The OECD Recommends a "Go Smart" Approach

This week the OECD released its biennial Economic Surveys on the United States, with the organization's economic recommendations for policymakers. The report identified needed short-term reforms in response to the sputtering U.S. economy but also examined the unique challenges of the U.S. in the future. Not surprising, fiscal issues were prominently featured in the OECD report. The OECD warned of the "fiscal cliff" and favored a slower and better targeted fiscal consolidation strategy:

The Survey suggests that broadening the tax base through reduced tax expenditures, such as for mortgage interest, as well as harmonizing the tax treatment of different forms of capital income while simultaneously lowering the corporate tax rate could help to reduce income inequality and at the same time boost investment and long-term growth.

For the short term, the Survey recommends that monetary policy continues to support the recovery and that current legislation be amended to avoid a sharp fiscal tightening in early 2013. Fiscal consolidation instead should be implemented at a gradual pace and as part of a medium-term framework to restore fiscal sustainability.

If this sounds familiar, it is because these recommendations are what comprehensive fiscal consolidation and tax reform plans like Simpson-Bowles, Domenici-Rivlin, and others hope to achieve. In many of these plans, tax expenditures would be eliminated and marginal rates for corporations and individuals would be allowed to fall, raising revenue and likely increasing growth prospects.

The OECD also warns that health care will likely need more cost control measures, especially if reforms under the ACA prove ineffective at bending the cost curve. There is not a lack of good cost control reforms to Medicare and Medicaid, but lawmakers will need to work toward bipartisian agreement in order for the country to get a grip on rising costs. The OECD claims that a plan could restore market confidence in the U.S. political system.

In view of these challenges, it is essential that the US authorities achieve bipartisan commitment to a medium-term fiscal plan. Adopting a medium-term fiscal framework could entail fiscal rules or transparency requirements that would increase accountability for fiscal outcomes and reduce uncertainty.

Sound fiscal policy will be important, because the OECD argues that the United States needs to be doing more with innovation, investment, and education. Yet our current path will have the government spending more--and eventually all--of its yearly revenues on rapidly compounding interest costs and rising health care and retirement costs. A well-designed fiscal consolidation plan can assure that the federal government will have the resources it needs to fund its necessary priorities.

The full report can be found here.