International Labour Conference The effectiveness and scope of fiscal stimulus in response to the crisis Jonathan Coppel Counsellor, Office of the OECD Chief Economist Geneva, 4 June 2009

Outline  A bleak economic outlook  Fiscal measures in response to the crisis  Medium-term fiscal sustainability

Growth will collapse this year and stagnate in 2010 OECD area, unless noted otherwise ECONOMIC OUTLOOK

The recession is the most synchronised in post-war history Proportion of all OECD economies experiencing at least two consecutive quarters of downturn¹ 1.The last historical observation is for 2008q4. Source: OECD. ECONOMIC OUTLOOK

Unemployment will rise substantially Source: OECD. (In percentage of labour force) ECONOMIC OUTLOOK

Certain categories of employment are more vulnerable* ECONOMIC OUTLOOK * Employment by type of contract in Spain

A slow recovery is foreseen Source: OECD. ECONOMIC OUTLOOK

Fiscal policy is expansionary FISCAL POLICY RESPONE (Cumulative impact on net lending, % of GDP, ) 1. Simple OECD average. 2. Weighted OECD average. Source: OECD. Fiscal packagesAutomatic stabilisers

Source: OECD. The size of discretionary fiscal packages varies inversely with the automatic stabilisers FISCAL POLICY RESPONE

* Cumulative impact of fiscal packages over the period on fiscal balances as a per cent of 2008 GDP. Source: OECD. The size and composition of fiscal packages* FISCAL POLICY RESPONE

The size and composition of fiscal packages (Total over period as a % of GDP in 2008) FISCAL POLICY RESPONE

Changes in labour market policy in response to the recession Source: OECD. Labour demand Measures to help unemployed find work or improve prospects Income support for job losers Other training measures Job subsidies, recruitment incentives or public sector job creation Lower employer social contributions Short-time work schemes Activation requirements Job search assistance and matching Job-finding and business start-up incentives Work experience programmes Training programmes Generosity or coverage of unemployment benefits Social assistance Other payments or in-kind support Training for existing workers Apprenticeship schemes AustraliaXXXXXXX AustriaXXXXX BelgiumXXXXXXXX CanadaXXXXXXXXXX Czech RepublicXXXX Denmark FinlandXXXXXXXXXX FranceXXXXXXXX GermanyXXXXXX GreeceXXXXXX HungaryXXXX IrelandXXXXX ItalyXXXXXX JapanXXXXXXXXXX KoreaXXXXXXXX MexicoXXXXX NetherlandsXXXX New ZealandXXXXXXXX NorwayXXXX PolandXXXXXXXXXX PortugalXXXXXXXX Slovak RepublicXXXX SpainXXXXX SwedenXXXXXXX SwitzerlandX TurkeyXXXXX United KingdomXXXXXXXX United StatesXXXXXXXX FISCAL POLICY RESPONE

The effect of fiscal packages on GDP varies across countries Effect on level of GDP (%), Note: Bars indicate values based on the reference multiplier case. Crosses show estimates based on a high multiplier alternative. See Box 3.1 (p of OECD Economic Outlook interim report) for explanation of the basis for the multiplier assumptions. Countries are arranged according to the size of effect in Source: OECD. FISCAL POLICY RESPONE

General government gross financial liabilities will rise sharply… Source: OECD. FISCAL SUSTAINABILITY

…due to both cyclical and structural factors Source: OECD. (Contribution to total cumulative change in budget balance, , % of GDP, preliminary projections) FISCAL SUSTAINABILITY

High government debt tends to raise long-term interest rates Note: Bars represent average across all OECD countries for which data is available over the period 1994 to Short-term interest rates are typically rates on 3-month Treasury bills and long-term interest rates those on 10-year government bonds. Source: OECD. (Spread between long term and short term vs. government debt in % of GDP) FISCAL SUSTAINABILITY

Sovereign bond spreads have increased since last year Source: OECD FISCAL SUSTAINABILITY

European unemployment ratchets up following severe downturns Source: OECD. FISCAL SUSTAINABILITY

The recession is likely to have reduced potential output Note: The solid line is the average response. The dotted lines are the upper and lower bound of the 99% confidence band. Source: Furceri and Mourougane (2009), OECD Economics Department Working Papers, No. 699 (Average cumulative effect of financial crises on potential output,%) FISCAL SUSTAINABILITY

A final word… “The national budget must be balanced. The public debt must be reduced. The arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn’t want to go bankrupt. People must again learn to work, instead of living on public assistance.”

Thank you …from Cicero in 55 B.C!