World cannot spend its way out of a slump, warns OECD chief

Countries that try to spend their way out of crisis risk becoming stuck in a permanent malaise, according to the head of the Organisation for Economic Co-operation and Development (OECD).

Angel Gurria said central banks were running out of firepower to boost economies in the event of another sharp slowdown, while governments had limited space to ramp up spending, reports The Telegraph.

“Countries that say: I’ll spend my way out of this third slump. I say: no you won’t, because you’ve already done that, and you ran out of space.”

“Countries that say: I’ll spend my way out of this third slump. I say: no you won’t, because you’ve already done that, and you ran out of space,” Mr Gurria said on the sidelines of the IMF’s annual meeting in Lima, Peru.

“Now countries are trying to reduce the deficit and debt because that’s a sign of vulnerability and the rating agencies are breathing down their neck – they’ve already downgraded Brazil and France.

“We don’t have room to inflate our way out of this one. So we go back to the same issue: it’s structural, structural, structural.”

The OECD has been working with countries such as Greece to liberalise product markets, which deal with competitiveness issues and labour laws.

Mr Gurria, who has urged countries for years to implement structural reforms, said he was frustrated at the lack of progress: “If you listen to the conversations we have on opening on Sundays you wouldn’t believe it. Or the debates we have about [the] 35 hour [working week]. These are the real issues.

“The people, the trade unions, they all have a stake and their arguments are strong. But where countries have room is to make structural changes, and central banks can help by continuing to ease.

“[With quantitative easing] there is a question of whether we’re entering a territory of diminishing returns. Of course we must use it, but there’s not a lot of room left.”

Mr Gurria conceded that the benefits of reform were gradual. “Germany modified its labour laws 12 years ago, and it’s reaping the benefits brilliantly and gallantly because of much better performance during the crsis. Spain did it three years ago, and they’re reaping the benefits now. Italy did it last month, and it will take a couple of years.”

Mr Gurria also described a British exit from the European Union as a “lose-lose” situation for the UK and EU that would reduce their standing on the world stage.

He said: “I would do anything in my power to avoid Brexit because I think that it’s a lose-lose proposition.

“Trying to calculate who would lose more is a fallacy. Britain would be weaker and Europe would be weaker.”

David Cameron, the prime minister, has set out a four point plan of key demands from the EU, including a new “red card” system to bring power back from Brussels to the UK.

Michel Sapin, the French finance minister, told reporters in Lima that many of Britain’s concerns were legitimate, but added that reforming free movement was a “red line”. He also said it was unlikely that there would be any EU treaty change “in the next few years”.

Mr Gurria used policymakers to start negotiations as soon as possible.

“Let’s get down and do it as early as possible so that these things can be put in writing and explained well before the British people go to their referendum.”

Mr Gurria also hailed the agreement reached by the G20 last week to implement the OECD’s plan to end corporate tax havens. He said the OECD’s target was to raise “100pc” of revenues currently lost through base erosion and profit shifting.

“It may be difficult to achieve 100pc, but we’ve moved the discussion and debate from the logic of double non-taxation being not only tolerated and legal because of the whole edifice that we’ve built since the League of Nations to saying nobody wants to tax you twice. In order to protect you from that, let’s make sure you’re taxed once and pay your fair share.”