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The OECD headquarters, in Paris, on June 7, 2017.Francois Mori/The Associated Press

The costs of repaying debt raised to help households and businesses through the COVID-19 crisis will be dwarfed by those from long-term trends such as funding pensions and health services as societies age, the OECD said in a report on Tuesday.

Examining the economic outlook out to 2060, the Organization for Economic Co-operation and Development said governments will increasingly have to contend with the costs associated with aging populations and rising prices for public services.

That is on top of servicing the huge debts left by COVID-19, which will take decades to repay.

Many of the 38 mostly wealthy countries belonging to the Paris-based OECD saw their budget deficits blow out to record levels during the pandemic as they propped up their economies during lockdowns.

If current historically low interest rates persist, most OECD countries could afford to cover the extra strain on their budgets by adding to their debt piles, the report said.

But fiscal pressure on the median OECD country could reach 8 percentage points of GDP by 2060 as governments try to keep public service standards and benefits at current levels, the OECD calculated.

The increased strain on public finances was seen highest in Slovakia at 17 per cent, followed by Poland at 14 per cent, Spain and the Czech Republic at 13 per cent and France and Japan at 12 per cent.

But a permanent 1 percentage point increase in global interest rates from current historically low levels would raise fiscal pressure by as much as 1 per cent to 1.5 per cent in countries with the most debt, such as Greece, Italy and Japan, the OECD said.

To ease fiscal pressure there was little countries could do other than adopt reform packages to boost employment, which would in turn boost per capita GDP.

That could raise living standards by nearly 7 per cent by 2060 while those countries with the furthest to go down the path of reform – identified by the OECD as Belgium, France and Italy – could see gains of 9 per cent to 10 per cent.

Such packages would ease fiscal pressure by about 1.75 percentage points of GDP by 2060 in the median OECD country, the report estimated.

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