This chapter provides background information on macroeconomic conditions until the end of 2023. Tax revenues and reforms are closely linked to macroeconomic conditions, including variations in economic growth, inflation, productivity, investment, the labour market, and public debt. This chapter gives a brief overview of recent trends in these areas to put the tax policy reforms in context.
Tax Policy Reforms 2024
OECD and Selected Partner Economies
Tax Policy Reforms
Abstract
Global GDP is estimated to have grown by 3.1% in 2023, around 0.5 percentage point below the 2010s average, with many economies continuing to suffer from the consequences of Russia’s war of aggression against Ukraine, the adverse impact of high inflation on real incomes and the necessary widespread monetary tightening (Figure 1.1). Many countries in Europe, especially in Central and Eastern Europe, performed particularly badly with a marked distance between the average over 2010-19 and the 2023 outcome. This reflects the relative importance of bank-based finance and the lagged effects of the energy price shock in energy-importing economies. Growth also moderated in countries in which higher policy rates were quickly reflected in higher borrowing rates. Over one-third of OECD countries experienced a technical recession during 2023, with two successive quarters of output declines.
Amongst advanced OECD countries, the United States is a notable exception with above-trend growth of 2.5% in 2023, exceeding expectations at the start of the year. Its performance was supported by elevated government expenditures and strong consumer spending, with households continuing to run down the excess savings accumulated since the beginning of the pandemic (OECD, 2024[1]). This behaviour differed markedly from most other advanced OECD economies where households over the last two years tended to maintain higher saving rates than before the pandemic. The differing origins of excess savings – the substantial income provided to households through fiscal packages in the United States versus suppressed consumption possibilities in Europe – helps to explain these differences (Barnard and Ollivaud, 2024[2]). Higher housing wealth had boosted household spending in the last few years but during 2023, house prices declined or stabilised in most OECD countries.
In percent
Note: Aggregates are calculated using weights in purchasing power parities except the euro area (EA17), for which countries are weighted by GDP in euros. Growth in Ireland was computed using gross value added at constant prices excluding foreign-owned multinational enterprise dominated sectors.
Source: OECD Economic Outlook 115 database; and OECD calculations
Growth in the emerging-market economies as a whole also surprised on the upside in 2023, but this was not the case in all countries. Brazil, India, Indonesia and Mexico all continued to expand at a solid pace, reflecting the benefits of improved macroeconomic policy frameworks, strong investment in infrastructure and steady employment gains. In contrast, GDP growth in China and the Republic of Türkiye (hereafter ‘Türkiye’) was below the 2010s average, even though it remained robust. For China, the slowdown relative to the pre-pandemic decade reflects both a downward trend in growth due in part to demographic factors and a milder-than-expected rebound at the start of 2023 following the reopening of the economy, together with the continued contraction of the property sector and soft consumer spending weighing on domestic demand.
Global GDP growth stabilised at around 3% in the second half of 2023 (seasonally adjusted at the annual rate). The period was characterised by the divergence between buoyant GDP growth in the United States and stagnant or negative growth in the euro area and Japan, respectively. Global trade remained subdued during 2023 but showed signs of some improvement towards the year end after pronounced weakness earlier in the year. A gradual upturn in semiconductor and electronics production in Asia and stronger car sales helped to underpin merchandise trade, and services trade was boosted by the return of international air passenger traffic to pre-pandemic levels. However, attacks on shipping in the Red Sea since December have resulted in trade flows being re-routed, rising shipping costs and longer delivery times (OECD, 2024[1]).
Headline and core inflation in the OECD and major emerging-market economies peaked in the second part of 2022 and have drifted downwards since then, with the exception of the high and rising inflation rates in Argentina and Türkiye (Figure 1.2). The generalised decline of inflation reflects the cooling prices of energy and food as well as widespread monetary tightening, and the easing of supply chain bottlenecks that boosted goods prices in the course of 2021-22. Services inflation has been stickier, with unit labour costs still rising by 4% or more in many economies, explaining why core inflation has decreased only marginally. Both supply-driven and demand-driven factors have contributed to the decline of headline inflation over the last year (OECD, 2024[1]). Headline inflation for OECD countries exceptionally exceeded the value for emerging-market economies during eight quarters owing to high inflation rates in some OECD countries including Türkiye and Baltic countries, and to weak inflation in China. By the end of 2023, however, OECD inflation was back below the average in the emerging-market economies.
Unemployment has generally remained low since 2020 despite the crises that have affected economies across the globe and at the end of 2023 was below the pre-pandemic level for most OECD countries (Figure 1.3). For the OECD as a whole, the unemployment rate was 4.9% in 2023Q4, down from 5.3% in 2019Q4 and having remained relatively stable through 2023. Nonetheless, labour market tightness eased through 2023 with the slowing of job growth, the fall of vacancy rates and evidence of fewer pressing labour shortages (OECD, 2024[1]). This was accompanied by some moderation of nominal wage growth in most economies.
Monetary policy tightening has pushed interest rates higher quickly across the globe. This has notably affected housing markets, even though strong population growth (including via immigration) and a limited stock of houses for sale limited the drop in prices in some countries. Nevertheless, housing and commercial real estate transactions dropped significantly in 2023, following higher mortgage rates (credit growth turned negative) and changes in working practices since the pandemic (OECD, 2024[1]). Falling prices and associated loan repayment difficulties are also weighing on the balance sheet of banks and other real estate investors (OECD, 2024[3]). Forward-looking real interest rates continued to rise in 2023, returning to levels last seen before the global financial crisis in some economies, maintaining restrictive financial conditions. Nonetheless, global financial conditions have begun to ease in recent months with the strengthening of equity prices, the reduction of volatility and the moderation of broader financial stress. Several central banks started to reduce their policy rate in the first half of 2024.
Year-on-year, in percent
Note: Core is a measure of inflation excluding food and energy products.
Source: OECD Economic Outlook 115 database; and OECD calculations.
As a percentage of the labour force
Source: OECD Economic Outlook 115 database; and OECD calculations.
Public debt in 2023 was higher than before the pandemic for most countries (Figure 1.4), except for Greece, Ireland, Portugal and Norway, and (to a lesser extent) for Denmark, Sweden and Switzerland. For the OECD as a whole government debt rose by around 9 percentage points, reaching 113% of GDP in 2023. Government deficits generally decreased over 2021-22 but following the energy crisis triggered by the war in Ukraine, the median deficit across OECD countries increased again in 2023, and is estimated to have reached 2.8% and 4.8% of GDP for the OECD median and weighted average, respectively – the latter led by the increase for the United States of about 3¾ percentage points. That being said, the deficit shrank in 2023 for some OECD countries including Australia, Austria, Canada, Germany, Hungary, Italy, Japan, Latvia, Portugal and Spain. As debts and interest rates increase, interest payments have started to rise as a share of GDP. Even so, in 2023, they mostly remained below the average over 2010-19, except notably for Australia, Hungary, New Zealand, the United Kingdom and the United States.
As a percentage of GDP, 2023
Note: Maastricht definition for EU countries.
Source: OECD Economic Outlook 115 database.
The macroeconomic conditions leading up to and in 2023, undoubtedly impacted government’s decisions to implement tax reforms. The causal link between macroeconomic patterns and particular tax reforms remains largely unexplored. That said, there is some evidence to suggest that high levels of government debt are a key motivator of revenue increasing tax reform (Romer and Romer, 2010[4]). Furthermore, population ageing, rising climate change mitigation costs, and other new spending priorities may induce countries to introduce revenue raising reforms sooner rather than later. High inflation rates, on the other hand, put pressure on the budgets of households whose wages are sticky, which, in turn, puts pressure on governments to offer tax relief to households through both targeted and broad measures. Similarly, the uncertain economic conditions may have led some policy makers to be cautious with reducing relief or increasing rates too quickly. These trends are supported in the analysis in Chapter 3.
References
[2] Barnard, G. and P. Ollivaud (2024), Whither excess household savings? A key known unknown, OECD, https://oecdecoscope.blog/2024/02/29/whither-excess-household-savings-a-key-known-unknown/.
[1] OECD (2024), OECD Economic Outlook, Interim Report February 2024: Strengthening the Foundations for Growth, OECD Publishing, Paris, https://doi.org/10.1787/0fd73462-en.
[3] OECD (2024), OECD Economic Outlook, Volume 2024 Issue 1, OECD Publishing, Paris, https://doi.org/10.1787/69a0c310-en.
[4] Romer, C. and D. Romer (2010), “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks”, American Economic Review, Vol. 100/3, https://doi.org/10.1257/aer.100.3.763.