- 5. Fiscal block: spending pressures • Health spending per capita projections depend on – Growth in real GDP per capita – Change in the share of population aged 65+ – Baumol effect: 1.3% per year • Pension expenditure from EC Ageing Report and S&P’s projections • Other primary expditure constant on real per capita basis. – Additional channel demographics public finances – Structural reforms that boost employment rate fiscal dividends. 5
- 6. 50 60 70 80 90 100 110 120 130 50 60 70 80 90 100 110 120 130 2000 2010 2020 2030 2040 2050 2060 Gross government debt, % of GDP 6 Fiscal rule stabilises debt-to-GDP ratio at initial level using overall tax rate (eg USA) 28 30 32 34 36 38 40 42 44 28 30 32 34 36 38 40 42 44 2000 2010 2020 2030 2040 2050 2060 Primary revenue, % of GDP (overall tax rate) -12 -10 -8 -6 -4 -2 0 2 4 -12 -10 -8 -6 -4 -2 0 2 4 2000 2010 2020 2030 2040 2050 2060 Primary balance, % of GDP
- 8. No institutional or policy reforms Look at fiscal pressures building up Reference point for reform scenarios BASELINE SCENARIO 8
- 9. Demographic change weighs on growth in OECD living standards The positive contribution from a rising employment rate declines and the contribution of the working-age population share turns negative -0.5 0.0 0.5 1.0 1.5 2.0 -0.5 0.0 0.5 1.0 1.5 2.0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 Trend real GDP per capita growth in the OECD, % 9
- 10. Living standards converge slowly • GDP per capita advances in all countries and gradually converges toward those of the most advanced countries, but to varying degrees. • Living standards in high-growth emerging market and Eastern European converge most, driven by catch-up in trend labour efficiency, • But GDP per capita in the BRIICS and some low-income OECD countries remains below half that of United States in 2060. 0 40 80 120 160 200 0 40 80 120 160 200 IND IDN ZAF COL BRA CRI CHN MEX ARG CHL RUS GRC LVA TUR HUN POL PRT EST LTU SVK SVN CZE ISR ESP ITA NZL KOR FRA JPN GBR FIN BEL CAN AUS DEU AUT DNK SWE ISL NLD CHE NOR IRL LUX 2018 2060 C. Real GDP per capita at 2010 Purchasing Power Parities, USA = 100 10
- 11. Fiscal pressure builds up -5.0 -2.5 0.0 2.5 5.0 7.5 10.0 12.5 15.0 -5.0 -2.5 0.0 2.5 5.0 7.5 10.0 12.5 15.0 AUS AUT BEL CAN CHE CZE DEU DNK ESP EST FIN FRA GBR GRC HUN IRL ISL ISR ITA JPN KOR LUX LVA NLD NOR NZL POL PRT SVK SVN SWE USA Health expenditure Pension expenditure Other primary expenditure Other factors Total Change in primary revenue necessary by 2060 to stabilise public debt ratios, % pts of potential GDP Median OECD tax rate up 6½ % pts of GDP 11
- 12. 12 Summary of average historical effects on income equality and output Source: Agkun, O., B. Cournède and J. Fournier (2017), “The Effects of the tax mix on inequality and growth”, OECD Economics Working Papers, No. 1447.
- 13. 0 10 20 30 40 50 60 VAT standard rate Revenue maximizing rate 95% Conf. Interval Country-specific revenue-maximising VAT standard rates & actual rates, % 2016 Source: Akgun, Bartolini and Cournède (2017) 13
- 14. Effective marginal effective tax rates of workers with wages of 167% of the average and estimated revenue-maximising rate 0 10 20 30 40 50 60 70 80 Chile Mexico Korea NewZealand Japan Switzerland Canada Poland Austria Estonia Australia UnitedStates Latvia Germany Hungary SlovakRepublic Turkey Iceland CzechRepublic UnitedKingdom Israel Netherlands Norway Ireland Spain Luxembourg Slovenia Denmark Greece Finland Portugal France Italy Belgium Sweden EMTR (2017, %) Revenue-maximising rate 95% confidence interval Source: Akgun, Bartolini and Cournède (2017) 14
- 15. 1. Better governance & educational attainment in BRIICS 2. Competition-enhancing product market reforms in OECD 3. Flexibility-enhancing labour market reforms in OECD 4. Increase in pensionable age in OECD 5. Higher R&D spending in OECD 6. Higher public investment in OECD 7. Cost containment in health care sector in OECD 8. Higher average import tariffs in all countries REFORM SCENARIOS 15
- 16. Labour market reforms could be most beneficial to women and youth 1 2 3 4 5 6 7 8 9 10 11 1 2 3 4 5 6 7 8 9 10 11 Youth (15-24) Prime-age men (25-54) Prime-age women (25-54) Older workers(55-74) Aggregate (15-74) Active labour market policies Union bargaining Familybenefits Maternityleave Tax wedges Impact of labour market reforms on OECD employment rates Difference from baseline by 2040, % pts of labour force A reform package to improve labour market policy settings in OECD countries up to those of leading countries raises the aggregate employment rate by 6½ percentage points by 2040, mostly via higher youth and female employment. 16
- 17. Labour market reforms + health cost containment would help alleviate projected fiscal pressures Change in tax rate to stabilise public debt ratios, difference from baseline in % pts of potential GDP -8 -6 -4 -2 0 2 4 -8 -6 -4 -2 0 2 4 AUS AUT BEL CAN CHE CZE DEU DNK ESP EST FIN FRA GBR GRC HUN IRL ISL ISR ITA JPN KOR LUX LVA NLD NOR NZL POL PRT SVK SVN SWE USA Health expenditure New ALMP and family expenditure Other primary expenditure Other factors Total Median reduction of 3½ % pts of GDP in tax pressure relative to baseline. 17
- 18. Change 2017 to 2030, % pts of the population aged 55 to 74 Note: Assumes minimum and normal retirement ages rise by two-thirds of the projected increase in life expectancy at 65, unless they are already planned to rise as fast or faster than this, in which case the chart shows a zero effect.. Increase in participation rate of older workers if retirement ages rise by 2/3 of gains in life expectancy
- 19. VARIANT SCENARIOS • Annother global downturn • Lower (r-g) 19
- 20. Another global slump would raise tax pressure even with no potential output effect? 0 1 2 3 4 5 6 7 8 9 SVN LVA CZE ESP POL CHE GBR HUN ISR ISL LTU SVK JPN NZL DEU BEL NLD FRA IRL KOR CAN AUS EST LUX DNK AUT SWE FIN PRT ITA GRC USA Peak change in tax rate to stabilise public debt ratio with global downturn in 2021, difference from baseline in % pts 20
- 21. What if interest rates have already ‘normalized’? -6 -4 -2 0 2 4 6 ITA JPN PRT ESP BEL FRA ISR GBR AUT IRL GRC SVK DEU NLD SVN LVA HUN POL LTU CAN CZE DNK USA NZL ISL CHE AUS KOR SWE EST LUX FIN Peak change in primary revenue necessary to stabilise public debt ratio assuming lower path for interest rates, difference from baseline in % pts of potential GDP 21
- 22. • Possible model improvements to fiscal side: – More complete modelling of fiscal impacts of reforms – Incorporate Laffer curve effects of taxation – Better modelling of pensions • Other Scenarios to explore in detail: – Another GFC – Different (r-g) • YOUR SUGGESTIONS WELCOME ! Future work? 22
- 23. Agkun, O., B. Cournède and J. Fournier (2017), “The Effects of the tax mix on inequality and growth”, OECD Economics Working Papers, No. 1447, OECD Publishing, Paris, https://doi.org/10.1787/c57eaa14-en Agkun, O., D. Bartolini and B. Cournède (2017), “The Capacity of Governments to Raise Taxes”, OECD Economics Working Papers, No. 1407, OECD Publishing, Paris, https://doi.org/10.1787/6bee2df9-en Guillemette, Y. and D. Turner (2018), “The Long View: Scenarios for the World Economy to 2060”, OECD Economic Policy Papers, No. 22, OECD, Paris, https://doi.org/10.1787/b4f4e03e-en Cavalleri, M. and Y. Guillemette (2017), “A revised approach to trend employment projections in long- term scenarios”, OECD Economics Department Working Papers, No. 1384, OECD, Paris, http://dx.doi.org/10.1787/075f0153-en. Guillemette, Y. et al. (2017), “A revised approach to productivity convergence in long-term scenarios”, OECD Economics Department Working Papers, No. 1385, OECD, Paris, http://dx.doi.org/10.1787/0b8947e3-en. Guillemette, Y. and D. Turner (2017), “The fiscal projection framework in long-term scenarios”, OECD Economics Department Working Papers, No. 1440, OECD, Paris, http://dx.doi.org/10.1787/8eddfa18-en. Guillemette, Y., A. de Mauro and D. Turner (2018), “Saving, investment, capital stock and current account projections in long-term scenarios”, OECD Economics Department Working Papers, No. 1461, OECD, Paris, http://dx.doi.org/10.1787/aa519fc9-en References 23