Transcript Impact of fiscal policies changes on the budgetary revenues

Impact of fiscal policies changes on the
budgetary revenues and sustainable
economic growth
Cristian Nicolae Stanica
Institute for Economic Forecasting,
Romanian Academy, Romania
Objectives
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The estimation of the GDP dynamics, employment and wages
as a response to the fiscal policies changes;
The presentation of the particular features of the model used
for fiscal policy simulation analysis ;
The investigation of the impact on the budgetary revenues
and expenditures by the direct effects of the fiscal policies
and by the indirect effects of the economic growth changes
using a baseline scenario and two alternative scenarios;
The presentation of the scenarios results.
Models used in Romania
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Macro Models
“Dobrescu Macro Model of the Romanian weakly
structured economy ”
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Link-Dobrescu Model
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Hermin Model
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SAM-MEGA Model
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RMSM-X Model
Other specific models
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Determination of the potential output
Long-term growth models, especially developed by the
experts of the National Commission for Forecasting
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Some features of the model used for
budgetary forecasts
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SAM-MEGA model is built on the relationships across
macroeconomic indicators of the IMF financial modules and the modules of
the institutional sectors (public, private and foreign sector):
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National Accounts Indicators (GDP and the aggregate incomes)
«NatAcc»;
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Public Accounts (General Consolidated Budget) «GovAcc»;
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Labor Force Indicators (Unit labor cost, Compensation of employees)
«Labor »;
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Foreign Sector (Exchange Rates, Balance of Payments, Romania’s
International Investment Position) «Foreign»;
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Monetary Sector (Monetary Survey) «MoneyAcc»;
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Private Sector, as a residual for the overall model «PrivSect»;
The transmission of the influence from the
governmental policies to primary blocks
Aggregate Demand
transmission
GDP
transmission
transmission
Gross added value
Market Private
Consumption
Investments
transmission
transmission
Social security
contributions,
Government
Policies
Taxes on income
VAT, Excise duties,
Custom taxes
Gross salary
earnings
transmission
Taxes on profit
Gross profit
transmission
The transmission of the influence from the
governmental policies to primary blocks
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Any shock in the fiscal policy, particularly related to a fiscal relaxation, would
entail a surplus of factors’ incomes which, at their turn, would generate a surplus
of aggregate demand (consumption and investments) and supply (GDP);
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During the forecasted period, aggregate demand and supply determines, at their
term, the comportment of taxation bases. The budget revenues are estimated in
relation with the taxation bases and the empirical collection rates.
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On the demand side, from the national account module it results the taxation
bases for indirect taxes:
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Market private consumption for value added tax ;
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Import for Customs taxes.
On the supply side, from the national account module it results the taxation
bases for direct taxes:
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Official gross wages for Social contributions and Taxes on income;
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Gross profit (and other incomes) for Taxes on profits.
Fiscal policies changes and the budget
scenarios
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The presentation of two practical applications of the
model to evaluate the impact of the fiscal policies on the
evolution of the budgetary revenues and on the
economic growth;
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The quantification of both the direct (budgetary) effects
of the fiscal policy and the indirect effects were
quantified for every alternative scenario variants; if the
direct effects are accounting results of the new tax rates,
the indirect effects consist in the influences of the new
fiscal policy on the macroeconomic indicators and the
impact of their changes upon the budgetary revenues);
Fiscal policies changes and the budget
scenarios
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The definition of a baseline scenario in order to
forecast the budgetary revenue, respecting the
following requirements: the update of the
macroeconomic indicator forecast in relation
with the first part of 2011 and the maintenance of
the same fiscal policy in 2011-2012 as the one
from 2010;
BASELINE SCENARIO
2010
2011
2012
Economic growth GDP (%)
-1.3
1.5
3.9
Final consumption
-2.1
1.3
3.4
Private consumption
-1.7
1.9
3.9
Public consumption
-3.6
-1.1
1.4
2.7
2.8
5.1
Gross average earnings (RON)
1910
2026
2125
Average number
(thou. pers.)
4570
4610
4655
-6.5%
-4.4%
-3.0%
Gross capital formation
of
Budget deficit (% GDP)
employees
The baseline scenario
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The baseline scenario for 2011-2012 foresees the
continuation of positive effects of economic growth
recovery recorded in the first quarter of 2011. Industry
and exports would be further the main catalyst elements
of economic growth.
On the labor market, in the private sector, over 80
thousand employees are to be hired in 2011, after losing
160 thousand employees during the crisis year 2010. As
for the governmental sector, the employees’ number
would decrease with 40 thousand persons in 2011, the
same with 2010, due to the measures meant to
restructuring government expenses negotiated with IMF.
The baseline scenario
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The main targets of the forecasting in the baseline
scenario concerning the economic growth, for the 20112012, are:
GDP will accelerate the growth from 1.5% in 2011 to
3.9% in 2012;
Gross fixed capital formation (investments) will be the
most dynamic component of the domestic demand;
The government consumption will decrease with 1.1% in
2011 and will have a moderate growth of 1.4% in 2012,
as a consequence of the restrictive budgetary
expenditures, planned according to the fiscal reform in
the Government Program.
ALTERNATIVE SCENARIOS
Influences on macroeconomic indicators for the year 2012
Variant I – flat tax decrease by 4%
Variant II – security contribution decrease by 3% and minimum
wage increase by 20%, from 165 euro to 200 euro
Baseline
Scenario
Var. I
Var. II
Economic growth GDP (%)
3.9
5.0
4.0
Final consumption
3.4
4.7
3.6
Gross capital formation
5.1
6.4
5.2
4655
4725
4655
2125
2146
2234
Number of
pers.)
employees
(thou.
Gross average earnings (RON)
The alternative scenario
Variant 1: flat tax (profits and personal incomes)
decrease by 4%
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The scenario of fiscal projections take into account the tax legislation:
reducing the legal rates of profit tax and income tax from an
average of 16% in 2010 to 12% in 2012;
The multiplicative effect of the surplus of income and profits would
entail the increase of domestic demand and supply which, at their
turn, would lead to the increase, in average, of gross salary earnings
and to the generation of new jobs. The GDP growth would change
from 3.9% (baseline scenario 2012) to 5% in 2012. The number of
employees would rise by 60 thousand people in 2012, as against the
level forecasted in the baseline scenario;
In spite of the fact that fiscal relaxation policies have positive effects,
stimulating labor, investments and economic growth, however a
decrease is expected for the overall budget revenues by 2.5 billion
Lei in 2012 as compared with the baseline scenario
The alternative scenario
Variant 2: security contribution decrease by 3
percentage points and minimum wage increase from
165 euro to 200 euro
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The proposal to increase minimum wage is imperatively
necessary for Romania’s economy, due to its low level and to
employment concentration around low income. However, this
measure alone would entail the inhibition of supply and the
increase of labor cost on short term, as well as the fast
increase of demand that could entail an inflationary shock.
Minimum wages indexation by 20% would lead to the
increase of average gross salary earnings by 2.5% in 2011
and by 5% in 2012, since the only professional categories
which are affected would be those with low salary earnings.
In order to minimize the financial effort of salaries increases,
the social contributions on the employers’ side must be
diminished by 3 percentage points, this being the optimal
value resulting from the model’s simulations.
The alternative scenario
Variant 2: security contribution decrease by 3
percentage points and minimum wage increase from
165 euro to 200 euro
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Moderate effect of this package of measures upon GDP growth,
being only entailed by the positive effect of increasing salary
earnings that would encourage consumption;
The fiscal relaxation of security contributions would not allow the
companies to allot funds for investments, but to compensate the
additional labor cost.
The combined effects of both economic policy measures at
budgetary level, allowing the revenues to remain unchanged:
 Direct effects: net impact upon revenues from the reduction of
legal quota by 3 percentage points consists in the diminution of
revenues with 0.6 billion Lei in 2011, respectively with 1.2 billion
Lei in 2012;
 Indirect effects: additional revenues of 0.6 billion Lei in 2011 and
1.2 billion Lei in 2012, resulting from consumption
encouragement (VAT, excise duties) and the increase of salary
earnings (taxes on income).
Conclusions
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After the end of recession, which lasted 2 years in
Romania, the application of economic policy measures is
imposed in order to ensure economic recovery and to
consolidate sustainable economic growth;
One of the factors encouraging the economic growth and
improving the employment by reducing the “hidden
economy” is the fiscal relaxation.
According to the model results, the best policy measure
for Romania is the one consisting in the reduction of flat
tax by, at least, 4 percentage points;
In these conditions, the medium term economic growth
(2011-2012) will continue to have a high level - of more
than 5% - and will continue to be sustainable, even if
the public finance will be less balanced due to the fiscal
relaxation;
Conclusions
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The fiscal relaxation will affect the budgetary revenues
(mainly the direct taxes) by 1 percentage point as share
in GDP on the short term;
On medium and long term, the economic growth would
be able to ensure the surplus of revenues necessary to
fill the gaps entailed by fiscal relaxation;
In order to preserve the target of budgetary deficit
weight in GDP of 3% in 2012, other compensatory
measures would be needed for supplementing budgetary
revenues with, at least, 2.5 billion lei;
Conclusions
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The solutions to increase the budgetary revenues and to
consolidate the public finance, on medium term, are the
following:
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Tax collection rate increase by fiscal control strengthening;
Tax base extension by the taxation of agricultural lands at
market value. Since the price for a hectare of land outside
localities should not fall below some hundreds of Euros, an
average taxation with 20 euro per hectare per year would be
entirely reasonable. The 15.7 million hectares of agricultural land
would thus entail about 215 million Euros (about 0.3% of GDP)
net gain for the consolidated budget;
Increase of budget receipts from the privatization of the viable
units from the portfolio of the Authority for State Assets
Recovery and from the closure of those (consuming subventions)
without survival chances.