Doc. 10704

4 October 2005

The OECD and the world economy

Contribution

Social, Health and Family Affairs Committee

Rapporteur: Mr Michael Hancock, United Kingdom, Alliance of Liberals and Democrats for Europe

1.       First of all, the rapporteur wishes to congratulate Mr Vrettos on his excellent report on the OECD and the world economy. The rapporteur is aware that it is difficult to cover the whole range of the OECD’s activities. Yet it is unfortunate that issues such us population ageing and its impact on employment, pension and health policies are not mentioned.

2.       European governments are currently faced with the difficult task of harmonising two relatively opposing trends: the pressure of a globalised economy to contain public expenditure and reduce labour costs in order to remain competitive and a justified demand by European citizens to strengthen the European social model as a basis for a stable and socially prosperous Europe.

3.       A new vision of the purpose of social policy is needed. Society is indeed undergoing profound upheaval. Ageing populations are increasing pressure on workforce. By 2050, Europe could have lost nearly 55 million people of working age. (Even in the 1990s, 90 of Europe’s 266 regions were already experiencing a decline in their population).

4.       Demographic decline is therefore not an abstract and distant event. It is already transforming society, the economy and relationships between individuals and generations.

5.       It is becoming a matter of urgency to establish a common approach to meeting the three major challenges of globalisation, technological change and demographic change. The crux of the matter is clear: the European social model must demonstrate its ability to respond effectively to these challenges.

Demographic change

6.       Declining birth rates and increasing longevity have produced a significant increase in the share of elderly in the population of most OECD countries over the past three decades. The trend is likely to accelerate sharply in the next decade, as the baby boom generation begins to reach retirement age. According to recent demographic projections by the United Nations, the share of the old-age population is expected to double, on average, over the next 50 years in the major industrialised countries. These demographic changes may have significant fiscal and economic consequences and pose important public policy challenges for the countries involved.

7.       A recently concluded comprehensive study on the implications of ageing and on possible remedies to meet future challenges of the OECD Secretariat shows that unless there are major changes in policy (et al. re-balancing of social policies and expenditures between generations), the increase in the number of retirees relative to persons active in the labour force will reduce growth in material living standards and put public budgets under mounting pressure.

8.       We must start by ceasing to regard population ageing simply as a problem of financing pensions or employing older workers, although these are of course essential issues which, moreover, have been European priorities for several years.

9.       However, population ageing concerns all age groups. It affects the entire economy and the whole of society. It makes it necessary to redefine relationships between generations. It also raises delicate questions such as measures to increase the birth rate and the contribution of immigration.

10.       Immigration can help Europe overcome the shortages of manpower likely to arise in certain regions or sectors. But immigration can be only one element in a much more global solution.

11.       We must therefore ask ourselves three simple questions: what priority do we attach to children, and what place do we want to give families, whatever their form? How can we develop new forms of solidarity between generations, in other words a new approach to the life cycle? How must we respond to the rise in the number of retired people and very old people?

12.       Experiments in a number of countries have shown that incentives can have a positive effect on the birth rate, subject to one condition: they must offer a genuinely global response. It is not enough to provide crèches and nurseries, although it is of course necessary to do so and this is something that has been neglected for too long in some countries. We must also promote parental leave and flexible organisation of working hours, give thought to the contribution of social protection systems and address the question of housing, which is becoming one of the major social problems of our time.

13.       A new approach to policy on reconciliation of work and family life is also becoming essential. Parental leave, part-time work and flexible organisation of working hours are all of limited value if mothers are the only ones to benefit. Europe will have to “move into top gear” by encouraging women and men to work and consolidating the position of children in society. We must respond to the demographic challenge by giving a new dimension to the policy of equality between women and men and by doing more to encourage the sharing of family and domestic responsibilities.

Social and economic implications of pension policies

14.       Recent reforms in old-age pension systems have gone in the direction of reducing the incentives to early retirement by changing several of the basic parameters determining pension benefits. The removing of the incentives to early retirement might pose a considerable challenge to OECD labour markets. It might be difficult to absorb the increased labour supply of older workers in countries with high structural unemployment. The adjustment would be eased if reforms of pensions and other income support systems for the elderly were to be accompanied by measures to increase job opportunities in general, including elimination of measures and practices that discriminate against older workers.

15.       However, the OECD study highlights the importance of raising the average age at which people retire from the labour market as a crucial element in meeting the ageing challenges. The more broad-based reforms of labour and product markets advocated in the OECD Jobs Strategy are highly welcomed.

16.       In any case, OECD countries need to introduce more active social policies, which means getting people off benefits and into work instead of keeping people in a state of dependency. It is not enough getting people into jobs: more efforts need to be made to help people keep jobs and to develop careers.

Well-being of children and support for families

17.       Many social problems have their roots in childhood. Ending childhood poverty is very important for social policy. Investing in families gives children the best possible start in life. Governments need to get family-friendly policies if they are to reduce poverty and promote child development and gender equity, underpin economic growth and bolster pension systems. Policies to promote child development are therefore essential but cannot be done by the government alone – workplaces must adapt to parents’ needs.

18.       Promoting child development requires society and families to invest adequate resources. All institutions of society and government should consider the impact of their policies on children. It is necessary to ensure that employment leads to an improved financial situation for families, that appropriate child care and educational support is available and that cash and other benefits are designed in such a way that they effectively reduce child poverty. Furthermore a wide range of flexible family support services to assist parents in managing their parenting and working roles should be developed and resourced; such as child care, help with quality parenting or marriage guidance. And in addition to that, working-time flexibility, part-time work and appropriate parental leave schemes should be promoted to help parents maintain labour market attachment and provide children with the care they need.

19.       The OECD should look at the potential role of policy in supporting families and should identify which interventions alleviate and will contribute to the eventual eradication of child poverty, break the cycle of inter-generational deprivation, and develop the capacity of children to make successful transitions through the life course.

Health policies

20.       In response to the pressing need to improve comparability of data on health financing and expenditures, the OECD, in co-operation with experts from OECD member countries, developed the manual, A System of Heath Accounts (SHA). Nearly all OECD countries have, by now, commenced or completed a pilot implementation of the SHA framework.

21.       Health is an issue that is taken up in nearly all OECD Economic Surveys. This is not only because it is a major item of expenditure in its own right, but also because of its important contribution to economic performance and living standards. It is also a growing element of public expenditure. The health issue is therefore treated in any discussion of long-term trends in public expenditure and in reviewing public sector efficiency.

Specific comments by the Rapporteur to the report of Mr Vrettos

Key Economies

a.       The rapporteur supports the view, in para 23 of the explanatory memorandum, that the US economy remains intrinsically strong, as demonstrated by its ability to weather a large natural disaster of the scale of Katrina.

b.       He also supports the general thrust of paras 54-59 of the explanatory memorandum, which focus on the UK economic position. However, there is concern that some of the text – with respect to latest outturns, such as the base rate – is not wholly up-to-date.

c.       The rapporteur welcomes the analysis on Japan although he feels it could be brought up to date as recent growth should make the recovery more sustainable.

d.       The overall analysis of the Eurozone area, discussed in paras 42-53 of the explanatory memorandum, and the economic reform of the Eurozone as discussed in paragraph 46, the rapporteur supports and is at the centre of the European Commission’s 2005-09 work plan.

US Current Account

e.       The rapporteur agrees with paragraph 4 that the current account deficit in the US is a risk to future growth, but he also considers a fall in house price growth or a continued disruption to the energy supply, following Hurricane Katrina, as key downside risks.

OECD

f.       In the draft resolution the rapporteur welcomes the acknowledgement of the OECD’s outreach to non-members in paras 2, 6 and 7 and the call for enlargement of the organisation in para 11 to retain global relevance.

Points the rapporteur would not support

Key Economies

g.       In the draft resolution the rapporteur believes that para 6 is inaccurate to blame high and volatile oil prices on rapidly rising demands in the US. Demand in the US has been growing at a steady rate for decades, and has fallen slightly in recent months due to high prices.

h.       In the explanatory memorandum, the paper suggests in para 21 that US federal revenues are projected to rise sufficiently for the deficit to be held at around 4% of GDP. This is at odds with the Administration and Congressional Budget Office projection of the federal deficit in 2005, at 2.7% of GDP, though this may increase due to spending on Hurricane Katrina. The UK Government would like to know what the assumptions are accounting for these differences and whether the fiscal deficit prediction includes the cost of reconstruction spending after Hurricane Katrina.

i.       The rapporteur would not necessarily agree with para 50 that ‘there should be deregulation’ in the Eurozone. The UK is spearheading the drive to better EU regulation, which it believes needs to be fit for the purpose, achieving policy objectives in the least burdensome way.

j.       Regarding comments on the UK deficit in para 59, the UK government believes that borrowing is sustainable because they took rough decisions on taxation and spending at the outset of the cycle.

k.       Paras 63-65 regarding the Russian economy are considered by the rapporteur to be somewhat pessimistic. Contrary to para 63 in the report, He does not consider banking reform or electricity reform to be stalled.

OECD

l.       The rapporteur believes in accordance with the 2005 OECD Annual Report, that the OECD has links with “some” 100 non members rather than the 22 stated in para 90. In para 102, when listing the criteria for membership, it fails to mention either “global considerations” or “mutual benefit”.

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Reporting committee: Committee on Economic Affairs and Development (Doc. 10645 prov)

Committee for contribution: Social, Health and Family Affairs Committee

Reference to committee: Permanent mandate

Contribution adopted by the committee on 4 October 2005

Secretaries to the committee: Mr Mezei, Mrs Nollinger, Mrs Meunier