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Tax Cuts and Spending Will Be the Next Crisis Defense, OECD Says

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Tax cuts and a spending splurge will be needed if the global economy slips into a sharp downturn because central banks have nothing left in the tank, according to the OECD.

The world’s largest economies should stand ready to coordinate on fiscal stimulus, it said, adding that growth is losing vim due to trade headwinds, tighter financial conditions and a higher oil price. Its warning came amid a global stock sell off that’s dragged European stocks to a two-year low and sent the S&P 500 careening toward a correction.

“The message we want to send to policy makers is get back to discussion,” OECD chief economist Laurence Boone said in an interview. “Should the soft landing turn out to be a sharper downturn then you need to cooperate together because there’s not much ammunition in the macro tool box.”

The OECD is sounding a similar note of caution to other international institutions: Capital flows are already reversing away from emerging economies, trade tensions are disrupting investment, and political uncertainty is rising in Europe and the Middle East.

The organization now expects 3.5 percent global growth in the coming two years after 3.7 percent in 2018. An interaction of downside risks would cut that pace further.

The fiscal recommendation stems from the fact that central banks have little room for maneuver. Only the U.S. has started properly normalizing monetary policy, and even there rates are about 200 basis points short of what they would have been historically at this point in the cycle, Boone said.

That leaves the burden on fiscal policy. But with already high levels of public debt, governments embarking alone would risk having markets turn against them. To avoid that, a coordinated response to a downturn would be necessary, the OECD said.

It also calculates that coordinated effort could take advantage of low borrowing rates and have a faster material impact than monetary policy.

The OECD acknowledged that the current international climate does not favor multilateral action, but Boone expects that deep economic difficulties would prompt cooperation.

“It’s not obvious, but at the same time, if there was a sharper slowdown then it’s in the common interest of everybody,” Boone said. “You cannot have the same calculus and computation that you have for trade.”