Transcript Lithuania will remain among the leaders by growth in

World Bank EU-8
Quarterly Economic Report
April 2005
World bank Vilnius
office
Jekaterina Rojaka
Lithuania will remain among the
leaders by growth in 2005
ECA: Real GDP Growth
(In percent change, %)
10,0
7,5
5,0
Central Europe & Baltic
Countries
9,7
6,7
2,5
6,2
-5,0
-7,5
-10,0
-12,5
-15,0
-17,5
-20,0
-22,5
CIS
2005p
2004e
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-2,5
1990
0,0
Consumption and investment
remain strong drivers
Final consumption expenditure
Gross fixed capital formation
Change in inventories
Net exports
12
9
6
3
0
-3
LV
LT
EE
SI
SK
PL
CZ
HU
2004
2003
2004
2003
2004
2003
2004
2003
2004
2003
2004
2003
2004
2003
2004
2003
-6
CPI starts to be a key constraint
Average annual CPI, in %
8
7.6
6.8
7
2004
2005p
7.5
7.1
6.2
6
5.0
5
4
2.8
3
2
2.8
3.0
3.0 3.0
4.0
3.7
3.5
3.3
3.2
2.8
1.2
1
60
Brent Crude Oil, US/BBL
0
Lithuania
Czech
Republic
Estonia
Poland
Slovenia
Latvia
Hungary
CIS
Slovak
Republic
50
40
30
Jan-04
May-04
Sep-04
Jan-05
While significantly dropped, structural
unemployment remains high
Unem ploym ent rate, LFS, %
20
15
2003
2004
Unemployment by duration, in %
100
10
80
5
60
20,5
0
9,7
PL
SK
LT
LV
EE
EU15
CZ
SI
HU
40
16,9
19,1
17,5
28,8
23,0
22,4
Source: Eurostat
20
45,0
41,9
33,1
31,7
28,1
28,0
27,9
LV
PL
SI
20,5
0
SK
EE
LT
CZ
24 months and more
7-12 months
12-24 months
less than 6 months
HU
Do the Baltics run pro- cyclical
expansionary policies?
Table 1. Fiscal developments.
2003
Actual
CZ 1/
EE
HU 2/
LV
LT
PL 2/
SK
SI
-11.7
3.1
-5.5
-1.5
-1.9
-3.9
-3.7
-2.0
2004
CP May
CP Nov
GG Balance
-5.3*
-5.2
0.7
1.0
-4.6
-4.5
-2.1
-1.7
-2.7
-2.5
-5.7
-5.4
-4.0
-3.8
-1.9
-2.1
1/Including one-off expenditures of around 6% of GDP in 2003.
2/Excluding effect of pension reform.
* actualization of Ministry of Finance.
Source: Eurostat.
Actual
2003
Actual
-3.0
1.8
-4.5
-0.8
-2.5
-4.8
-3.3
-1.9
38.3
5.3
56.9
14.4
21.4
45.4
42.6
29.4
50
2004
CP May
CP Nov
GG Debt
38.4*
38.6
5.4
4.8
56.3
57.3
16.2
14.2
22.4
20.1
49.0
45.9
45.1
43.0
29.1
30.2
Actual
37.4
4.9
57.6
14.4
19.7
43.6
43.6
29.4
Electoral budget cycles in the Baltic countries
45
40
35
30
Total expenditure/GDP
25
Parliamentary elections
EE
Source: AMECO
EE
LV
LV
LT
LT
20
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Special Topic
Labor taxes and employment
in the EU-8
Labor taxes and employment
in the EU-8 - contents






current statutory and effective tax rates
theoretical foundations of the tax wedge-employment
findings from empirical studies
situation in the EU: determinants
panel regression analysis
conclusions: there exists a strongly negative
relationship between employment growth and the size
of the tax wedge in EU8
Current tax rates in EU8
Table 1. Statutory PIT rates in EU8 countries in 2004
Country
Czech Rep
Estonia
Hungary
Latvia
Lithuania
Poland
Slovakia
Slovenia
Various sources
upper limits of income bracket (EUR/year) and tax rate within the respective bracket
income bracket
tax rate
income bracket
tax rate
income bracket
tax rate
income bracket
tax rate
income bracket
tax rate
income bracket
tax rate
income bracket
tax rate
income bracket
tax rate
3413
15
flat
24
3177
18
360
0
994
0
620
0
1.6*PvLn
0
1477
0
6825
20
10350
25
5957
> 5957
26
38
> 360
25
> 994
33
8228
16455
19
30
> 1.6*PvLn
19
6669
13338
17
35
> 10350
32
> 16455
40
{PvLn: national poverty line}
20007
37
26676
40
40014
45
> 40014
50
Effective and statutory tax rates
Personal Income Tax rates
25%
20%
15%
10%
a
5%
0%
Czech R.
Latv ia
Lithuania
Hungary
Poland
Slov enia
statutory average rate at minimum w age (of 2004)
statutory average rate at APW (of 2003)
hypothetical effective rate at minimum w age (2003)
hypothetical effective rate at APW (2003)
Slov akia
The relative tax burden for low wage earners
is much higher in EU8 than in EU15


The average tax wedge for a 50% APW earner in EU8
countries is 38.6%, whereas in EU15 it is on average 4.7
percentage points lower
WHY? Because of the flat or regressive character of social
security contributions.
The more elastic is the L supply curve, the
more harmful is the tax wedge for employment
Dh
Important factors:

skills

minimum wage
 non-employment benefits

other taxes

taxed party
Dh’
net wage
Dl
Dl’
minimum wage
(net)
E
D
C
B
A
employment







Dh – demand for skilled labour
Dh’ – demand for skilled labour after tax wedge
Dl – demand for unskilled labour
Dl’ – demand for unskilled labour after tax wedge
AB – employment reduction among skilled workers
due to tax wedge
CD – employment reduction among unskilled workers
due to tax wedge without binding minimum wage
CE – employment reduction among unskilled workers
due to tax wedge with binding minimum wage
Empirical results


Problem 1: Lagging
Problem 2: Measurement issues
–
–
–
–

which taxes to include: payroll vs income taxes
average or marginal tax rates: participation vs working hours
representative worker or a macroeconomic ratio
no clear guidelines, but: measures are correlated
Results: there is a negative relationship, however
magnitude fluctuates, because of different
elasticities (from -0.11 to -0.55)
Determinants of the tax wedgeemployment relationship in EU8

structure of the labor force
–


national minimum wage
non-employment income
–


skilled versus unskilled labor
unemployment and other social benefits
wage bargaining structure
This relationship could be stronger in
the EU8
Lithuania is highly abundant in lowskill working force
manual wo rkers
wo rkers in agriculture
60
55%
50
50%
40
45%
M inimum wage/ A P W
30
40%
20
35%
10
0
30%
LT

LV
PL
SK
EU8
HU
EE
CZ
SI
EU15
HU
SI
LV
LT
SK
Thus the negative effect is STRONGER
compared to the rest of EU
EE
PL
CZ
Estimation
EMPGj,t = 0 + 1WEDGE j,t+ 2GDPG j,t+e j,t
where:
EMPG – employment growth,
WEDGE – tax wedge for low wage (50% and 67% of
APW) earners,
GDPG – real GDP growth,
j – country, t – year, e – error term.
Strongly negative relationship between
employment and the tax wedge in EU8
Coefficients
WEDGE
GDPG
R2
Sample used
Total observations
Estimations results
Tax Wedge for 67% APW earner
Tax wedge for 50% APW earner
Balanced
Imbalanced
Balanced
Imbalanced
sample
sample
sample
sample
-0.77 (-2.73)*
-0.70 (-3.00)**
-0.80 (-2.05)
-0.50 (-2.50)*
0.36 (2.34)*
0.41 (3.38)**
0.11 (0.57)
0.40 (3.30)**
0.45
0.41
0.51
0.41
1999-2003
1997-2003
1999-2001
1997-2003
40
52
20
50
t-values in parenthesis, *-significant at 5% level, ** - significant at 1% level

Increase in tax wedge by 1 p.p. is associated with a
decrease in employment growth by 0.5 - 0.8 p.p.
Key conclusions and policy
implications

Significant and negative relationship between the size
of the tax wedge and employment exists
–
it is stronger that in EU15

Lowering labor taxes (particularly payroll taxes) may
raise employment and output in the EU8

Gap financing:
–
–
–
–
Self- financing;
Shift to general taxation
Broadening the tax base or raising consumption and/or wealth
taxes
Better targeting of social transfers and reduction in
subsidies
Thank You