OECD calls for action on jobs: A new analysis questions British fiscal policy and urges international reforms to improve employment prospects. Peter Torday reports

RECOVERY in the industrialised world may be too fragile to prevent unemployment climbing to 34 million next year and justifies a switch in public spending to expand job prospects, the Organisation for Economic Co-operation and Development said yesterday.

But the OECD warned in its latest Economic Outlook against a general expansion of budget deficits. As for further interest rate cuts, the prospect of locking in a potential inflation performance better than at any time since the 1960s called for caution in the US and Japan.

Nevertheless, the organisation worried that hopes of even gradual economic recovery in its 24 rich industrial country members next year may be set back as consumers and businesses repay debts rather than boost spending.

Expansion could also be blocked for a time by a delay in German interest rate reductions - though both these risks should fade later in 1993.

The OECD admitted that its forecasts for the main industrial countries - the US, Japan and Germany - were now out of date. The US economy looked like expanding faster than projected, while Germany and Japan were experiencing greater weakness than the OECD originally envisaged. But these factors largely cancelled each other out and the OECD stuck by its projection that the industrial world would grow by 1.9 per cent next year.

Prospects are better outside the OECD area. The dynamic Asian economies are growing at an annual average of 7 per cent, China is emerging as an important trading partner for these economies and activity has also been buoyant in several Latin American nations.

Within the OECD area, the number out of work will rise next year by 1.5 million, standing some 10 million above the recent low point reached in the first half of 1990. A slow decline may not begin until 1994.

'Many of those who become unemployed over the next two years will drift into long-term unemployment, with all that entails in terms of erosion of skills and morale and financial hardship,' the organisation said.

As a result, the OECD said it was more important than ever for governments to shift their spending priorities away from benefits and income transfers and towards 'active' labour market policies and reforms that improve job prospects.

It also suggested stepped-up expenditure on the infrastructure and on basic education and training for young people and adults.

But in view of the worsening budgetary situation of many governments, overall public spending should be contained, with these new priorities taking hold at the expense of cuts elsewhere.

The OECD warned against an expansion of budget deficits to drive up growth in the industrialised world. In the past few years, the OECD said, most countries have allowed their deficits to widen because of recession, or following a deliberate loosening of fiscal policy to stimulate recovery, and also due to the increased cost of servicing more government debt.

Any further move in this direction would damage weak consumer and business confidence. 'Temporary fiscal expansion might strengthen confidence and demand in cases where activity remains weak,' the OECD said.

A credible commitment to cut back deficits when economies pick up would be needed subsequently. But 'past experience is not encouraging', the organisation said. In particular, it cautioned the incoming Clinton administration against a short-term fiscal boost to stimulate the US economy, which could bolster an already growing economy and lift inflation risks.

Medium-term plans to shrink budget deficits were a key to lasting falls in long-term interest rates, which would strengthen recovery.

Nor was there much room for lower interest rates to assist economic growth. The US should be ready to start raising rates if it becomes clear that capacity use is rising fast. Japanese rates have already fallen 'considerably'. And in countries - like Britain, Italy and some Nordic nations - whose currencies have depreciated, the OECD indicated that the risk of higher inflation suggests an end to further interest rate cuts and fiscal expansion. 'Credibility in the setting of both monetary and fiscal policies needs to be re-established,' the OECD said.

Those countries still in the European exchange rate mechanism that have maintained their parities against the mark must probably await an easing in German rates. But the OECD said recent signs of weakening demand in Germany might lead to an earlier than expected cut in German rates and 'substantial' cuts in some European rates could ultimately lie in store.

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