Tax policy in (and for) hard times
Michael Keen, 16 October 2013
Fiscal consolidation, and public concern that its pain be fairly spread, is putting tax systems under considerable pressure. This column takes stock of how they have been faring, and how they could do better.
Tax policy, like everything else, has been through tough times since the onset of the crisis. First, tax policy was to stimulate the economy (Heady 2011). Now it is to help consolidate the fiscal position – always with considerable urgency and all in the midst of public anger and disquiet.
Topics: Macroeconomic policy, Taxation
Tags: fiscal consolidation, fiscal policy, global crisis, Inequality, taxation, wealth
Carlos A. Vegh , Guillermo Vuletin, 1 October 2013
Government spending is procyclical in developing countries, exacerbating the business cycle. However, an analysis of tax policy is also required in order to properly assess the overall stance of fiscal policy. This column presents recent research showing that tax policy tends to be procyclical in developing countries and acyclical in developed countries. Although some developing countries have managed to escape the procyclical fiscal policy trap, some developed nations – notably Eurozone members – are falling into it.
It is well-established that government spending in developing countries has often been procyclical. In other words, government spending has increased in good times and contracted in bad times, thus exacerbating the underlying business cycle. The inability to save in good times to build a war chest for bad times has often led to wrenching financial and sovereign-debt crises.
Topics: Macroeconomic policy, Taxation
Tags: austerity, business cycles, cyclicality, developing countries, fiscal policy, tax
When is the time for austerity?
Alan Taylor, 20 July 2013
Recent austerity policies have been guided by ideology rather than research. This column discusses research that reconciles disparate estimates of fiscal multipliers in the literature. It finds that common identification assumptions are problematic. Matching methods based on propensity scores show how contractionary austerity really is, especially in economies operating below potential.
In 1809, on a battlefield in Portugal, the first recognisable medical trial evaluated bloodletting on a sample of 366 soldiers allocated into treatment and control groups. The cure was shown to be bogus. It was the beginning of the end of pre-modern medicine.
Topics: Macroeconomic policy
Tags: austerity, fiscal policy, UK
Spillovers: Why macro-fiscal policy should be coordinated in economic unions
Gerald A. Carlino, Robert P Inman, 24 June 2013
How should macro-fiscal policy be coordinated in economic unions? This column argues that the received wisdom has it right, and presents new empirical evidence suggesting that there are important positive spillovers between an economic union’s lower-tier governments in the management of macro-stabilisation policies. We should pursue coordinated policies. Finding programmes and institutions that can best facilitate this coordination is the important next step, both for new and established economic unions.
The recent Great Recession in the US and Europe has generated renewed interest in the management of macro-stabilisation fiscal policy in economic unions. The received wisdom among economists is that such fiscal policies can only be managed efficiently by an overarching central government. Oates, in his classic treatise on fiscal federalism, concludes:
Topics: Europe's nations and regions, Macroeconomic policy
Tags: Eurozone crisis, fiscal policy
Self-defeating austerity shocks
Reda Cherif, Fuad Hasanov, 3 May 2013
Europe’s austerity-first approach has triggered research-based efforts to evaluate the effectiveness of debt-reduction strategies. This column, based on a US empirical study, suggests that an ‘austerity shock’ in a weak economy may be self-defeating. Public-debt reduction historically occurs gradually amid improved growth. If policymakers, firms and households respond as in the past, we should expect lower deficits amid higher growth and, eventually, decreasing debt ratios.
In many advanced countries, in the wake of the 2008 global financial crisis, deficits skyrocketed and public debt ballooned (see Figure 1). In fact, fiscal stimulus accounted for only a small fraction of the increase in debt, whereas collapsing revenues and higher unemployment and social benefits contributed the largest share (IMF 2011).
Topics: Global crisis
Tags: austerity, Eurozone crisis, fiscal policy
Why do emerging markets liberalise capital-outflow controls? Fiscal versus net capital flow concerns
Joshua Aizenman, Gurnain Kaur Pasricha, 2 May 2013
Recent years have seen a return to the capital controls policy debate. Presenting new data, this column argues that liberalisation of capital-outflow controls can allow emerging-market economies to reduce net capital inflow pressures, but may cost emerging economies the fiscal revenues that external financial repression generates.
Recent years have seen a re-emergence on the capital controls policy debate:
Topics: International finance, Monetary policy
Tags: capital outflow, fiscal policy
Should the role of preparing budgetary projections be delegated to an independent agency?
Rossana Merola, Javier J. Pérez, 1 May 2013
Who should we trust when it comes to fiscal forecasts: governments or independent agencies? This column argues that this question is, in fact, a red herring: empirical evidence suggests that in the past, international agencies’ fiscal forecasts were partially affected by the same problems that the literature widely acknowledges for governmental forecasts. An attractive solution is independent national forecasters.
The debate about fiscal forecasts has recently been growing more intense in Europe. At its root, there is the evidence of planned government deficits significantly exceeding recurrent budgetary plans in recent years. This comes at a time of high public deficit and debt levels for EU member states.
Topics: Global crisis, Monetary policy
Tags: Eurozone crisis, fiscal policy, forecasting
Budget balance, structural unemployment and fiscal adjustments: The Spanish case
Javier Andrés, Rafael Doménech, 5 April 2013
Fiscal adjustment and structural reform are key parts of Eurozone bailout packages (or key features of government policy that aims to avoid such bailouts). This column argues that patience is the most prized virtue of policymakers implementing fiscal adjustment and structural reform. Reducing unemployment and fiscal consolidation are mutually reinforcing, but they move at different speeds.
One of the most important questions in the current process of fiscal consolidation in many developed economies concerns the size and the pace of the adjustment. An excessive and/or too-fast fiscal retrenchment can have dramatic effects on unemployment and growth, while if it is too slow, it can prove to be ineffective and lack credibility in the eyes of the financial markets.
Topics: Europe's nations and regions
Tags: Eurozone crisis, fiscal policy, Spain, structural adjustment, unemployment
Fiscal consolidation and implications of social spending for long-term fiscal sustainability
Rossana Merola, Douglas Sutherland, 31 March 2013
During the economic and financial crisis, fiscal positions across OECD countries deteriorated sharply. This column agues that population ageing and trends in social spending will further challenge the sustainability of fiscal balances. Research suggests that the scale of fiscal consolidation that will be needed to ensure long-term sustainability is large, but policymakers can look at the potential benefits of policy reform in mitigating budget pressures.
Predicted demographic developments over the coming decades are well known. Due to low fertility rates and rising life expectancy, OECD nations will see a ‘greying’ of their populations. The fiscal implications have been widely discussed (Kotlikoff 2012).
Topics: Monetary policy, Poverty and income inequality, Welfare state and social Europe
Tags: Ageing, fiscal policy, pensions
Fiscal policy and consumption
Tullio Jappelli, Luigi Pistaferri, 23 March 2013
Crisis-stricken governments have enacted large stimulus packages to counteract the recent recession. But how are these financed, and are consumers responding? This column argues that we must understand marginal propensity to consume in order to optimally design fiscal policy, outlining new research on how to get the best measurements. Through several policy simulations, it’s clear how important it is to truly understand the relationship between stimulus packages and marginal propensities to consume.
Governments on both sides of the Atlantic have enacted large fiscal stimulus packages to counteract the Great Recession. The effectiveness of these interventions crucially depends on:
Topics: Global crisis, Macroeconomic policy
Tags: consumption, fiscal policy