Designing a European Fiscal Union: Lessons from the Experience of Fiscal Federations Fiscal Affairs Department IMF

Transcription

1 Designing a European Fiscal Union: Lessons from the Experience of Fiscal Federations Fiscal Affairs Department IMF Discussion Chapters 1 and 2 Antonio Fatás INSEAD

2 Distribution of Fiscal Responsibilities Significant decentralization in the 13 federations considered. Patterns of decentralization look reasonable: Corporate taxes tend to be decentralized, military spending is centralized, education and healthcare are decentralized. Vertical transfers can be large, suggesting common pool problems might be severe.

3 Distribution of Fiscal Responsibilities Allocating fiscal decisions to a level of government that is closer to the taxpayers and beneficiaries of the government services allows a closer tailoring of fiscal policy to regional social preferences and a tighter accountability. But is the % of taxes collected by SNGs or % of spending under the SNGs budget capturing these effects? (e.g. healthcare, education own resources?)

4 Distribution of Fiscal Responsibilities Interregional vertical transfers: spending decentralization faster than revenues decentralization. But what really matters is how they are determined. Some potential issues: Automatic or discretionary? Spending linked to revenues? Ability of local governments to borrow?

5 Redistribution and Risk Sharing We normally think about redistribution at the individual level (not the regional level). [Europe is an exception where (most) transfers go to regions with the idea of supporting convergence in income (not just disposable income). Relevant?] Tax and transfer rules are written with a redistribution motive in mind. Automatic stabilizers are a side-effect in many cases (e.g. progressive taxation). Exceptions: payments which are linked to individual status and not income (unemployment benefits). Risk-sharing = redistribution at a business cycle frequency?

6 Redistribution If defined properly, redistribution should be easy to measure (just use the tax/transfers rules). It can be measured in any year, in a decade, in the long run -- it should be a direct function of tax/transfer rules and income inequality. [Real difficulty is on the spending side] The literature struggles because of the use of regressions and because the definitions used are ambiguous.

7 Defining redistribution Example: Levels versus ratios. redistribution of 20 percent implies a region with $1 lower output would have disposable income that is only 80 cents below the national average. But in a world with a flat proportional tax rate, this measure of redistribution is equal to the tax rate. An alternative is to measure it relative to the distance of the two regions (so with a flat tax rate, redistribution is zero).

8 Risk Sharing Risk sharing is often mixed with stabilization. Risk sharing is about automatic transfers of income that reduce the effects of shocks on permanent income. This is very difficult to measure. (and is close to the concept of redistribution). Stabilization is the ability of fiscal policy to smooth the effects of shocks (but this needs to be defined properly, more later). Stabilization (if effective) can increase permanent income. Most policy discussions tend to be about stabilization and not risk-sharing.

9 Measuring Stabilization The literature often makes the mistake of assuming that income is exogenous and stabilization is just about disposable income and consumption (not GDP). Why? Because they anchor the discussion in the more academic issue of risk sharing. Because of this there is also a tendency to focus on cyclicality of revenue components as a measure of risksharing (or stabilization). This is not right. Example: taxes can be procyclical but if proportional they provide very little stabilization effect.* *Fatás and Mihov (2012): Automatic stabilizers among OECD countries are mainly the result of stable government spending given that the elasticity of taxes with respect to output is close to 1.

10 Lessons for Europe 115 Real Government Consumption (Index 2007=100) France Germany Greece Ireland Italy Netherlands Portugal United Kingdom

11 Lessons for Europe Most of the stabilization/risk-sharing effects come from regular automatic stabilizers and countercyclical deficits (via stable government spending). Given similarity of business cycles, limited effect of centralization of these taxes/transfers. But central budget could allow for a better fiscal policy with stronger stabilization effects (spending matters).