Transcript Policy strategies for growth- and equity

POLICY STRATEGIES FOR
GROWTH- AND EQUITYFRIENDLY FISCAL
CONSOLIDATION
Jan Stráský
With input from Boris Cournède, André Goujard
and Álvaro Pina
Prague, 20 April 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
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Outline
1. Consolidation needs
2. Ranking consolidation instruments
3. How much consolidation can rely on
benign instruments?
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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
Further consolidation is needed over
the outcomes achieved as of end-2012
Difference between debt-control and baseline underlying primary surplus
In the year when initial consolidation ends (short to medium term)
% of potential GDP
In 2060 (long term)
20
20
15
15
10
10
5
5
0
0
Source: Cournède, Goujard and Pina (2013).
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RANKING CONSOLIDATION
INSTRUMENTS
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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
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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
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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
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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 
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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)
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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)
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Assessing the instruments
Growth
Current
account(a)
Equity
ST
LT
ST
LT
ST
---
--
-
--
+
++
--
-
--
+
++
+
+
++
--
Revenue increases
Personal income taxes
Social security contributions
Corporate income taxes
Environmental taxes
Consumption taxes
-
---+(b)
-
Recurrent taxes on immovable property
Other property taxes
Sales of goods and services
-
Spending cuts
Education
Health services provided in kind
Other government consumption
Pensions
Sickness and disability payments
Unemployment insurance
Family
Subsidies
Public investment
Source: Cournède, Goujard and Pina (2013).
+
--+
+
+
++
-
-+
+
+
+
-
+
++
++
++
+
+
++
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.
+
++
+
++
+
+
+
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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
10 12
8
6
Instrument rank
14
16
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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).
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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
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HOW MUCH CONSOLIDATION CAN
RELY ON BENIGN INSTRUMENTS?
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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
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Results from short- to medium-term simulations
Consolidating more in general implies using more unfavourable marginal
instruments (but there are exceptions)
Marginal instrument rank
20
18
16
USA
JPN
GBR
14
NZL
IRL
12
ISL
FRA
GRC
10
AUS CAN
ESP
FIN
8
PRT
HUN
SVN
6
SVK
NLD
ISR
4
BEL
ITA
POL
CZE
2 AUT
SWE
LUX
0
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).
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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
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Results from long-term simulations
Consolidating more in general implies using more unfavourable marginal
instruments (but there are exceptions)
Marginal instrument rank
16
NZL
AUS
USA
14
GBR
IRL
12
ISR
10
ESP
JPN
KOR
SVK
LUX
8
SVN
POL
NLD
6
CZE
CHE
CAN
DEU
4
ISL
DNK
FIN
BEL
EST
2
HUN
SWE
GRC
FRA
PRT
AUT
0
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).
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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
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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.
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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
Source: Economics Department Policy Note No. 20.
USA
AUS
SVK
JPN
IRL
ESP
CAN
POL
NZL
ISR
GBR
CZE
PRT
ISL
LUX
NLD
HUN
GRC
SVN
ITA
AUT
SWE
BEL
FIN
FRA
30
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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
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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.
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