Stimulus plans must target low income earners: OECD

By James Mackenzie

PARIS (Reuters) - Government stimulus packages aimed at combating the worst recession in decades should focus on getting cash to low-income earners who are more likely to spend it than hoard savings, the OECD's chief economist said.

"In the current juncture we need a lot of immediate effectiveness in terms of hitting consumers directly, now," the think tank's chief economist Klaus Schmidt-Hebbel told Reuters.

"I think the most effective way is to put money into the hands of consumers, particularly low and middle-income consumers who are likely to spend a higher fraction of the check they get in the mail than higher-income households," he said.

Governments around the world have been looking at huge stimulus packages aimed at protecting key industries and heading off a deadly mix of rising unemployment, shrinking demand and slumping output. Britain announced its plan on Monday.

In its Economic Outlook published on Tuesday, the Organisation for Economic Cooperation and Development said members of the 30-nation group faced the most serious recession since the early 1980s and governments had to offer additional stimulus measures.

Schmidt-Hebbel said cuts in value-added tax, such as those in the British stimulus package, were not as likely to give the direct boost needed as they helped both low-income earners and the better-off who were more likely to put extra cash aside.

"So it's less targeted and therefore probably less effective than tax breaks targeted at lower income groups," he said.

"TARGETED, TIMELY, TEMPORARY"

The OECD said the crisis was likely to add another 8 million people to jobless rolls over the next two years as employers from banks to carmakers slash payrolls to cut costs.

Britain plans to borrow billions of pounds to fund tax cuts and spending, and President-Elect Barack Obama said a big stimulus jolt was needed to bring the U.S. economy back into shape.

But Schmidt-Hebbel said stimulus measures had to be applied correctly if they were to be effective, and it had to be made clear from the start that they would be rolled back once economies began to recover.

"These measures should not only be timely -- meaning now, not only targeted -- meaning to those (lower-income) groups, but also they should be temporary, particularly in those countries where the initial fiscal situation is pretty bad to start with, like the United States," he said.

It was important to ensure that the strained budget positions in many countries were not overloaded by open-ended spending programs.

"They should be taken with a strong commitment that they are put in place as long as they are needed to address the recession and to kick start a recovery but there should be a very strong upfront commitment that they will be withdrawn or unwound as conditions improve," he said.

The same problem applied to major infrastructure projects, which some commentators have suggested would provide a more effective long-term boost to the economy.

"The disadvantage with infrastructure investment is that it sometimes takes a long time to be brought on stream and once begun it is difficult to wind down in line with the recovery in activity in, let's say, two years from now," Schmidt-Hebbel said.