This document summarizes a presentation on macroeconomic trends, shocks, and prudent levels of government debt. It discusses how long-term projections are used to examine issues like technological change, demographics, and fiscal sustainability over decades. It notes that world growth is projected to slow while emerging economies like India and China increase their share of global output. For OECD countries, aging populations will weigh on growth in living standards. The document outlines a simulation-based approach to determining prudent debt targets for individual countries that account for shocks and ensure debt levels remain below established thresholds. Prudent debt targets and required fiscal efforts to meet them through 2040 are presented for various countries.

1. MACROECONOMIC TRENDS
AND SHOCKS AND FISCAL
RISKS: DEFINING PRUDENT
DEBT LEVELS
Falilou Fall
Senior economist, Deputy head of division
OECD Economics Department
Tallinn
5-6 June 2019

2. • Long-term projections needed to investigate economic issues which play out
over decades:
Technological development
Demographic change
Increasing importance of emerging-market economies
Effects of structural reforms
 Fiscal sustainability
• 46 countries: 35 OECD + 8 non-OECD G20 + 3 other small countries
 Core is production function for potential output
 Linked to Economic Outlook projections (currently to 2019) assuming output gaps close over 4-5
years
• Model also has:
 Fiscal block
 Market and PPP exchange rates
 Saving, investment, current account balances and equilibrating mechanism through interest rates
Motivation for long term projections
2

3. Policy channels
3

4. World growth slows
• World trend growth declines from 3½ % now to 2% pa in 2060
• Mainly due to a deceleration of large emerging economies
• India and China take rising share of world output
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
OECD BRIICS World
A. Trend real GDP growth by area, %
0
20
40
60
80
100
0
20
40
60
80
100
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
OECD China India Other
B. Composition of world output, in USD at 2010 PPPs
4

5. Demographic change weighs on growth in OECD living
standards
The positive contribution from a rising employment rate declines and the
contribution of the working-age population share turns negative
-0.5
0.0
0.5
1.0
1.5
2.0
-0.5
0.0
0.5
1.0
1.5
2.0
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Trend real GDP per capita growth in the OECD, %
5

6. Fiscal pressure builds up
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
AUS
AUT
BEL
CAN
CHE
CZE
DEU
DNK
ESP
EST
FIN
FRA
GBR
GRC
HUN
IRL
ISL
ISR
ITA
JPN
KOR
LUX
LVA
NLD
NOR
NZL
POL
PRT
SVK
SVN
SWE
USA
Health expenditure Pension expenditure Other primary expenditure Other factors Total
Change in primary revenue necessary by 2060 to stabilise public debt ratios, % pts of potential GDP
Stabilising public debt while meeting pressures from health spending &
demographic change => median OECD government primary revenue up 6½ %
pts of GDP.
6

7. 7
Short run outlook: Economic growth has
slowed in sync with trade growth
World GDP growth World trade volume growth
Goods and services
2.5
3.0
3.5
4.0
4.5
2016 2017 2019Q1
% q-o-q a.r. y-o-y
Note: Figures for the first quarter of 2019 are based on currently available data and projections for the remaining economies.
Source: OECD Economic Outlook database.
-2.0
0.0
2.0
4.0
6.0
8.0
2016 2017 2019Q1
%
q-o-q a.r. y-o-y

8. 8
OECD Economic Outlook projections
Note: The European Union is a full member of the G20, but the G20 aggregate only includes countries that are members in their own right.
1. Fiscal years starting in April.
Real GDP growth
%, year-on-year
2018 2019 2020 2018 2019 2020
World 3.5 3.2 3.4 G20 3.8 3.4 3.6
Australia 2.7 2.3 2.5 Argentina -2.5 -1.8 2.1
Canada 1.8 1.3 2.0 Brazil 1.1 1.4 2.3
Euro area 1.8 1.2 1.4 China 6.6 6.2 6.0
Germany 1.5 0.7 1.2 India1
7.0 7.2 7.4
France 1.6 1.3 1.3 Indonesia 5.2 5.1 5.1
Italy 0.7 0.0 0.6 Mexico 2.0 1.6 2.0
Japan 0.8 0.7 0.6 Russia 2.3 1.4 2.1
Korea 2.7 2.4 2.5 Saudi Arabia 2.2 2.5 1.9
United Kingdom 1.4 1.2 1.0 South Africa 0.8 1.2 1.7
United States 2.9 2.8 2.3 Turkey 2.6 -2.6 1.6

9. 9
OECD Economic Outlook projections
Real GDP growth
%, year-on-year
2018 2019 2020 2018 2019 2020
Austria 2.7 1.4 1.6 Latvia 4.8 2.7 2.7
Belgium 1.4 1.2 1.3 Lithuania 3.5 2.9 2.5
Chile 4.0 3.4 3.3 Luxembourg 2.6 2.0 2.5
Colombia 2.7 3.4 3.6 Netherlands 2.6 1.6 1.5
Costa Rica 2.7 2.7 3.0 New Zealand 2.8 2.6 2.5
Czech Republic 2.9 2.6 2.5 Norway 1.4 1.8 2.1
Denmark 1.4 2.1 1.7 Poland 5.1 4.2 3.5
Estonia 3.9 3.2 2.8 Portugal 2.1 1.8 1.9
Finland 2.3 1.5 1.4 Slovak Republic 4.1 3.5 3.4
Greece 1.9 2.1 2.0 Slovenia 4.5 3.4 3.1
Hungary 5.0 3.9 3.0 Spain 2.6 2.2 1.9
Iceland 4.6 1.0 2.4 Sweden 2.4 1.6 1.6
Ireland 6.8 3.9 3.3 Switzerland 2.5 1.0 1.5
Israel 3.3 3.1 3.2

10. 10
Fiscal policy has provided a buffer,
appropriately
Fiscal stance
% pts of potential GDP
Fiscal
easing
Note: The fiscal stance is defined as the change in the underlying general government primary balance.
Source: OECD Economic Outlook database.
-1.5
-1.0
-0.5
0.0
0.5
1.0
2018 2019 (projected) 2020 (projected)

11. Key risks: Trade tensions, China slowdown, high debt
Global economic growth is stabilising at a low level
• Trade growth has plunged and investment has slowed due to high uncertainty
• Manufacturing is weak, but strong labour markets and services are supporting consumption
• A slight pick-up by 2020 will not be enough to boost living standards
Key risks: Trade tensions, China slowdown, high debt
• Further increases in trade restrictions would hurt investment, workers and consumers
• A sharp slowdown in China would hit activity across the world
• Private, often risky, debt is building up
Governments must act urgently to reinvigorate growth that benefits all
• Invest in infrastructure, digital transformation and skills to meet tomorrow’s challenges
• In the euro area, combine structural with fiscal policies to stimulate activity
• Resolve trade disputes through increased international cooperation while fixing the international rules-
based system
11

12. ASSESSING MACROECONOMIC
SHOCKS AND DESIGNING PRUDENT
DEBT LEVELS
12

13. • Three questions:
– How should a government debt target be set?
– What should be the prudent debt-to-GDP ratio countries should
target over the medium term?
– How can fiscal frameworks be designed to achieve prudent debt
targets while providing scope to respond to the economic cycle?
13
Designing debt targets and fiscal
frameworks

14. Government debt levels raise concern
0
50
100
150
200
Japan
Greece
Italy
Belgium
Portugal
France
Austria
Israel
Hungary
Canada
Germany
UnitedStates
Norway
Poland
UnitedKingdom
Netherland
Sweden
Switzerland
Spain
Korea
Finland
Slovakia
Denmark
CzechRepulic
Slovenia
Iceland
Ireland
NewZealand
Lithuania
Luxemburg
Australia
Latvia
Estonia
Per cent GDP
2007 2018
Source: OECD (2019), Economic Outlook No 105, OECD Economic Outlook,
Statistics and Projections (database)
OECD government debt increased between 2007 and 2018.
14

15. • Debt limits cannot be the anchor of prudent debt targets
15
Sustainability limits may look high, but countries
should steer clear of them
0
50
100
150
200
250
300
350
% GDP Gross debt in 2013 Debt limit (model based interest rate) Debt limit (current interest rate)
Source: Fournier and Fall (2015)

16. • The debt threshold takes into account:
• the impact of debt on growth,
• the effectiveness of fiscal policy,
• and the link between debt and the provision of
public infrastructure.
• It seems that gross debt above about 80%
of GDP has detrimental consequences.
16
Defining a debt threshold as the anchor of
prudent debt targets

17. • A stochastic debt analysis was performed.
• The cushion that is needed to stay below debt thresholds
in the case of adverse shocks was calculated.
• The prudent debt target is the median debt by 2040 such
that there is less than a 25% risk to go beyond the debt
threshold.
17
Designing prudent debt targets

18. • Primary balance is simulated with the estimated fiscal reaction
function.
• The impact of government structural spending on potential
growth is estimated: above OECD average spending has a
negative impact on potential growth
• The simulations are anchored on the potential growth rate gpot
projected in the Long-
• Each country is subject to six shocks: four country-specific
shocks on current growth, potential growth, inflation and on the
long-run nominal interest rate, a monetary policy shock, which
is common for EMU countries and country-specific for others,
and a common macroeconomic shock.
Simulation strategy
18

19. Uncertainties surrounding the debt-to-GDP ratio
Example: the United States
19

20. 20
Country by country prudent debt targets
Prudent debt levels
Average annual fiscal effort (primary balance surplus) by 2040
0
25
50
75
100
125
150
GRC
IRL
SVK
FIN
PRT
SVN
NLD
ESP
DEU
BEL
FRA
ITA
AUT
JPN
CAN
ISR
POL
USA
GBR
Per cent of GDP
0
1
2
3
4
5
6
7
GRC
IRL
SVK
FIN
PRT
SVN
NLD
ESP
DEU
BEL
FRA
ITA
AUT
JPN
CAN
ISR
POL
USA
GBR
Per cent of GDP

21. 21
Further information
Disclaimers:
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice
to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and
boundaries and to the name of any territory, city or area.
OECD Economic Outlook, May 2019. http://www.oecd.org/eco/outlook/
Guillemette, Y. and D. Turner (2018), “The Long View: Scenarios for the World economy to
2060”, OECD Economic policy Papers, No. 22.
Fall, F., D. Bloch, J.-M. Fournier and P. Hoeller (2015), “Prudent Debt Targets and Fiscal
Frameworks”, OECD Economic Policy Papers, No. 15, OECD Publishing, Paris.
Bloch, D. and F. Fall (2015), "Government Debt Indicators: Understanding the Data", OECD
Economics Department Working Papers, No. 1228, OECD Publishing.
Fournier, J-M. and F. Fall (2015), "Limits to Government Debt Sustainability", OECD
Economics Department Working Papers, No. 1229, OECD Publishing.
Fall, F. and J-M. Fournier (2015), "Macroeconomic Uncertainties, Prudent Debt Targets and
Fiscal Rules", OECD Economics Department Working Papers, No. 1230, OECD Publishing.