Tax Policy Reforms 2018

OECD

• Publisher: OECD
• Year: 2018
• eBook ISBN: 9789264306370
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Chapter 1. Macroeconomic background

This chapter gives an overview of the main macroeconomic trends up until 2017. The purpose of this overview is to provide background information to help understand tax revenue trends as well as tax policy changes. Tax policy reforms are closely connected with economic trends: tax revenues are affected by changes in macroeconomic conditions and economic trends themselves are key drivers of tax reforms.

Macroeconomic trends

This chapter provides background information on macroeconomic conditions up until 2017 in order to help understand tax revenue trends and tax policy changes. It covers recent trends in growth, inflation, productivity, investment, the labour market, public finances and inequality. Tax policy developments are closely connected with economic trends: tax revenues are affected by changes in the macroeconomic conditions and these developments themselves are key drivers of tax reform.

Global growth picked up in 2017 and became increasingly broad-based

Global GDP growth is estimated to have been 3.7% in 2017, the fastest pace since 2011, albeit still below the longer-term average of around 4% seen in the two decades prior to the financial crisis (Figure 1.1). The long awaited lift to global growth, supported by policy stimulus, was accompanied by solid employment gains and an upturn in investment and global trade. Whilst welcome, the cyclical improvement in consumption and investment remained short of that achieved in past upswings (Figure 1.2). Per capita GDP growth improved in the majority of OECD economies in 2017, but shortfalls in the years after the crisis have yet to be overcome (OECD, 2018[1]). The lingering effects of prolonged sub-par growth after the financial crisis also continue to be reflected in subdued productivity and wage developments.

The global cyclical upturn became increasingly broad-based in 2017, with output growth picking up in both OECD and non-OECD countries (Figure 1.3). Amongst the advanced economies, fiscal and monetary support as well as the rebound in global trade helped to underpin growth in the euro area and Japan as well as in many other small open economies strongly connected to the major economies via value-chain linkages. Growth also rebounded in the United States, with accommodative monetary policy, strong asset prices gains and steady real income growth supporting domestic demand. OECD GDP growth picked up to 2.5%, around 0.7 percentage points higher than in the previous year. The rebound in global trade and strong policy-driven infrastructure investment in China contributed to the upturn in the EMEs, boosting external demand elsewhere, especially in Asia and in many commodity-exporting economies. Growth also picked up in India in the latter half of 2017, as the earlier drags from demonetisation and the introduction of the goods and services tax began to fade.

Figure 1.1. Real GDP growth

Year-on-year percentage changes

1. GDP measured using purchasing power parities.

2. With growth in Ireland computed using gross value added at constant prices excluding foreign-owned multinational enterprise dominated sectors.

Source: OECD Economic Outlook 103 database.

Figure 1.2. The recovery of consumption and investment in OECD countries

Note: Aggregate data for the OECD economies. Consumption is total consumers' expenditure and investment is total gross fixed capital formation. The average of the past three recoveries is an unweighted average of developments after 1973Q4, 1980Q1, 1990Q3 and 2008Q1. Series scaled to equal 100 in these quarters. All data are at constant prices.

Source: OECD Economic Outlook 103 database; and OECD calculations.

Figure 1.3. Real GDP growth in OECD countries

Percentage changes

Note: With growth in Ireland computed using gross value added at constant prices excluding foreign-owned multinational enterprise dominated sectors.

Source: OECD Economic Outlook 103 database; and OECD calculations.

Labour market conditions continued to improve but the recovery in employment remained uneven

Labour market conditions continued to improve in 2017, with further declines in unemployment rates (Figure 1.4) and solid employment growth (Figure 1.5, Panel A). In the OECD as a whole, the harmonised unemployment rate fell to 5.5% by the end of 2017, marginally below the pre-crisis level. However, the level of unemployment remained elevated in some countries, particularly in some southern countries in the euro area (Figure 1.4). Long-term (over one year) and youth unemployment, and the number of involuntary part-time workers, still remained elevated. As of 2017, long-term unemployment represented 31% of total unemployment on average in the OECD economies (compared to under 25% in 2007), peaking at 73% in Greece and 59% in Italy. The large share of long-term unemployed people carries the risk of a rising number of discouraged workers - people who drop out of the labour force and experience skills attrition. Youth unemployment has declined from post-crisis peaks but still remains above pre-crisis levels in many OECD countries.

In most advanced economies, employment and labour participation rates are now above the level prior to the crisis, although the United States is a notable exception (OECD, 2017[2]) (OECD, 2018[1]). However, many OECD countries still have a high rate of involuntary part...

Table of contents

• Title page
• Legal and rights
• Foreword
• Editorial
• Executive summary
• Chapter 1. Macroeconomic background
• Chapter 2. Tax revenue trends
• Chapter 3. The latest tax policy reforms
• About the OECD