The Organization for Economic Cooperation and Development (OECD) expects that growth will almost halve in developed and large emerging markets in the coming decades. This will necessitate higher taxes to prevent debt from skyrocketing. The forecast came in an update of the OECD’s long-term economic projections.
Growth in the 38 OECD and G20 member states is expected to slow gradually from pre-COVID levels of 3 percent to 1.7 percent by 2060. Additionally, the workforce will shrink in many countries due to aging and slowing labor efficiency growth in emerging market countries.
Moreover, the growth rate trend for OECD members will slowdown from 1.8 percent to 1.3 percent in 2060. Meanwhile, emerging market economies in the G20 could see even more slowdown, from 4.5 percent to 2 percent by 2060.
In addition, the OECD said that accelerating the transition to clean energy may have a greater impact on activity. However, effective carbon pricing plans could generate windfall revenues for some governments.
Taxes on the rise
OECD sees India overtaking China as the largest contributor to global growth by the late 2030s. Additionally, the Chinese economy is still expected to be the largest single economy throughout the forecast period.
As growth slows, pressures on government finances are increasing. Therefore, in the case of OECD countries, this means that taxes will need to rise over 6 percent by 2060 to keep debt at current levels.
Governments unwilling or unable to raise taxes should look to other ways to ease pressures. This includes reforming health and pension systems.
Read: U.S. inflation surges ahead of Federal Reserve’s rate decision
Additional government revenues
In addition, the OECD said that accelerating the transition to clean energy may have a greater impact on activity. However, effective carbon pricing plans could generate windfall revenues for some governments.
Global growth would be 0.2 percentage points lower than expected between 2025 and 2030 as countries accelerate their transition to green energy to limit the rise in global temperatures to 1.5 degrees Celsius.
This decline is expected to rise to approximately 0.6 percentage points by 2045-2050, with a smaller shock in OECD countries than in large emerging economies more reliant on fossil fuels.
However, the widespread use of tradable emissions permits, carbon taxes, and fuel excise taxes to boost carbon prices could generate additional government revenue of around 3.75 percent of economic output in OECD countries over the 2026-2030 period.
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