Fiscal Sustainability, Inflation Targets
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Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed. Outline. 1. Public Debt and Fiscal Risk Assessment. 2. Fiscal Model. 3 . Policy Coordination. 4 . Fiscal Sustainability. 5. Conclusion. Public Debt. Debt incurred and accumulated by governments over time.

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Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed

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Fiscal sustainability inflation targets and the appropriate policy mixed

Fiscal Sustainability, Inflation Targets

and the Appropriate Policy Mixed


Fiscal sustainability inflation targets and the appropriate policy mixed

Outline

1. Public Debt and Fiscal Risk Assessment

2. Fiscal Model

3. Policy Coordination

4. Fiscal Sustainability

5. Conclusion


Fiscal sustainability inflation targets and the appropriate policy mixed

Public Debt

Debt incurred and accumulated by governments over time

Debt burden borne by the public (taxpayers)

Debt of the public:

Not debt of the government or any particular person


Fiscal sustainability inflation targets and the appropriate policy mixed

Thailand’s Public Debt

% of GDP

53.5%

(2,869 Bil. Baht)

52.3%

1987

11.5

(614)

17.6

(942)

14.0%

1996

24.5

(1,313)


Fiscal sustainability inflation targets and the appropriate policy mixed

Bil. Baht

% of GDP

1. Public debt (as of Mar 2002)

2,869

53.5

2. Off-budget expenses (within next 5 yrs)

535

9.4

2.1 FIDF debt

277

5.2

- FIDF 2+3= 892 Bil. B. (Less 615 Bil. B. already included in public debt.)

2.2Universal health insurance (30 Baht)

142

2.3

- 24 Bil. B. annually

2.3Education reform

103

1.7

- 20 Bil. B. annually

2.4 Reserve fund for GPF

13

0.2

- 2 Bil. B. annually

3. Public debt + Off-budget expenses

3,404

62.9

LessLow-risk state enterprise debt

733

13.7

4. Total

2,671

49.2

Public Debt and Fiscal Risk Assessment


Fiscal sustainability inflation targets and the appropriate policy mixed

Outline

1. Public Debt and Fiscal Risk Assessment

2. Fiscal Model

3. Policy Coordination

4. Fiscal Sustainability

5. Conclusion


Fiscal sustainability inflation targets and the appropriate policy mixed

Debt Dynamics

Market rates

Output gap

Monetary policy

RD3M

MLR

GAP

RP

Inflation

P

Domestic demand

Domestic demand

Bond yield

Expectations

C, I

CINFEX

RB

C, I

Government

spending

GDP growth

GDP growth

Debt interest

G

GDP

DINT

GDP

TAX

PB

DEBT

Tax revenue

Budget deficit

Debt/GDP


Fiscal sustainability inflation targets and the appropriate policy mixed

if budget surplus

 if budget deficit

_

_

Revenue

Expenditure

Interest

Bond yield

Tax revenue

RP14D

Fed Funds

GDP

Modelling Debt

PUBLIC DEBT

Central government domestic debt

Central government foreign debt

State enterprise debt

Debt(t)

Debt(t-1)


Monetary policy reaction function

Monetary Policy Reaction Function

*[Actual GDP – Potential GDP]

*[Actual inflation - Target ]

  • Monetary policy responds to deviations of GDP from potential and inflation from target.

  • Weights (, )applied on gaps determine how strong interest rate adjusts to output and inflation deviations.

RP14D

Equilibrium rate

Inflation gap

Inflation

Output gap

  • 14-day repurchase rate is monetary policy instrument.


Monetary policy reaction function1

Monetary Policy Reaction Function

%

Monetary policy behaves broadly in line with policy rule.


Fiscal policy reaction function

Fiscal Policy Reaction Function

TAX

*{[Debt(t) – Target] -

[Debt(t-1) – Target(t-1)]}

*[Debt(t) – Target]

  • Tax rates (VAT, personal income tax) are fiscal policy instruments.

  • Fiscal policy responds to deviations of debt (Debt/GDP) from debt target, in terms of direction and speed.

  • Tax-smoothing parameters (, ) determine the rate at which tax rate changes.


Fiscal sustainability inflation targets and the appropriate policy mixed

Outline

1. Public Debt and Fiscal Risk Assessment

2. Fiscal Model

3. Policy Coordination

4. Fiscal Sustainability

5. Conclusion


Fiscal sustainability inflation targets and the appropriate policy mixed

  • Coordination between Monetary and Fiscal Policy

Monetary Policy

Fiscal Policy

RP14D

TAX, G

Price Stability

Fiscal Sustainability

Macroeconomic Stability

Sustainable Growth


Coordination between monetary and fiscal policy vat and rp14d

Coordination between Monetary and Fiscal Policy

(VAT and RP14D)

%

%

%

Debt stays above target. Monetary policy tighter and VAT rate increases from 7% to 11%.


Coordination between monetary and fiscal policy vat and rp14d1

Coordination between Monetary and Fiscal Policy

(VAT and RP14D)

%

%

Core Inflation

Real GDP Growth

Larger impact on inflation.


Coordination between monetary and fiscal policy personal income tax and rp14d

Coordination between Monetary and Fiscal Policy

(Personal Income Tax and RP14D)

%

%

%

Debt reduced to target. Monetary policy stance remains easy, while personal income tax rate doubles.


Coordination between monetary and fiscal policy personal income tax and rp14d1

Coordination between Monetary and Fiscal Policy

(Personal Income Tax and RP14D)

%

%

Real GDP Growth

Core Inflation

Stronger effect on real GDP growth.


Fiscal sustainability inflation targets and the appropriate policy mixed

Sustainable Growth

  • Coordination between Monetary and Fiscal Policy

Coordination

Cooperation

Consistency

Macroeconomic Policy

Commitment

Clarity

Economic Stability


Fiscal sustainability inflation targets and the appropriate policy mixed

Outline

1. Public Debt and Fiscal Risk Assessment

2. Fiscal Model

3. Policy Coordination

4. Fiscal Sustainability

5. Conclusion


Fiscal sustainability inflation targets and the appropriate policy mixed

Scenarios for Long-term Projections


Fiscal sustainability inflation targets and the appropriate policy mixed

Public Debt

% of GDP

Peak 65.7% in 2005

Peak 60.9% in 2005


Fiscal sustainability inflation targets and the appropriate policy mixed

Interest Payments : Total Expenditure

%

Peak 13.6%in 2007

Peak 12%in 2007


Fiscal sustainability inflation targets and the appropriate policy mixed

Debt Services : Total Expenditure

%

Peak 16.5%in 2007

Peak 14.9%in 2007


Fiscal sustainability inflation targets and the appropriate policy mixed

Public Debt

In the past 20 years and in the next 30 years

% of GDP

60.9%

2005

52.3%

1987

40.8%

2006

35.8%

1987


Fiscal sustainability inflation targets and the appropriate policy mixed

Debt Service and Interest Payments

In the past 30 years and in the next 30 years

% of Total Expenditure

24.7%

1987

14.9%

2007

17%

1988

12%

2007


Fiscal sustainability inflation targets and the appropriate policy mixed

Economy reaches potentialin medium term

Low interest rateenvironment

Slower economic growth?

Higher interest rates?

Fiscal Sustainability


Fiscal sustainability inflation targets and the appropriate policy mixed

Fiscal Sustainability

  • Increase VAT rate back to 10%and introduce other tax reforms.

  • Fiscal consolidation to accommodate private sector recovery.

  • Reform the public sector and keep personnel budget growth below 5%.

  • Debt management strategy should be in line with bond market development plans.

  • Closer coordination between government and state enterprises in debt management plans.

  • Increase efficiency in budgeting e.g. multi-year budgeting plan.


Fiscal sustainability inflation targets and the appropriate policy mixed

Outline

1. Public Debt and Fiscal Risk Assessment

2. Fiscal Model

3. Policy Coordination

4. Fiscal Sustainability

5. Conclusion


Fiscal sustainability inflation targets and the appropriate policy mixed

  • Coordination between Monetary and Fiscal Policy

Monetary Policy

Fiscal Policy

Price Stability

Fiscal Sustainability

Economic Stability

Sustainable Growth


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