Warning that the Chancellor's 1-4 per cent target for underlying inflation could be breached next year, the OECD said higher import prices were likely to follow sterling's enforced departure from the European exchange rate mechanism. There was also a risk of a wage-price spiral, as workers attempt to compensate for higher prices.
The organisation, which acts as a forum for economic policy coordination among the 24 leading industrial states, said that only a cautious monetary and fiscal policy could restore the Government's credibility lost on 'Black Wednesday'. 'The authorities have a difficult task of building public confidence in a policy course that restores growth and contains inflation.'
As for fiscal policy, the OECD questioned the Chancellor's assumption that the recent sharp widening in the budget deficit was entirely due to the recession. It hinted that the Government might have to cut back spending or raise taxes in the next two years to reinforce the anti-inflation drive.
The latest Economic Outlook also urged its members to consider new policies - including Japanese tax cuts and an early decline in German interest rates - to increase employment prospects. Unemployment in the OECD area would climb by
1.5 million to 34 million in 1993, it predicted. The true picture may be even worse - the figures do not take account of people forced to accept part-time work or who have given up looking for a job.
The OECD is also worried that many jobless will remain unemployed because of permanent restructuring by industry in the US and Europe.
It says that recovery in the industrial world next year is likely to be gradual and too fragile to block a further surge in joblessness, with a sharper than expected pick- up in the US being offset by a darkening outlook in Germany and Japan.
The organisation urged member countries to spend more on infrastructure - a policy taking shape in Britain and at a European Community level - and on training and education. It also suggested further liberalisation of the labour market and encouraging people to seek work rather than just passively financing benefits.
Despite the call for new policies, the OECD emphasised that there was little room for tax cuts or higher public spending without undermining already weak business and consumer confidence. Higher public spending on capital projects should be financed by cuts in other spending.
OECD analysis, page 25Reuse content