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Gurria Calls For New Fiscal Balance

by Leroy Baker,, New York

30 June 2010

Addressing the G20 Business Summit, Angel Gurria, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), spoke on the difficulty of balancing fiscal consolidation with the support of a job-rich recovery.

If public debt were left to accumulate at its current pace, said Gurria, the cost of borrowing may rise, and crowd out private investment; private business investment was greatly needed right now to replace policy stimulus as the source of recovery, he suggested.

Gurria warned that, if all countries moved to consolidate at the same time, the fragile recovery could stall, and job creation would be delayed, the situation being exacerbated through trade and financial linkages.

At the core of the G20 Leaders’ agenda, the solutions inevitably would be country specific, but through cooperation the trade-offs could be reduced, and growth maximized, said Gurria. The OECD believed that there was no option other than to combine sound fiscal policies with specific actions and to maintain the momentum for recovery and job creation.

The OECD thought fiscal consolidation should be as growth-friendly as possible, with growth enhancing programmes: education, innovation and infrastructure and efforts to improve public sector efficiency and phase out inefficient subsidies. Consolidation measures should concentrate primarily on cutting government spending.

When additional revenue was needed, according to Gurria, emphasis should be placed on the least distortive taxes, especially consumption and property taxes, rather than taxes on labour and business income. Recently announced fiscal consolidation plans in the UK moved in this direction, said Gurria.

Other options included putting a price on carbon, via a carbon tax or through tradeable emission permits, which would both raise revenue and help to reduce greenhouse gas emissions, said Gurria.

With regard to the sharing of the tax burden, a renewed effort to achieve better tax compliance had been possible with the combination of G20 political support and OECD work in combating tax evasion. Gurria pointed to exchange of information for tax purposes, where, he noted, more progress had been made since November 2008 than in the last 10 years. This breakthrough meant a more level playing field for international business, where competitiveness depended on the productivity of business enterprises, rather than aggressive tax planning, according to Gurria.

In another speech, Gurria said it was essential for the G20's credibility that it continue to deliver as it had done recently with the US financial reform, the many examples of fiscal adjustment and structural reform in Europe, including courageous moves in Spain, the UK and Portugal, among others, and the recent welcome announcement by China about flexibility in its exchange rate regime.

A second way Gurria said leaders could build confidence was to achieve a "New Balance", where recovery and employment, on the one hand, and fiscal consolidation, on the other, became mutually reinforcing. While fiscal consolidation should be as growth-friendly as possible, Gurria commended the boost in confidence that courageous, ambitious, well designed consolidation plans could give to markets.

Thirdly, Gurria thought confidence should be boosted by "moving from emergency and urgency measures towards structural policies" in the fields of competition, education, skills creation, R+D, taxation, public sector spending effectiveness including the elimination of fossil fuel subsidies, fighting corruption, innovation, and green growth.

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