The Economic Crisis:
Facts and implications
for public policy
Higher Education at a Time of Crisis –
Challenges and Opportunities,
Copenhagen, 29-30 June 2009
Sven Blondal
Macroeconomic Policy Divison
Economics Department
OECD
Organisation of presentation
• The economic crisis: driving forces and
key features.
• The OECD Economic Outlook projections.
• The implications of the crisis for budget
policies in the medium term.
• Budget policies and public spending in the
medium term.
2
The driving force in the
downturn
• Abrupt shift towards risk aversion:
– Collapse in asset prices
– Increased cost of capital
– Credit rationing
• The consequences:
– Financial institutions left with bad loans and assets;
lack of confidence in counter parties
– Businesses cut capital spending as financial
conditions tighten and uncertainty mounts
– Households reduce consumption in response to
falling wealth
3
The negative feedback loop
• The weakness of the economy is making it
difficult for households and businesses to
service and repay their debt …
• …creating more bad debts for banks and
undermining their balance sheet …
• … which in turn weakens the real economy
even further.
4
The crisis: key features
• The deepest post-war recession in the OECD
area.
• The most synchronised recession on record.
• Manufacturing has been particularly hard hit.
• Employment has fallen and unemployment has
risen.
• Inflation is falling but is positive in most
countries.
5
The recession: Depth and
synchronicity
6
Output declines in the 4th quarter of
2008 and the 1st quarter of 2009
7
Industrial production has plunged
Index, January 2000 = 100
8
Unemployment has risen
significantly in many countries
9
Inflation is falling
10
The policy responses
– Monetary policy has been eased significantly,
with interest rates close to zero in many
countries and central banks have used other
unconventional measures to support demand.
– Fiscal stimulus packages have been
introduced in most OECD countries to
increase aggregate demand.
– Financial market policies have aimed at
repairing the financial system and increase
confidence.
11
Policy rates are very close to zero in
most major OECD economies
12
Discretionary fiscal stimulus
programmes in most OECD countries
(2008-2010 net effect on fiscal balance, % of 2008 GDP)
13
OECD Economic Outlook 85
projections to end-2010: summary
Average
1996-2005
2006
2007
2008
2009
2010
2008
q4
2009
q4
2010
q4
-1.7
-0.8
-1.7
-4.4
-2.6
-1.7
-3.6
-3.6
1.5
1.5
0.9
0.8
Per cent
Real GDP growth1
United States
Euro area
Japan
2.8
3.2
2.1
1.1
3.1
2.8
3.0
2.0
2.7
2.0
2.6
2.3
0.8
1.1
0.5
-0.7
-4.1
-2.8
-4.8
-6.8
0.7
0.9
0.0
0.7
-0.2
1.3
1.7
0.3
-5.3
-5.8
6.6
6.0
5.6
5.9
8.5
9.8
6.4
9.4
9.9
3.3
2.3
2.3
3.2
0.6
0.8
2.4
0.7
0.6
-2.2
-1.3
-1.4
-3.2
-7.7
-8.8
World real trade growth
6.9
9.5
7.1
2.5 -16.0
2.1
6
3.7
4.7
4.5
2.4
2.3
Output gap2
Unemployment rate
Inflation
3
4
Fiscal balance
5
Memorandum Items
World real GDP growth
-2.2
1.
2.
3.
4.
5.
6.
Year-on-year increase; last three columns show the increase over a year earlier.
Per cent of potential GDP.
Per cent of labour force.
Private consumption deflator. Year-on-year increase; last 3 columns show the increase over a year earlier.
Per cent of GDP.
OECD countries plus Brazil, Russia, India and China only, representing 81% of world GDP at 2005
purchasing power parities. Fixed weights based on 2005 GDP and purchasing power parities.
Source: OECD Economic Outlook 85 database.
14
OECD Economic Outlook 85 projections
to end-2010: United States
• Relatively early exit from the
recession.
• The recession bottoms out in
3rd quarter and a recovery
starts in 4th quarter thanks to
massive policy effort.
• The recovery is weaker than
consensus projections for
2010.
• Unemployment rate to reach
10% in end 2009 and stay at
that level in 2010.
• Inflation falls to low levels but
remains positive.
GDP growth (s.a.a.r.)
15
Very high budget deficits in most
OECD countries in 2010
• High budget deficits due to:
– Fiscal packages introduced to support the
economy.
– Budgets no longer benefitting from revenues
related to booming asset markets.
– “Automatic stabilisers”: revenues fall and
spending increases when the economy is
weak.
16
General government net lending in
2010 (% of GDP)
17
The inevitable consolidation of public
finances in the medium term
• Consolidation will have to take place in the
medium term and governments have to
prepare credible medium-term
consolidation plans now.
• Absence of credible consolidation plans
risks triggering adverse reactions of
financial markets, which in turn would
risk the economic recovery.
18
Consolidation requirements will
differ across OECD countries
– Remove stimulus measures only: Most Nordic
countries, Korea, Switzerland.
– Remove stimulus measures and cumulative
tightening of 3 per cent of GDP: Japan,
Germany, France, Italy, Canada, etc.
– Remove stimulus measures and cumulative
tightening of 7 per cent of GDP: United States,
United Kingdom, Spain, Ireland.
19
Consolidation requirements
(% of general government outlays)
20
Consolidation based on tax
increases?
• Historical experience suggests that tax-based
consolidation is rarely successful.
• Tax increases would undermine economic
performance.
• If unavoidable, tax increases should be
concentrated on taxes that have the least
harmful effects on economic performance, e.g.
increase taxes on fixed property and indirect
taxes rather than taxes on labour or corporate
profits.
21
Consolidation based on public
spending cuts
• On unchanged policies, public spending is
set to increase rather than fall due to the
ageing of the population:
– Old-age pension spending is set to increase.
– Health care spending will increase.
• Consolidation needs may trigger long
overdue reforms in these key areas.
22
Increase in ageing-related public spending
23
Education spending in a time of
budget consolidation
• Education spending will come under close
scrutiny in the search for budgetary saving
as the size of young cohorts diminishes.
• Cuts in education output could undermine
economic performance in the long term.
• Scope for efficiency increases in the
delivery of education services?
24
Tertiary education in a time of budget
consolidation: the scope for efficiency gains
and new ways of financing
• What scope is there for efficiency gains in delivery of
higher education?
• Will consolidation lead to, for example, institutional
rationalisation to exploit economies of scale? Restriction
on numbers in high cost programmes? Growth in
distance education?
• Higher education graduates appropriate most of the
gains of university education: A case for raising tuition
fees for university education combined with governmentsponsored income-contingent study loans?
25