Madrid. theThe Organization for Economic Co-operation and Development recently urged governments to take advantage of the slight improvement in growth to cut tax aid and shore up funds for essential spending in the future.Like taking care of the elderly population. I think this is the right decision to avoid a surge in inflation, although one must be very careful not to inflict serious pain on the economy in the form of a deep recession.
Our economic prospects are less optimistic than those of the Organization for Economic Co-operation and Developmentas we expect a US-led recession in developed markets to hit the global economy in 2024. But we agree that fiscal stimulus at this point in the cycle would be counterproductive
The labor markets in the United States and the United Kingdom are overheated, which generates strong salary growth. While it is true that this variable has not been the main cause of the sharp increase in inflation we have seen so far, the current strength of wage growth makes it very difficult to expect inflation to return to target without a recession, which seems a very painful but necessary option. A more expansionary fiscal policy would inject more inflationary pressure into the economy, which would force interest rates to rise even more, and end up causing a more difficult recession.
Governments can control aggregate spending while helping needy families through careful allocation of resources. It is still possible for governments to develop specific tax packages that support the incomes of the most vulnerable families.
These packages will certainly include some spending increases and tax cuts that tax increases elsewhere match. This would redistribute the pain of recession to society more evenly. And it will help avoid some of the long-term economic scars that recessions often inflict.
Luke Bartholomew is Chief Economist at Abrdn
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