Does fiscal policy work?

Ethan Ilzetzki and colleagues examine whether programmes of fiscal stimulus and fiscal austerity have a significant impact on national economic activity

Kosher Pork

Both conventional wisdom and leading academic research view pork barrel spending as antithetical to responsible policymaking in times of crisis. In this paper we present an alternative view. When agents are heterogeneous in their ideology and in their information about the economic situation, allocation of pork may enable passage of legislation appropriate to a "crisis" that might otherwise not pass. Pork "greases the legislative wheels" not by bribing legislators to accept legislation they view as harmful, but by conveying information about the necessity of policy change, where it may be impossible to convey such information in the absence of pork. Pork may be used for this function in situations where all legislators would agree to forgo pork under full information. Moreover, pork will be observed when the public good is most valuable precisely because it is valuable and the informed agenda setter wants to convey this information.

The economic cost of UK school closures

Pupils in UK schools have lost up to 105 days of education due to school closures during the COVID-19 lockdown, and a second wave is disrupting education further. A Centre for Macroeconomics (CfM) survey predicted that the cost to UK economic growth in the long term will be minor to moderate, writes Ethan Ilzetzki (LSE). However, the CfM panel was unanimous that school closures will increase inequality, with a large majority predicting a persistent increase in inequality. The panel also predicted harm to gender equality

Tax reform and the political economy of the tax base

This paper studies the political prospects for reform in a model where the tax base and statutory rate are separate instruments of tax policy. The model suggests that large changes in the tax code may be easier to enact than marginal reforms. The tax base faces a tipping point where even the beneficiaries from tax exemptions support reform. At this tipping point, tax reform is Pareto improving. Politically feasible tax reform occurs when fiscal needs are large, but may nonetheless involve reductions in marginal tax rates. There is strategic complementary in lobbying for tax exemptions, resulting in multiple equilibria. The model’s main predictions are consistent with recent tax reforms in OECD countries

What do top economists think of the UK’s post-COVID fiscal rules?

The October 2021 Centre for Macroeconomics survey asked the members of its UK panel to evaluate the performance of UK fiscal rules to date and which rules would best serve the British economy going forward. The majority of the panel thinks the sequence of fiscal rules in place in the UK since 1997 has caused a material reduction in UK public debt. However, twice as many panellists thought these rules harmed the conduct of macroeconomic policy than those that thought they helped. Going forward, a majority of the panel believes that well-designed rules limiting public deficits or debts would best improve the conduct of macroeconomic policy – but nearly a third would scrap fiscal rules altogether, says Ethan Ilzetzki (LSE)

Fiscal policy and debt dynamics in developing countries

Using a new tax database for 28 countries and a variety of econometric methods, this paper contributes to the debate on the effects of fiscal policy on economic activity in a number of ways. The analysis finds that tax cuts have a stimulative effect on economic growth in developing countries. Lowering the personal income tax rate by 1 percentage point, or cutting revenues by 1 gross domestic product of gross domestic product increases gross domestic product by 0.3-0.4 percent on impact and 0.8 percent in the long run. The author finds that cuts in personal income taxes are more effective in stimulating growth than cuts in corporate or valued added tax rates. The author incorporates debt dynamics into a fiscal vector autoregression model for a number of developing countries. Existing estimates of the effects of fiscal policy on growth use linear time-series methods, which may assess the effects of fiscal policy along a debt-path that is unsustainable. Incorporating the non-linear relationship between government expenditure, taxes, and debt alters estimates of the impact of fiscal policy on gross domestic product in several countries. In Brazil, for example, conventional time-series methods may overstate the effects of fiscal policy on gross domestic product, by ignoring the detrimental effects of debt accumulation.Debt Markets,Taxation&Subsidies,Emerging Markets,Economic Theory&Research,Tax Law

Measuring productivity dispersion:Lessons from counting one-hundred million ballots

We measure output per worker in nearly 8,000 municipalities in the Italian electoral process using ballot counting times in the 2013 general election and two referenda in 2016. We document large productivity dispersion across provinces in this very uniform and low-skill task that involves nearly no technology and requires limited physical capital. Using a development accounting framework, this measure explains up to half of the firm-level productivity dispersion across Italian provinces and more than half the north-south productivity gap in Italy. We explore potential drivers of our measure of labor efficiency and find that its association with measures of work ethic and trust is particularly robust

A positive theory of tax reform

The political impediments to reform and the forces allowing its success are studied in a model where the tax base and statutory rate are separate instruments of tax policy. The model predicts that big bang reforms—large changes in the tax code–may be easier to enact than marginal reforms. Preferences over the tax base face a tipping point where even the beneficiaries from tax exemptions support reform. At such a “reform moment”, tax reform is Pareto improving. Politically feasible tax reform occurs when fiscal needs are large, but may nonetheless involve reductions in marginal tax rates. There is strategic complementary in lobbying for tax exemptions, resulting in multiple equilibria. Evidence from tax-base changes in a panel of OECD countries supports a number of the main predictions

How Big (Small?) are Fiscal Multipliers?

We contribute to the debate on the macroeconomic effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rates but is zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are smaller than in closed economies; (iv) fiscal multipliers in high-debt countries are negative.

Kosher Pork

Both conventional wisdom and leading academic research view pork barrel spending as antithetical to responsible policymaking in times of crisis. In this paper we present an alternative view. When agents are heterogeneous in their ideology and in their information about the economic situation, allocation of pork may enable passage of legislation appropriate to a "crisis" that might otherwise not pass. Pork "greases the legislative wheels" not by bribing legislators to accept legislation they view as harmful, but by conveying information about the necessity of policy change, where it may be impossible to convey such information in the absence of pork. Pork may be used for this function in situations where all legislators would agree to forgo pork under full information. Moreover, pork will be observed when the public good is most valuable precisely because it is valuable and the informed agenda setter wants to convey this information.