Top US policy priorities: public finances, competition, climate transition

06/25/2024 – The United States economy continued its robust recovery from the COVID-19 pandemic, increasing wages and attracting people to the job market despite significant tightening in monetary policy that helped reduce high inflation , according to the most recent OECD Economic Survey of the United States.

The OECD forecasts GDP growth to rise from 2.5% in 2023 to 2.6% in 2024, before slowing to 1.8% in 2025. Growth will be supported by consumer spending, continued market strength work and, eventually, by the easing of monetary policy. Underlying inflation is expected to decline from 4.1% in 2023 to 2.6% in 2024 and further to 2.1% in 2025 as wage growth and housing inflation slow.

General government debt rose to 122% of GDP in 2023, its highest level since the Second World War and the fourth highest in the OECD. The debt-to-GDP ratio is expected to continue to rise sharply in the coming decades under current tax and expenditure policies. This is due to a growing gap between expenditure on the provision of public services, social security and infrastructure, and a narrowing of the tax base through tax reductions.

“The United States recovered quickly and strongly from the pandemic, with strong employment and wage growth, while inflation is falling. Monetary policy easing will be appropriate once there are clearer signs that inflation is moderating on a lasting basis to meet the Federal Reserve’s 2% target. objective,” said OECD Secretary-General Mathias Cormann when presenting the survey in Washington, DC, along with the chairman of the White House Council of Economic Advisers, Jared Bernstein. “This strong recovery creates a good opportunity to begin reduce the budget deficit and put debt on a more prudent path. Fiscal consolidation should begin in fiscal 2025, as growth has proven resilient, with a combination of expenditure and revenue measures. to reforms that increase productivity and promote competition, including by maintaining the openness of international trade, and reforms aimed at increasing the workforce, helping women to participate fully in the labor market.”

Achieving fiscal sustainability would make the economy less vulnerable to future economic shocks and ensure the maintenance of key government roles. A steady multi-year fiscal adjustment that includes expenditure adjustments, notably savings in pensions and health care, and increases in taxes, especially on capital income, would put high public debt on a more prudent path. Replacing the debt ceiling with a simple medium-term debt ratio target would be simpler than existing legislative budget rules and would provide more clarity for the public budget.

Competition in some parts of the economy has weakened, making it even more important for the United States to maintain and strengthen open investment and trade policies. Furthermore, productivity growth will benefit from adjustments in education and immigration policies that ensure an adequate supply of highly qualified workers. These could include expanding tailored measures to accelerate learning for disadvantaged students.

The Survey shows that there has been a major acceleration in efforts to achieve the United States’ climate goals, including reaching net-zero emissions by 2050. These measures must be implemented. However, additional policies will likely be needed to achieve climate objectives and should involve a well-balanced policy mix that includes carbon pricing, sectoral regulations and subsidies.

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