Governments need to better target financial support to avoid wasting money and “entrenching” undesirable consumer spending behaviour, a world trade group has said.
Mathias Cormann, secretary-general of the Organisation for Economic Co-operation and Development (OECD), said it is important for all nations to work to bring down inflation.
But such measures need to be targeted at the right people, and temporary, he warned.
“It is one thing to respond to the initial shock – and of course there is a need for speed, and to stabilise things quickly – but of course, now it is becoming clear that the challenging situation is going to be more sustained.
“To keep non-targeted measures in place for a long period will obviously be very expensive, and it will entrench distortions in terms of impacts on consumer behaviour and investment behaviour that would not be entirely desirable.”
He said energy support in particular is falling into the pockets of those who do not need it, which could end up being costly for governments.
In the UK, the Government’s Energy Price Guarantee caps bills at around £2,500 for the typical household until April, with most homes getting a discount of £400 off their electricity bills from October.
“Inevitably, price support has more blanket application, and goes to many people in firms who perhaps do not need it as much as others.
“The question, really, is whether that is the most appropriate use of resources.
“Our message to everyone is to really focus on making these support efforts more targeted in the future.”
The remarks come after the OECD published a report which showed the UK economy will contract the most out of the world’s seven most advanced nations next year. It is expected to shrink by 0.4% in 2023 and grow by just 0.2% in 2024.
OECD interim chief economist Alvaro Santos Pereira used the example of Brazil, saying its central bank acted decisively, which is “paying off” with inflation coming down steadily.
Mr Cormann added: “The fight against inflation is extremely important and we need to get it under control, it is hurting households and hurting real people. It is a crucial priority.
“Central banks must do what needs to be done to get inflation under control.
“But fiscal policy also needs to be well aligned with monetary policy objectives and not add to inflation.”