Options for Fiscal Consolidation in the United Kingdom

This paper examines the macroeconomic effects of different timing and composition of fiscal adjustment in the United Kingdom using the IMF’s Global Fiscal Model. Early consolidation dampens aggregate demand in the short term, but increases output in the long term as smaller primary surpluses are needed as a result of lower interest payments. Reducing government transfers or current government spending provides larger gains than increasing taxes, in particular compared to raising corporate or personal income taxes. We show that these conclusions are robust under alternative behavioral assumptions and parameterizations. A reduction in global saving would make early consolidation more urgent from both cyclical and long-term perspectives. Finally, we show that tax reform aimed at increasing incentives to save could provide support to fiscal consolidation measures.Fiscal consolidation;Fiscal reforms;Government expenditures;Public debt;Savings promotion;Tax increases;Tax reforms;income taxes, tax reform, fiscal adjustment, corporate income taxes, taxation, government spending, fiscal policy, capital accumulation, personal income taxes, aggregate demand, tax rates, fiscal rules, fiscal policies, corporate income taxation, fiscal model, tax system, payroll tax, interest payments, government budget, government budget constraint, higher interest rates, government expenditure, budget constraint, corporate income tax, fiscal balance, tax increase, average tax rate, taxes on labor, fiscal variables, payroll taxes, public finances, tax returns, fiscal issues, wage taxes, tax distortions, fiscal position, fiscal affairs, sales tax, fiscal solvency, fiscal stimulus, capital stock, fiscal policy framework, tax rates on capital, corporate taxes, fiscal structure, foreign fiscal policies, tax burden, labor taxes, income tax rates, personal income tax, tax liabilities, fiscal reform, efficient tax system, fiscal affairs department, debt service, tax cuts, fiscal framework

Tax Reform and Debt Sustainability in Germany

In 2005, the German government announced a far-reaching fiscal adjustment program. This paper uses the IMF’s Global Fiscal Model to study its impact and explores options for addressing long-term pressures from population aging. The growth effects of the planned VAT increase are likely modest, largely owing to the stimulating effect of other tax reductions. The reform will improve the long-term debt path but achieving fiscal sustainability requires further adjustment over the medium term. An additional package of expenditure restraint, entitlement reform, and tax-base broadening compares favorably to other adjustment options. Spillover effects to trading partners of these policies are modest.Aging;Debt sustainability;Tax reforms;Value added tax;Economic models;taxation, tax reform, fiscal adjustment, tax base, fiscal policy, payroll taxes, vat rate, tax measures, government spending, corporate income taxation, fiscal model, fiscal sustainability, tax policy, consumption tax, tax increases, tax system, fiscal consolidation, tax rates, corporate income tax, expenditure cuts, fiscal pressures, direct taxation, indirect taxes, tax reform proposals, indirect tax, income taxes, tax reductions, public debt, tax exemptions, aggregate demand, personal income tax, efficient tax system, indirect taxation, fiscal policies, vat revenue, consumption taxes, budget constraint, fiscal deficits, fiscal adjustment package, fiscal deficit, direct taxes, income tax rates, effects of taxation, fiscal reaction function, personal income taxes, sales tax, expenditure ratios, tax distortions, expenditure restraint, cuts in government spending, fiscal reform, fiscal affairs department, tax bases, fiscal reaction, fiscal difficulties, payroll tax, fiscal implications, fiscal impulse, expenditure policy, direct tax, tax burden, fiscal affairs, fiscal structure, fiscal balance, fiscal issues, fiscal improvement, fiscal scenario, marginal tax rates, deficit reduction, capital stock, fiscal variables, primary expenditure, fiscal developments, current account deficit

Fundamental Determinants of the Effects of Fiscal Policy

We explore the underlying determinants of the macroeconomic effects of fiscal policy and tax and social security reform using the Global Fiscal Model (GFM). We show that the planning horizon of consumers, access to financial markets, and the elasticity of labor supply, as well as the characteristics of utility and production functions, and the degree of competition are all critical for determining the impact of fiscal policy. Four topical fiscal policy issues, for a representative large and small economy, are examined: the effects of changes in government debt; higher government spending; tax reform; and privatization of retirement savings.Public debt;Government expenditures;Tax reforms;Privatization;Economic models;government spending, taxation, labor income, fiscal policy, private consumption, real interest rate, tax reform, fiscal consolidation, capital accumulation, tax policy, disposable income, consumption over time, government spending shocks, tax cut, fiscal adjustment, national saving, aggregate demand, fiscal model, fiscal policies, tax rates, capital income, increase in consumption, government revenue, fiscal expansion, tax burden, tax base, general equilibrium, fiscal stimulus, consumption increases, consumption goods, fiscal deficits, consumption declines, fiscal loosening, temporary tax, temporary tax cut, expansionary fiscal, consumption decline, tax system, fiscal contraction, consumer behavior, fiscal policy on consumption, tax reduction, national income, national savings, consumption tax, fiscal affairs department, tax bases, government deficit, fiscal structure, tax revenue, fiscal affairs, consumption growth, expansionary fiscal policy, fiscal reform, aggregate consumption, fiscal shocks, consumption needs, fiscal models, tax increase, permanent income, fiscal discipline

Global Aging Pressures

Demographic pressures will materialize in many economies over the next few decades. We examine the macroeconomic impact of alternative fiscal adjustment and structural reform strategies to address these global aging pressures using the IMF''s Global Fiscal Model (GFM). The results suggest substantial spillover effects of aging through international financial channels. To maintain sustainability, fiscal adjustment needs to be broad-based, while avoiding increases in direct taxes. There are substantial benefits from fiscal cooperation, while negative growth effects can be offset by complementary structural reforms in product and labor markets with the benefits accruing early and to all incomegroups.Economic models;Labor markets;Direct taxation;aging, fiscal adjustment, social security, government spending, fiscal variables, fiscal pressures, tax rates, fiscal affairs, dependency, fiscal affairs department, tax base, entitlement, fiscal positions, fiscal reform, taxation, fiscal policy, tax reform, fiscal consolidation, fiscal model, fiscal policies, budget constraint, fiscal deficits, fiscal sustainability, public finances, unemployment, primary deficit, government revenue, fiscal balance, primary expenditure, fiscal position, bargaining, tax policy, aging society, government expenditure, account deficits, government budget, fiscal contraction, tax system, expenditure ratios, expenditure cuts, fiscal scenario, fiscal incentives, public expenditure, government deficit, fiscal burden, fiscal response, progressive taxation, expansionary fiscal, fiscal structure, government budget constraint, ageing, public debt, unemployment benefits, structural fiscal, fiscal studies, budgetary position, aggregate demand, fiscal consolidations, fiscal models, fiscal implications, taxation of labor

Policy Challenges of Population Aging in Ireland

The projected rise in age-related government spending as a share of GDP in Ireland over the next forty years is among the highest in the euro area. In the absence of reforms, public debt will increase to unsustainable levels. This paper uses the IMF''s Global Fiscal Model to compare the macroeconomic effects of different fiscal strategies to accommodate the rise in age-related spending. The simulations suggest that adopting a package of measures, including an increase in the retirement age, broadening the tax base, and raising indirect taxes, would be a more growth-friendly strategy than relying exclusively on raising the social security contribution rate.Aging;Taxation;Pension regulations;Government expenditures;Public debt;Tax bases;Economic models;pension, pension system, retirement, pensions, retirement age, tax base, fiscal policy, public pension, dependency ratio, public pension system, fiscal adjustment, contribution rate, pension expenditure, fiscal model, fiscal surplus, tax rates, life expectancy, fiscal pressures, government spending, fiscal position, aggregate demand, fiscal measures, contribution rates, payroll taxes, fiscal balance, fiscal sustainability, pension assets, long-term care, health care, income tax base, private pension, long-term projections, pension benefits, tax increases, fiscal affairs department, national pensions, public finances, pension liabilities, budget constraint, early retirement, fiscal strategies, tax rate, fiscal target, fiscal authorities, benefit levels, payroll tax, risk-free rate, flat-rate pension, retirement savings, fiscal saving, accumulated savings, pension benefit, national pensions reserve fund, tax burden, public expenditure, fiscal affairs, public spending, pension age, fiscal structure, pension value, public expenditures, fiscal projections, replacement rates, contributory pension, pay-as-you-go system, fiscal consolidation, savings for retirement, pension systems

Investment Incentives and Effective Tax Rates in the Philippines

We compare the general tax provisions and investment incentives in the Philippines to six other east-Asian economies-Malaysia, Indonesia, Lao, Vietnam, Cambodia, and Thailand. We calculate effective tax rates and find that general effective tax rates are relatively high in the Philippines, while investment incentives are comparable to those in neighboring countries. Tax holidays are most attractive for very profitable firms, creating redundancy, and for investment in short-lived assets. We also consider recently-proposed tax reforms that would replace tax holidays by a reduced corporate income tax rate or a low tax on gross receipts. The results suggest that this would result in stronger incentives to invest, while government revenue increases. Alternatively, replacing holidays with a general reduction in the corporate tax rate and offering accelerated depreciation will either not provide the same incentives or be very costly.Corporate taxes;Tax reforms;Revenue sources;tax rates, tax incentives, tax rate, taxation, investment incentives, taxable income, accelerated depreciation, income tax rate, tax system, corporate tax, fiscal incentives, discounted value, depreciation allowances, fiscal incentives for investment, tax policy, corporate tax rate, tax administration, investment projects, investors, foreign direct investment, tax credit, tax base, direct investment, tax credits, investment allowances, retained earnings, local taxes, investment promotion, tax avoidance, rate of return, institutional reform, investment decisions, foreign investment, economic zone, economic zones, revenue collection, government revenue, investment priorities, investment promotions, investment climate, business taxation, statutory tax rate, cost of capital, fiscal cost, special economic zones, investment promotion agency, tax on capital gains, tax on dividends, reforms of tax administration, tax payment, fiscal authority, tax returns, international investors, fiscal affairs, fiscal affairs department, fixed costs, tax revenues, tax authorities, tax competition, foreign investors, investment climate assessment, export processing zones, capital expenditure, import duty exemptions, corporate tax structure, business investment, investment promotion agencies, tax payments, tax structure, depreciation methods, rates of return, fixed assets, international norms, tax regime, public finance, domestic investment

Location of Investors and Capital Flight

This paper utilizes a very simple model to study the timing and determinants of speculationagainst a fixed exchange rate regime when investors are heterogeneous because of locationaldifferences. Location matters because resident players may incur smaller costs when takinga short-position, are less exposed to exchange rate risk, possess better information quality,have more knowledge about each others information sets, due to asymmetries in tax treatment,or because of the presence of government guarantees. Our model clarifies the respective rolesplayed by local and international investors during episodes of capital flight as well as theresulting room of maneuver for policymakers in emerging markets.Locational heterogeneity; Private information; Exchange rate volatility; Illiquidity; Capital flight

Strategies for Fiscal Consolidation in Japan

Japan''s key fiscal challenge is to put public finances on a more sustainable footing. This paper investigates the macroeconomic implications of alternative fiscal strategies for Japan using the IMF''s Global Fiscal Model. The results suggest that: (i) an adjustment package that achieves primary balance through lower social transfers and government spending and a higher VAT is the most viable option and has a smaller negative impact on growth than other fiscal measures; (ii) achieving primary balance is not sufficient to stabilize the net debt ratio; (iii) prefunding future aging costs provides greater long-term benefits compared with less front-loaded strategies; (iv) tax reform involving shifting from corporate taxation to consumption taxation could mitigate the short-term output losses associated with fiscal consolidation; and (v) the spillovers to the rest of the world from consolidation in Japan are positive in the medium term, but modest.Aging;Debt sustainability;Tax reforms;Adjustment policy;Public finance;Economic models;tax reform, taxation, consumption tax, government spending, fiscal policy, fiscal adjustment, corporate income tax, fiscal consolidation, income taxes, tax rates, tax increases, budget constraint, vat rate, indirect taxation, fiscal model, fiscal strategies, payroll tax, personal income tax, tax increase, home country, public debt, corporate income taxes, personal income taxes, corporate income taxation, tax base, expenditure cuts, aggregate demand, fiscal policies, corporate taxes, government budget, capital accumulation, benefits of tax reform, tax burden, public finances, tax system, tax policy, consumption taxes, reduction in government spending, capital spending, lump-sum tax, average tax rate, direct taxation, fiscal variables, fiscal policy on consumption, capital investment, budget deficits, revenue adjustment, tax distortions, fiscal structure, government expenditures, government budget constraint, higher interest rates, government budget deficits, income tax rates, government expenditure, fiscal debate, capital stock, tax measures, fiscal balance, sales tax, fiscal measures