Economic policy

This paper describes the latest update of the OECD’s long-term scenarios, which are done every 2-3 years to quantify some of the most important long-term macroeconomic trends and policy challenges facing the global economy. The focus is on illustrating the output trade-off associated with transitioning to low-carbon energy sources, between the shorter-run costs of carbon mitigation and the longer-run benefits of avoided climate damages. Both are subject to considerable uncertainty, which is illustrated using several scenarios that vary according to the steepness of the climate damage curve and how quickly carbon mitigation costs decline. The paper includes two annexes detailing the changes that have been made to the projection framework, the first on the expanded country coverage and revised productivity convergence framework and the second on the new climate damage channel.

Global temperatures continue to rise despite strengthened climate mitigation efforts, increasing the likelihood of climate disasters and posing significant risks to economies. The physical risks from climate change threaten public finances, investment, inflation, international trade, and overall economic growth, underscoring the urgent need for effective climate adaptation. This paper offers several considerations for designing and implementing effective climate change adaptation strategies and policies. Specifically, it develops a practical multi-step framework that can be used to integrate adaptation into broader economic policy, consisting of three key steps: (1) identifying climate-related risks and impacts, (2) identifying adaptation actions, (3) planning and implementing adaptation. Additionally, the paper highlights various technical and institutional tools to facilitate effective adaptation, thereby promoting resilience in the face of escalating climate challenges.

The paper contributes to renewed debates about industrial policy in the context of recent initiatives in several OECD economies. It discusses the pros and cons of industrial policies motivated by environmental, national security and place-based/inclusiveness objectives. The paper also considers implementation and design issues, and how to respond to industrial policies in other countries. There are well-grounded economic, social and environmental justifications for some industrial policies. However, there are legitimate concerns that the benefits of such policies could be limited and the costs high. This mainly relates to measures curbing domestic and international competition and the practical and political challenges in designing and implementing effective measures. Thus, while governments may want to experiment with future and welfare-oriented industrial policies, they should exert moderation in scope, exercise caution in design and implementation, and be mindful of possible negative international implications.

This paper describes the latest update of the OECD’s long-term scenarios, which are done every 2-3 years to quantify some of the most important long-term macroeconomic trends and policy challenges facing the global economy. For the first time, this update incorporates the effect of the low-carbon energy transition. The study first presents a baseline projection that acts as a business-as-usual scenario against which the economic effects of the transition can be gauged. Next, it outlines extensions to the OECD global long-term model (LTM) to consider energy use and associated CO2 emissions and describes an alternative stylised scenario in which OECD and non-OECD G20 countries successfully transition to low-carbon energy in a way broadly consistent with a net-zero target for greenhouse gas emissions by 2050. These extensions rely on a variety of sources, but most crucially on simulations of CO2 mitigation costs with the OECD’s ENV-Linkages model. Finally, the model’s extensions are used to explore some fiscal implications of the energy transition, in particular how the negative economic effects of carbon mitigation could be alleviated by fiscal or other structural reforms.

Governments rapidly provided large support to help households and firms face the 2021-22 energy price crisis. Drawing on the OECD Energy Support Measures Tracker and country case studies, this paper documents countries’ policy responses and draws lessons for enhancing countries’ preparedness to future energy price shocks. Support implemented or announced by countries so far has been largely untargeted and often fiscally costly. As such it might add to inflationary pressures and in many cases reduce incentives to save energy and transition away from fossil fuels. Reliance on imported energy, technical obstacles to implement a targeted approach and political economy constraints help explain the type of support countries provided. There is now a case for withdrawing broad-based energy support, given the recent moderation in energy prices and ongoing or planned minimum-wage and welfare-benefit increases to compensate for high inflation. Digitalisation would help improve the quality of support countries can provide to face a future energy or other crisis by speeding up payment delivery and facilitating a more targeted approach based on vulnerability factors beyond low income, such as the inability to renovate an energy-inefficient home. Ensuring that support measures maintain incentives for energy savings and encourage energy diversification, combined with investments to accelerate the green transition, is key to reducing vulnerability to energy price shocks.

European consumers have withstood major shocks since 2019, including the COVID-19 pandemic, the energy and food price shock following the Russian invasion of Ukraine, and a sharp rise in the overall price level amid tightening of monetary policy. This paper constructs a new high-frequency, granular dataset from aggregated, anonymised transaction-level data from Mastercard. It estimates monthly national and TL2 subnational spending for 12 European countries and 9 COICOP spending categories from 2018 to 2024. The analysis focuses on “everyday spending”, the subset of consumption categories well captured by card payments and closest to households’ lived experience of day-to-day expenditure. Everyday spending recovered after the pandemic but has been subdued since 2022, marking a sharp deceleration relative to pre-2020 trends and has been on a weaker trajectory than suggested by annual national accounts data. Granular monthly data reveal how households adjusted spending across different categories in response to sharp changes in prices and the decline in real incomes. Subnational patterns show that poorer subnational regions experienced a stronger slowdown in everyday spending, consistent with their greater exposure to essential goods such as food and energy. At monthly frequency, increases in nominal incomes are associated with noticeable improvements in real spending.

Competitive and transparent energy markets are essential to economic growth and social wellbeing. Well-functioning markets ensure efficient energy delivery and strong incentives for innovation and investment. This requires regulatory frameworks that facilitate market entry, ensure fair access to infrastructure, and foster competition across the energy value chain. While many countries have implemented liberalisation reforms to achieve these goals, the OECD Product Market Regulation (PMR) database for the energy sector indicates that important regulatory tools, such as mechanisms for consumer engagement to reduce switching costs, and the technical and digital infrastructure to support retail price liberalisation, are not yet widely adopted. It is therefore important to complete the regulatory reform necessary to ensure the development of effective competition in energy markets to ensure better outcomes for consumers and the broader energy system.

This paper analyses drought severity across Mexican regions between 2000 and 2025 using satellite-based indicators of vegetation health and surface moisture. Unlike traditional station-based measures, which depend on sparse weather data and often involve reporting delays, this approach directly captures how ecosystems respond to water stress across the entire territory. By combining these signals into a regional Normalised Difference Drought Index, the study provides a consistent, high-resolution measure of drought intensity for all Mexican states, identifying both the location and severity of water stress. The methodology enables detection of drought conditions at a finer spatial scale than conventional indicators, revealing substantial intra-state variation, such as the contrasts observed within Querétaro. The results show a persistent north–south divide: northern states, characterised by arid and semi-arid climates, experience more frequent and severe droughts, while southern regions retain higher levels of vegetation and moisture. From an economic and fiscal perspective, these patterns point to greater vulnerability in the north, where water-intensive agricultural, industrial, and energy sectors are concentrated. The findings underscore the value of near-real-time, spatially detailed monitoring to support Mexico’s climate adaptation policies and to inform the development of fiscal resilience mechanisms to mitigate climate-related risks.

Military spending is increasing rapidly as many OECD countries move to shore up defence in a degraded security environment. Larger defence budgets compound strains on public finances from past crises and mounting fiscal pressure from population ageing and the cost of climate change. Many governments which are financing the first phase of rearmament with debt will have to tighten their fiscal positions in the medium term, particularly if defence spending remains high. The economic effects of higher defence spending will vary across countries due to economic and fiscal context, industrial structure, the composition of military purchases, and through trade. Near-term stimulus to demand may be offset over time by output reductions from higher interest rates and any future fiscal consolidation. In the long run, if military expenditure is to have positive effects, it must expand economies’ productive capacity. Enduring gains are more likely if governments pursue structural reforms alongside higher defence spending, including to improve public procurement, enhance competition and reduce barriers to market entry.

After decades of weak productivity growth across the OECD, understanding how regulation in market services affects economic performance has become a policy priority. This paper exploits a new OECD dataset covering regulatory policies in retail trade and professional services across 15 OECD countries from 1998 to 2023, greatly extending the time coverage of comparable indicators. These sectors are major employers and important suppliers of intermediate inputs to the rest of the economy: restrictive regulations can hinder competition, technology adoption and resource reallocation. Using a novel regulatory impact (REGIMPACT) indicator that combines services regulatory burden with downstream input-output intensities and a highly demanding identification strategy with extensive fixed effects, we estimate the indirect effects of services regulation on over 20 downstream industries. The results show that deregulation in retail trade and professional services generates positive spillovers to downstream labour productivity, mainly through higher value added, with limited effects on employment and investment. Past reforms delivered modest but meaningful cumulative productivity gains of 1% and 1.5% through deregulation in retail trade and professional services, respectively, with gains concentrated in reforming countries such as Italy, Spain and Belgium, while already deregulated economies saw little change. Looking forward, retail trade and professional services represent a large remaining source of reform-driven productivity gains in the OECD.