POLICY STRATEGIES FOR GROWTH- AND EQUITY- FRIENDLY FISCAL CONSOLIDATION

Similar documents
Nero Meeting: Alain de Serres OECD Economics Department. 21 June 2013

OECD Science, Technology and Industry Scoreboard 2013

2018 OECD ECONOMIC SURVEY OF CHILE

2017 OECD ECONOMIC SURVEY OF SWITZERLAND

OECD ECONOMIC SURVEY OF BRAZIL 2018

What is the economic outlook for OECD countries?

Revenue Statistics Tax revenue trends in the OECD

Wirtschaftspolitik für höheres Wachstum und weniger Ungleichheit

Why is Japan s inward FDI so low?

FA M I LY A L L O WA N C E A N D F E M A L E L A B O U R M A R K E T S U P P LY I G A M A G D A

THE TAX SYSTEM IN BELGIUM COMPARED TO OTHER OECD COUNTRIES

Taxation and Skills. How tax systems impact skills development in OECD countries

ECONOMIC POLICY CHALLENGES FOR DENMARK FROM AN INTERNATIONAL PERSPECTIVE

G20 Finance and Central Bank Deputies Meeting February February, Structural Reform in a Crisis Environment.

2019 OECD ECONOMIC SURVEY OF PORTUGAL

THE BENEFITS OF EXPANDING THE ROLE OF WOMEN AND YOUTH IN ECONOMIC ACTIVITIES

Can employment be increased only at the cost of more inequality?

OECD ECONOMIC SURVEY OF NORWAY

WHAT DO HOUSEHOLD SURVEYS SUGGEST ABOUT THE TOP 1% INCOMES AND INEQUALITY IN OECD COUNTRIES? Nicolas Ruiz (OECD)

HOW MUCH SCOPE FOR GROWTH AND EQUITY- FRIENDLY FISCAL CONSOLIDATION?

Upgrading business investment

STRUCTURAL POLICIES AND THE DISTRIBUTION

PUBLIC SERVICE EMPLOYMENT

SERVICES TRADE, REGULATION AND GVCS

THE INDEPENDENCE OF ECONOMIC REGULATORS

High Debt, Slow Growth, Financial Instability, Growing Inequality: What Role for Economic Policy?

Overview of the political economic and financial situation in Italy

2018 OECD ECONOMIC SURVEY OF POLAND

TOWARDS MORE SUSTAINABLE AND INCLUSIVE GROWTH

OECD long-term projections for the global economy. David Turner, OECD

OECD Workshop on effective corporate taxation. Corporate taxation on FDI; Kwang-Yeol. YOO, Korean Ministry of Finance. July.

Towards a more prosperous and inclusive Argentina

Income support for older persons in the Republic of Korea : a perspective of older persons

Earnings related schemes: Design, options and experience. Edward Whitehouse

From Here to Eternity: The Outlook for Fiscal Adjustment in Advanced Economies. Carlo Cottarelli Director, Fiscal Affairs Department

OECD Centre for Opportunity and Equality

How demanding are eligibility criteria for unemployment benefits? Quantitative indicators for OECD and EU countries

Fiscal Policy and Economic Growth

Inequality and Fiscal Policy

The Danish flexicurity model and the crisis. Torben M. Andersen University of Aarhus CEPR, CESifo and IZA

MINIMUM WAGES ACROSS OECD COUNTRIES: BACK TO THE FUTURE?

Policy Forum: How to address Inequality and Poverty in South Africa 7 June 2011, Reserve Bank, Pretoria

Fiscal Implications of Population Ageing Asian Countries

RESILIENCE IN A TIME OF HIGH DEBT

Credit Supply, Household Debt, and Business Cycles

Roads to recovery. George Gelauff, Debby Lanser, Albert van der Horst, Adam Elbourne. CPB Netherlands Bureau for Economic Policy Analysis

How to deal with potential secular stagnation

OECD INTERIM ECONOMIC OUTLOOK. Will Soft Foundations and Financial Vulnerabilities Derail the Modest Recovery? Catherine L. Mann OECD Chief Economist

Fiscal Policy and Inequality: What Do We Know? Benedict Clements International Monetary Fund

Insurance Markets in Figures

The Global Economic Outlook: Stronger growth ahead, but more risks Paris, 19th November h00 Paris time

ISRAEL TRADE AND INVESTMENT STATISTICAL NOTE

NEW ZEALAND TRADE AND INVESTMENT STATISTICAL NOTE

OECD MULTI-DIMENSIONAL COUNTRY REVIEW - THAILAND INITIAL ASSESSMENT REPORT

education (captured by the school leaving age), household income (measured on a ten-point

JAPAN : PROMOTING INCLUSIVE GROWTH FOR AN AGEING SOCIETY

Inequality and Fiscal Policy

CHILE TRADE AND INVESTMENT STATISTICAL NOTE

Capital Access Index 2006 Gauging Entrepreneurial Access to Capital

The Norwegian Economy

ICELAND TRADE AND INVESTMENT STATISTICAL NOTE

SWITZERLAND TRADE AND INVESTMENT STATISTICAL NOTE

CZECH REPUBLIC TRADE AND INVESTMENT STATISTICAL NOTE

ITALY TRADE AND INVESTMENT STATISTICAL NOTE

CANADA TRADE AND INVESTMENT STATISTICAL NOTE

NORWAY TRADE AND INVESTMENT STATISTICAL NOTE

Housing Markets and Structural Policies in OECD Countries

HUNGARY TRADE AND INVESTMENT STATISTICAL NOTE

THE IMMEDIATE EFFECTS

Corrigendum. Page 41, Table 1.A1.1. Details of pension reforms, September 2013-September 2015 : Columns on Portugal should read as follows:

ESTONIA TRADE AND INVESTMENT STATISTICAL NOTE

IRELAND TRADE AND INVESTMENT STATISTICAL NOTE

Outlook Overview: OECD Countries UN LINK Conference, Bangkok October, 2009

FINLAND TRADE AND INVESTMENT STATISTICAL NOTE

POLICY TRENDS IN OECD COUNTRIES TO INCREASE COVERAGE AND CONTRIBUTIONS INTO FUNDED PENSION PLANS

UNITED KINGDOM TRADE AND INVESTMENT STATISTICAL NOTE

LUXEMBOURG TRADE AND INVESTMENT STATISTICAL NOTE

POLAND TRADE AND INVESTMENT STATISTICAL NOTE

SPAIN TRADE AND INVESTMENT STATISTICAL NOTE

UNITED STATES TRADE AND INVESTMENT STATISTICAL NOTE

DENMARK TRADE AND INVESTMENT STATISTICAL NOTE

COVERAGE OF PRIVATE PENSION SYSTEMS AND MAIN TRENDS IN THE PENSIONS INDUSTRY IN THE OECD

FDI drops 18% in 2017 as corporate restructurings decline

REGULATORY HETEROGENEITY AND TRADE IN SERVICES. Workshop on Trade and International Regulatory Cooperation, Hildegunn Kyvik Nordås, TAD/TSD

EFFECTS OF NEW US AUTO TARIFFS ON GERMAN EXPORTS, AND ON INDUSTRY VALUE ADDED AROUND THE WORLD

FRANCE TRADE AND INVESTMENT STATISTICAL NOTE

AUSTRIA TRADE AND INVESTMENT STATISTICAL NOTE

Pensions at a Glance: Europe and Central Asia

GERMANY TRADE AND INVESTMENT STATISTICAL NOTE

Effective Labour Taxation and the International Location of Headquarters. Peter H. Egger, Doina Radulescu, Nora Strecker.

SLOVAK REPUBLIC TRADE AND INVESTMENT STATISTICAL NOTE

AUSTRALIA TRADE AND INVESTMENT STATISTICAL NOTE

LABOUR MARKET REFORMS IN PORTUGAL

SWEDEN TRADE AND INVESTMENT STATISTICAL NOTE

GREECE TRADE AND INVESTMENT STATISTICAL NOTE

ASSET-BASED POVERTY: INSIGHTS FROM THE OECD WEALTH DISTRIBUTION DATABASE. Carlotta Balestra OECD Statistics and Data Directorate

Fiscal Policy and Income Inequality. March 13, 2014

Managing Public Wealth

Is Full Employment Sustainable?

DO POLICIES THAT BOOST AGGREGATE GROWTH GENERATE ECONOMIC INSTABILITY FOR INDIVIDUAL HOUSEHOLDS?

Transcription:

POLICY STRATEGIES FOR GROWTH- AND EQUITY- FRIENDLY FISCAL CONSOLIDATION Jan Stráský With input from Boris Cournède, André Goujard and Álvaro Pina Prague, 19 October 2015

Remarks The opinions expressed and arguments employed in this document are the authors and do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This document and any map included therein are without prejudice to the status of or sovereignity over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. 2

Source Cournède, Goujard and Pina (2013): How to achieve growth- and equity-friendly fiscal consolidation? A proposed methodology for instrument choice with an illustrative application to OECD countries, OECD ECO Working Paper 1088. Available at http://www.oecdilibrary.org/economics/how-to-achieve-growth-andequity-friendly-fiscal-consolidation_5k407lwvzkkh-en 3

Outline 1. Consolidation needs 2. Ranking consolidation instruments 3. How much consolidation can rely on benign instruments? 4

CONSOLIDATION NEEDS 5

Fiscal consolidation and other objectives Consolidation needs (short and long term): Bring gross debt to 60% of GDP and keep it there Choice of instruments driven by other objectives: Output Equity Global rebalancing 6

Defining short- to medium-term and long-term consolidation needs 7

% of potential GDP Further consolidation is needed over the outcomes achieved as of end-2012 Difference between debt-control and baseline underlying primary surplus 20 In the year when initial consolidation ends (short to medium term) In 2060 (long term) 20 15 15 10 10 5 5 0 0 Source: Cournède, Goujard and Pina (2013). 8

RANKING CONSOLIDATION INSTRUMENTS 9

The instruments of fiscal consolidation: spending side Public consumption: Education Public consumption: Health Public consumption: Other (except family policy) Cash transfers: Pensions Cash transfers: Unemployment benefits Cash transfers: Sickness and disability Public consumption and cash transfers: Family policy Subsidies Public investment 10

The instruments of fiscal consolidation: revenue side Personal income taxes Social security contributions Corporate income taxes Environmental taxes Consumption taxes (non-environmental) Recurrent taxes on immovable property Other property taxes Sales of goods and services 11

Growth and equity effects of fiscal consolidation instruments Rough assessment (--, -, +, ++) is given to the effects of each instrument on: Short- and long-term growth Short- and long-term equity Global rebalancing This is based on the following sources: Previous work of WP1 on the sources of growth OECD Going for Growth Wider literature New econometric estimates 12

Short-term growth effects Consolidation instruments harmful for growth Public investment and consumption vs. transfers and taxes (direct vs. indirect effect on AD) ALSO: Scope for monetary policy response to offset fiscal consolidation is important 13

Positive long-term growth effects Smaller government and better allocation Distortions through subsidies Better pricing (also of environmental services) Cuts in public spending pensions labour utilisation unemployment benefits employment 14

Negative long-term growth effects Tax burden on mobile and adjustable factors of production (ALL in the long run) Personal income taxes, social security contributions and corporate income taxes particularly harmful Value-added and consumption taxes less bad Lower spending on public goods Cuts in education and health care labour supply and productivity Cuts in childcare labour force participation Cuts in family benefits ambiguous ( labour market participation, child poverty, fertility rates) 15

Effects on equity Many instruments aggravate income inequality cuts in benefits, cuts in public services Many taxes fall disproportionately more on lowerincome households BUT: some taxes can reduce inequality Inheritance and capital gain taxes (here as other property taxes ) Personal income tax (i.e. progressive) Corporate income tax (i.e. on capital income) 16

Assessing the instruments Growth Equity Current account (a) ST LT ST LT ST Spending cuts Education -- -- - -- + Health services provided in kind -- - - - ++ Other government consumption -- + - + Pensions ++ ++ Sickness and disability payments - + -- - ++ Unemployment insurance - + - ++ Family - - -- -- + Subsidies - ++ + + + Public investment -- -- ++ Notes: (a) current account effects refer to a deficit country and would switch signs for a surplus country (b) this + sign relates to welfare effects as the GDP impact may be ambiguous. Revenue increases Personal income taxes - -- + + + Social security contributions - -- - - Corporate income taxes - -- + + ++ Environmental taxes - + (b) - + Consumption taxes - - - ++ Recurrent taxes on immovable property - + Other property taxes - ++ + + Sales of goods and services - + - - + 17 Source: Cournède, Goujard and Pina (2013).

A possible generic hierarchy of consolidation instruments Ranking from most (highest score) to least (lowest score) desirable instrument of consolidation Subsidies Pensions Other property taxes Unemployment insurance Personal income taxes Corporate income taxes Environmental taxes Rec. taxes on imm. property Other gov. consumption Sales of goods and services Sickness payments Consumption taxes Public investment Health services in kind Social security contributions Childcare and family Education Equal weights Simulated interdecile range 0 2 4 6 8 10 12 14 16 18 Instrument rank Note: The rankings are based on the assessment in Table 2. Scores of +1 and -1 are given to each + and- signs respectively, each objective is given a weight, and the resulting indicator is used to rank instruments. Each individual instrument score based on the assessment in Table 2 is kept with a probability of ¾ or increased by +1 with a probability of 1/8 or reduced by -1 with a probability of 1/8. Weights ranging each from 0.15 to 0.55 and summing to unity have been given to each objective. Weights have been restricted to no smaller than 0.15 because each objective is considered important. A total of 40,000 random draws have been made. Source: Cournède, Goujard and Pina (2013). 18

The optimal use of instruments depends on: 1. Consolidation needs 2. Hierarchy of instruments - Instruments used one by one until consolidation needs are met 3. Room for manoeuvre in each instrument Move until reaching the median (OECD benchmark) No more than one st.dev. (national preferences) Reduced margins for pensions (esp. in the short term) Adjustment for pensions and education and for unemployment benefits 19

HOW MUCH CONSOLIDATION CAN RELY ON BENIGN INSTRUMENTS? 20

Two sets of simulations for each country Short- to medium-term simulations Short- to medium-term consolidation needs Long-term simulations Long-term consolidation needs Considering only long-term growth and equity effects 21

Results from short- to medium-term simulations Consolidating more in general implies using more unfavourable marginal instruments (but there are exceptions) 20 Marginal instrument rank 18 16 14 USA GBR JPN 12 10 NZL AUS CAN ISL FIN FRA ESP IRL GRC 8 6 4 2 0 HUN ITA AUT SWE LUX PRT SVN SVK NLD ISR BEL POL CZE 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Achieved consolidation (percent of potential GDP) Source: Cournède, Goujard and Pina (2013). 22

How far down the hierarchy of instruments do countries need to go? Simulated short- to medium-term consolidation packages: Top-half instruments only in 16 countries (e.g. AUS, CAN, NLD) Top-half instruments mainly in 6 countries (e.g. FIN, FRA) Bottom-half instruments mainly: JAP, the UK, and the US 23

Results from long-term simulations Consolidating more in general implies using more unfavourable marginal instruments (but there are exceptions) Marginal instrument rank 16 14 NZL AUS USA GBR 12 IRL 10 KOR ISR ESP SVK JPN 8 LUX SVN 6 4 2 0 DEU ISL FIN EST CHE DNK BEL HUN NLD POL CZE CAN FRA GRC SWE AUT PRT 0 1 2 3 4 5 6 7 8 9 10 11 Achieved consolidation (percentage point of potential GDP) Source: Cournède, Goujard and Pina (2013). 24

How far down the hierarchy of instruments do countries need to go? Simulated long-term consolidation packages: Top-half instruments only in 20 countries Top-half instruments mainly in 6 countries Bottom-half instruments mainly: AUS, NZL, and the US 25

Spending vs. taxes in simulated packages On average across countries, spending reductions account for: 41% of short- to medium-term simulated packages 65% of long-term simulated packages with considerable variation across countries. Examples: In JPN and USA, the simulations give a large role to tax increases (70% of consolidation over the medium term). FRA has a very strong potential for spending cuts which make up 73% of the simulated medium-term package. 26

FRA FIN BEL SWE AUT ITA SVN GRC HUN NLD LUX ISL PRT CZE GBR ISR NZL POL CAN ESP IRL JPN SVK AUS USA A medium-term increase in the tax share Cyclically-adjusted primary government revenue, % of potential GDP 55 Estimated in 2012 Simulated in 2020 50 45 40 35 30 Source: Economics Department Policy Note No. 20. 27

Conclusions No room for complacency CZE situation good in the short-/medium term, less so in the long term Structural reforms to ease trade-offs between fiscal consolidation and other objectives 28

The full results are available in: OECD Economic Policy Papers No. 07, Choosing Fiscal Consolidation Instruments Compatible With Growth and Equity, A Going for Growth Report, July 2013. Cournède, B., A. Pina and A. Goujard (2013), How to Achieve Growth- and Equity-Friendly Fiscal Consolidation? A Proposed Methodology for Instrument Choice With an Illustrative Application to OECD Countries, OECD Economics Department Working Papers, No. 1088. Barbiero, O. and Cournède (2013), New Econometric Estimates of Long-Term Growth Effects of Different Areas of Public Spending, OECD Economics Department Working Papers, forthcoming. Goujard, A. (2013), Cross-Country Spillovers from Fiscal Consolidation, OECD Economics Department Working Papers, forthcoming. 29