Rock-Bottom Rates Create Fiscal Space for G20: OECD Report by Reuters

By William Schomberg

CHENGDU, China – The world’s major economies are exploring ways to leverage their lower debt costs for increased investment to stimulate sluggish economic growth, according to the head of the Organisation for Economic Co-operation and Development (OECD).

OECD Secretary General Angel Gurria noted that lower interest rates create more fiscal space during an interview in Chengdu, where finance ministers and central bank governors from the Group of 20 (G20) are meeting. He indicated that the average cost of debt takes time to fully reflect interest rate changes, as the effects span several years.

The G20 is actively seeking new strategies to revitalize the global economy following a period of limited growth, despite unprecedented central bank initiatives that have brought interest rates close to zero, and even negative in some areas. There is now a heightened focus on what governments can achieve through enhanced spending and reforms aimed at increasing economic efficiency.

Countries such as China, Japan, and the United Kingdom have already begun to relax their fiscal policies or have suggested future plans for doing so. Japanese Prime Minister Shinzo Abe, for instance, has directed the government to develop a substantial spending package by the end of the month, which includes a fiscal investment and loan program intended to stimulate private-sector investment.

Nonetheless, the significant public debt levels in numerous countries pose a limitation on substantial increases in spending. Gurria emphasized that discussions on expanded infrastructure investment were central to the G20 meetings in Chengdu.

"This is about creating fiscal space, which essentially means the capacity to undertake strategic investments in certain sectors," he said. While the official G20 communique may not delve deeply into fiscal policy, Gurria insisted that the importance of the topic was evident from the extensive discussions at the meeting.

To maximize their spending capacity, governments might consider engaging private investors to support their financing efforts. "A small amount of public investment can potentially trigger a much larger amount of private investment," he remarked.

In this context, the European Union launched a fund last year aimed at drawing private capital to generate broader investment in various infrastructure and R&D projects across member states. The fund, initially set at 21 billion euros, exceeded its targets in its first year due to unexpectedly strong interest from small businesses and the private sector’s contributions.