Levels of government debt have soared in most countries since 2008 as a result of the financial crisis and will need to be brought down to “prudent” levels of around 50 percent of gross domestic product to cope with future challenges including health and long-term care and pensions, the OECD said in a report published on Thursday.
“Countries should reduce debt levels to around 50 percent of (gross domestic product) or lower to provide a safety margin against future adverse shocks,” the OECD said in its report.
It acknowledged that different debt targets were appropriate for different countries, but said that a target of bringing gross debt down to around 50 percent of GDPcould, nonetheless, be supported by a number of arguments.
The OECD said research suggests that changes in the functioning of the economy occur around debt levels of 70 percent to 80 percent of GDP.
“Interest rate effects of debt seem to become more pronounced, discretionary fiscal policy becomes less effective because offsetting private saving responses become stronger and trend growth seems to suffer,” it said.
As a result, for a standard country, “building in a safety margin to avoid exceeding the 70 to 80 percent levels in a downturn suggests aiming for a 50 percent or even lower long-term debt target during normal times,” the report said.