By Denny Gulino

The OECD economics staff maintained hope that progress is being
made to moderate the global imbalance of savings and consumption and, in
the U.S., “Higher public and private saving and stronger exports would
limit the extent that large current account imbalances reemerge and
would support matching efforts that should be taken in surplus
countries.”

The U.S. banking sector could be reinforced by “higher capital and
liquidity ratios across all financial institutions to provide a larger
cushion in the event of trouble.” The report generally praised the slew
of financial system safeguards built into the new regulatory reform
legislation.

While much has to be done to repair fiscal policy, the report said
that “the United States entered the financial crisis and the subsequent
economic recession with public finances already weakened by past
policies.”

Tax cuts in 2001 and 2003 cut government revenues “below the levels
prevailing in the second half of the 1990s,” while public spending
was up even before emergency stimulus spending became necessary.

The OECD report hinted the United States, though severely hit by
the financial crisis, could be doing better that it is, and that choices
to create more deficits by extending tax cuts is out of synch with many
other countries’ fiscal progress. Among those countries doing better
despite their own crises, the OECD staff said, are Australia, Canada,
Denmark, Finland, Iceland, Ireland, Korea, Luxembourg, Netherlands, New
Zealand, Norway, Slovak Republic, Spain, Sweden, Switzerland) and the
budgets of Belgium and Germany are in balance “or improving
significantly,” and even Italy and Japan were seen making significant
fiscal progress.

The report aimed at U.S. tax expenditures — benefits created
through exemptions from the tax code — that it suggested are somewhat
extravagant compared to “many other” OECD countries — a persistent
theme in OECD economic surveys.

Specifically, other than mortgage tax deductions, the OECD took aim
at the way the U.S. provides a personal and payroll tax exclusion for
employer-provided health insurance, allows deductibility of state and
local taxes and excludes capital gains from estate taxation.

The report praised the Obama administration proposal to lower the
percentage rate at which itemized deductions can be subtracted from
taxable income and that initiative should go further. Reducing that rate
to 15% from the current 28%, the OECD report said, “would bring about
$1.3 trillion of additional tax revenues over 2010 to 2019.”

Nevertheless, the OECD suggested the administration is aiming too
low. “While this is welcome, it would stabilize the debt-GDP ratio at
almost twice the pre-crisis level, leaving little freedom to deal with
contingencies and complicating further the long-term problem of
population aging.”

Further consolidation measures should be taken post
2015 to put the debt-GDP ratio on a downtrend during the second half of
the decade.”

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** Market News International Washington Bureau: 202-371-2121 **

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