OECD Observer
News Brief– Q4 2012

Crisis drives up social spending–; –as tax revenues rise; Soundbites; Economy; Country roundup; Rebalancing act; Pensions struggle; Plus ça change… 

Crisis drives up social spending–

Crisis-fuelled increases in unemployment and income support benefits combined with stagnating or declining GDP has pushed public social spending up. A new report, Social Spending after the Crisis, finds that spending has climbed to an average of 22% of GDP across the OECD in 2012, up from 19% in 2007. In fact, real social spending has risen on average by around 10% since 2007-2008 after prices are taken into account.

Real social spending has fallen in only two countries–by 14% in Greece and 13% in Hungary. Spending rose most in Korea where a 29% increase reflected spending on pensions and other benefits such as childcare. France spends most on social policy, at 32.1% of GDP, followed by Denmark (30.2%) and Sweden (29.8%).

Population ageing will also drive up pension and health spending in the years ahead. The challenge now, the report says, is to safeguard social support for future generations. Public social spending on the elderly amounted to 11% of GDP in 2009. The proportion of elderly in the population is around 15% across the OECD but on average they receive 40% of all public social spending. In Japan and Italy, where senior citizens make up about 20% of the population, the share swells to 60%.


–as tax revenues rise

Tax revenues in most OECD countries are again on the rise. This follows declines seen at the beginning of the crisis. The OECD’s annual Revenue Statistics shows that member countries collected some 34.0% of GDP in taxes in 2011, compared with 33.8% in 2010. This is still well below the most recent 2007 peak of 35.1%.

Chile, France, the Czech Republic and Germany saw the largest increases in 2011, and Hungary, Estonia and Sweden the largest falls.

Several factors explain the increasing tax ratios in 2010 and 2011. Under progressive tax regimes, economic recovery led to tax revenues rising faster than GDP. At the same time, many countries raised tax rates and/or broadened bases. In 2008 and 2009, the declining ratios reflected the severity of the recession and the fact that some countries responded by cutting tax rates.



Hope of the ages

“We began the year in the valley of recession–we completed it on the high road of recovery and growth.” John F. Kennedy, State of the Union Address, 11 January 1962

End of growth?

“Growth is not just a product of incentives. It depends even more on opportunities. Rapid increases in productivity at the frontier are possible only if the right innovations occur.” Martin Wolf, Financial Times, 2 October 2012

Euro optimism

“The euro’s rescue is on track” Editorial in French daily, Le Monde, 1 October 2012

Love tax

“These days, few people are willing to extol the glories and virtues of taxation, but this discovery would not have happened without the tax payer. In fact, the vast majority of the planet’s taxpayers had skin in the game.”

Paul Tipton, Professor of Physics, Yale University, writing about the discovery of the Higgs Boson particle, Los Angeles Times, 9 July 2012


Provisional growth estimates show that quarterly gross domestic product (GDP) in the OECD area rose by 0.2% in the third quarter of 2012. This was the same rate as in the previous quarter, but with continuing diverging patterns across countries. In the US, growth accelerated to 0.5%, compared with 0.3% in the second quarter. In the UK, growth boosted to 1% compared with a contraction of 0.4% in the previous quarter. Growth also picked up in France to 0.2%, compared with a decline of 0.1% in the previous quarter.

Leading indicators from the OECD, which help anticipate turning points in economic activity, continue to point to weak growth prospects. However, signs of stabilisation are emerging in Canada, China and the US. The leading indicators for Japan, Germany, France and the euro area as a whole continue to look weak (see page 38).

Annual inflation in the OECD area rose by 2.2% in the year to September 2012, up from 2.1% in the year to August 2012. This slight increase in the annual rate of inflation was driven by higher energy prices which accelerated to 5.1% in September, up from 3.5% in August, while food price inflation slowed to 2.1% in September, compared with 2.2% in August. Excluding food and energy, the OECD annual inflation rate slowed to 1.6% in September 2012 compared with 1.7% in August.

The OECD area unemployment rate was 7.9% in September 2012, broadly the same rate recorded since January 2011. In the euro area, the unemployment rate increased for the 16th consecutive month–up 0.1 percentage point to 11.6% in September–while it fell by 0.3 percentage point in the US in September (to 7.8%).

Unit labour costs in the OECD area rose by 0.3% in the second quarter of 2012, driven by continued increases in labour compensation per unit of labour input.

Merchandise trade continued to slow in most major economies in the third quarter of 2012 compared to the second quarter of 2012. Imports and exports fell in the third quarter of 2012 in Brazil, Germany, Italy, Japan, Russia, South Africa, and the US.

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Country roundup

Denmark should build on the strengths of its vocational and educational training programme to ensure that young people enter the labour market with the skills companies need and to meet the national goal of having 60% of young people enter higher education by 2020, according to a new OECD report.

Estonia recovered strongly from the global economic crisis but growth has since slowed, highlighting the need for further reforms that reduce exposure to external shocks and ensure against future boom/bust cycles, according to the OECD’s latest Economic Survey of Estonia.

Finland should not back-track on its aid commitments, according to the OECD’s Review of the Development Co-operation Policies and Programmes of Finland. While the country is making efforts to improve its development co-operation, sharpening the focus of its efforts and emphasising the importance of human rights, success is contingent on Finland honouring its commitment to increase funding, focusing on areas and countries where it can have the most impact, and improving the way it manages development co-operation.

Israel has world-class primary care services and should now focus efforts on bringing its hospitals up to the same high international standards, according to the OECD’s Health Care Quality Review of Israel.

Ghana has signed the Convention on Mutual Administrative Assistance in Tax Matters, a multilateral agreement developed jointly by the Council of Europe and the OECD. Ghana is the second African country, after South Africa, to sign the Convention since it was opened for signature to all countries in June 2011.

Tax revenues in Latin American countries as a proportion of their national income are rising slowly although they remain lower than in most OECD countries. Revenue Statistics in Latin America shows that the average tax revenue to GDP ratio in the 15 Latin American countries covered by the report increased from 19% in 2009 to 19.4% in 2010, after falling from a high point of 19.7% in 2008.

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Rebalancing act

The balance of economic power is expected to shift dramatically over the next half century. Fast-growing emergingmarket economies will likely account for an increasing share of global output, according to a new OECD report.

Divergent long-term growth patterns will lead to radical shifts in the relative size of economies. The United States is expected to cede its place as the world’s largest economy to China, as early as 2016, though living standards will still only be 60% of that in the leading countries in 2060. India’s GDP is also expected to pass that of the United States over the long term, but its per capita income will only be about 25% of that in advanced countries.

Fast-ageing economic heavyweights, such as Japan and the euro area, will gradually lose ground on the global GDP table to countries with a younger population, like Indonesia and Brazil.


Pensions struggle

Pension funds in the OECD are losing steam. Though assets hit a record US$20.1 trillion in 2011, return on investment fell below zero, with an average negative return of -1.7%, according to the OECD’s latest Pension Markets in Focus. The September report says that weak equity markets and low interest rates drove the poor performance.


Plus ça change…

“Nobody has time enough to read all these publications, and nobody needs to know everything about every specialised subject, but there are many people who do feel a need to know something about some of the problems and to follow the work in a more general way. This is why we are now issuing the OECD Observer, a new periodical.”

“The OECD Observer” by Thorkil Kristensen, former Secretary-General of the OECD, in issue No 1, November 1962

Crisis drives up social spending––as tax revenues riseSoundbitesEconomyCountry roundupRebalancing actPensions strugglePlus ça change… 

©OECD Observer No 293, Q4 November 2012