1 / 27

Fiscal Policy and Euro

The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague. Fiscal Policy and Euro. Jaromír Šindel ECES.

breanna-hampson
Download Presentation

Fiscal Policy and Euro

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Fiscal Policy and Euro Jaromír Šindel ECES

  2. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Topics • Fiscal Economic Policy • Time inconsistency, rules better than discretion, cyclical adjusted government balance,... • Maastricht and SGP – dreams and facts • Fiscal consolidation under Maastricht criteria, SGP reality, reform of SGP • CEEC and Fiscal Policy, euro linkage • Fiscal reforms, fiscal consolidation, implication for sustainable development and economic growth, Tax Competitiveness

  3. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Understand to Fiscal Policy EFFICIENCY non-efficient tax system non-efficient spending Source: www.energystar.com, own layout.

  4. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Structural and cyclical governmetn budget Fiscal Economic Policy Automatic stabilizersautomatically increase deficit during cyclical downturns by taxes based on incomes, especially when progressive or payments for unemployed workers (during downturns, automatic stabilizers moderate the business cycle) Gap of about 2% between cyclical and structural deficit during recessions shows effect of automatic stabilizers Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  5. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Fiscal Economic Policy Time inconsistency Inconsistency between short-time and long-time effect of fiscal policy. For example durign good times, government decreases taxes, more generally makes structural changes in fiscal policy. Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  6. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Fiscal Economic Policy Time inconsistency and election year • Time inconsistency and the effect of structural changes in fiscal policy is stronger during election year. Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  7. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Ricardian Equivalence in the USA Savings in the USA, 1970-2003(% GDP) Ricardian equivalence? Source: OECD Economic Studies No. 38, 2004/1

  8. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Sustainable Fiscal Policy • There is many measures of fiscal policy sustainability. We use the unchanging level of debt in GDP term. So: • Because and , using derivation formula for change of d we get . • In term of GDP and because we get . • Our goal is , so the level of unchanged debt is . Then desired balance of fiscal budget is . Source: Obsfeld, Rogoff (2004)

  9. Fiscal Policy in Europe • Question of currency union • Maastricht Treaty was not enough for Germany – Stability and Growth Pact was established. Troubles? • If there are troubles with fiscal rules, how to cope with them?

  10. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Review of the OCA theory • Benefits outweigh costs if … • Markets are highly integrated • Goods markets, Financial markets, Labor markets • Shocks to currency union members are symmetrical (UK - oil) • Labor markets are flexible • Flexible fiscal policy for fiscal transfers (to cope with shocks) • Question of OCA endogenity • Convergence to OCA and higher flexibility follow integration process call for flexible and sustainable fiscal policy Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  11. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Why Rules in Eurozone? • Free rider effect of countries with high debt and higher deficits of government balance, becouse there is common currency and interest rate. • Fiscal imbalance in currency union can increase price level. Central bank have tighten monetary policy through higher common interest rate. • And because you want to avoid increase in interest rate, there is call for fiscal rules.

  12. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Why Rules in Eurozone? Optimal Mix of Monetary and Fiscal Policy in Currency Union is not Feasible • Optimum is sustainable fiscal policy and moderate monetary policy. • But free rider problem with fiscal policy in monetary union. • Some countries have unsustainable fiscal policy and tigher monetary policy is need. Optimal Mix of Monetary & Fiscal Policy is not Feasible due to Free Rider Problem Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  13. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Rules in Eurozone and Reality Debt and Deficit in Eurozone and EU Member Countries Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  14. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Fiscal Policy - Changes, Reforms? • Fiscal Policy and Tax Burden • structure of tax burden, tax burden according to economic function • Changes and Reforms • Tax Competitiveness

  15. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Burden Tax to GDP ratio in EU countries and the US and Japan (in %, ranked by 2003 level) Source: Eurostat. Structures of the taxation systems in the European Union

  16. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Burden Structure of tax revenues by major type of taxes (2003, in % of total tax burdens) Source: Eurostat. Structures of the taxation systems in the European Union

  17. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Burden accord. to ec. function Taxes on labour – empl. and non-employed (pension and social benefits), consum. and capital - capital and business income and stocks (in % of GDP, 2003) Source: Eurostat. Structures of the taxation systems in the European Union

  18. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Shares of tax revenues raised on labour (empl. and non-employed), consumption and capital (capital and business income and stocks)(in % of total taxation, 2003) Tax Burden accord. to ec. function Source: Eurostat. Structures of the taxation systems in the European Union

  19. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Contribution of taxes on labour, capital and consumption (in % of GDP) to the changes in the total tax-to-GDP ratio(1995-2003, diff. in p.p. of GDP) Tax Burden accord. to ec. function Note:*LT: 2000-2003 Source: Eurostat. Structures of the taxation systems in the European Union

  20. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Development of implicit tax rates for the Member States(1995 - 2003, in %) Tax Burden accord. to ec. function Source: Eurostat. Structures of the taxation systems in the European Union

  21. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Burden accord. to Consumption Trend developments of ITRC in the old and new Member States(1995-2003, in %) Source: Eurostat. Structures of the taxation systems in the European Union

  22. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Burden accord. to Consumption Implicit tax rates on consumption in the EU(1995-2003 changes in the rate in p.p.) Note: LT, PL, SK: no data available Source: Eurostat. Structures of the taxation systems in the European Union

  23. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Burden accord. to Labour Decomposition of the implicit tax rate on labour force in EU(2003, in %) Source: Eurostat. Structures of the taxation systems in the European Union

  24. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Effective top statutory tax rate on corporate income (2005, in %) Tax Competitiveness NOTE: Only the 'basic' (non targeted) top rate is presented here. Existing surcharges and averages of local taxes are included. The rate for Estonia refers only to distributed profits; as from 2000 the tax rate on retained earnings is zero. The rate for Italy includes 'IRAP'(rate 4.25%) a local tax levied on a tax base broader than corporate income. Source: Eurostat. Structures of the taxation systems in the European Union

  25. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Competitiveness Top statutory personal income tax rate (2005, in %) Note: Without surcharges - DK, FI, SE: state taxes plus municipality taxes Source: Eurostat. Structures of the taxation systems in the European Union

  26. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Competitiveness Develop. of effective top statutory tax rate on corporate income(1995-2005 in %) Source: Eurostat. Structures of the taxation systems in the European Union

  27. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Tax Competitiveness Evolution by major type of taxes (1995-2003, differences in % points of GDP) Note: data for EE, CY and HU are not available for 1995. Source: Eurostat. Structures of the taxation systems in the European Union

More Related