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Fiscal Policies and Growth: Constraints and Opportunities. Carlo Cottarelli and Michael Keen “Ascent after Decline”: Workshop World Bank, Nove mber 19, 2010. The Macroeconomic Dimension. The state of the world’s public finances.

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fiscal policies and growth constraints and opportunities

Fiscal Policies and Growth: Constraints and Opportunities

Carlo Cottarelli and Michael Keen

“Ascent after Decline”: Workshop

World Bank, November 19, 2010

advanced economies entered crisis with worst non war fiscal outlook
Advanced economies entered crisis with worst (non-war) fiscal outlook

General Government Gross Debt for G-7 Economies, 1950-2007

(In percent of GDP)

with pressures from aging on top of that
With pressures from aging on top of that

Old Age Dependency Ratio

  • Pension reforms contain cost to 1 percent of GDP
  • Health care costs increase by average 3.5 points by 2030
pre crisis outlook for emerging e conomies better
Pre-crisis outlook for emerging economies better

General Government Debt in Emerging Economies, 1998-2007

(In percent of GDP)

fiscal legacy of crisis most marked in advanced economies reflecting lasting impact on gdp
Fiscal legacy of crisis most marked in advanced economies---reflecting lasting impact on GDP

General Government Balance

General Government Debt

slide10

What debt target for stabilization?

Higher public debt associated with:

  • Higher real interest rates—perhaps 1.75 percentage points over 2008-15 for advanced economies
  • Lower growth (through reduced investment and labor productivity)—perhaps 0.5 points per year
so need to do more than return to pre crisis
So needtodo more thanreturnto pre-crisis

6

4

2

0

Cyclically Adjusted

Primary Balance

Primary

Balance

-

2

-

4

-

6

OverallBalance

-

8

-

10

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2030

  • Required adjustment is roughly:
  • 8.5 percent GDP in advanced economies
  • 3 percent in emerging
impact of fiscal adjustment on growth
Impact of fiscal adjustment on growth
  • Prospects for expansionary contractions limited:
  • Recent WEO work
  • Low interest rates
  • Evidence that adjustment on spending side is:
  • Associated with more durable consolidation
  • Less contractionary
welfare reform
Welfare reform
  • Pensions—Argue for raising retirement age by 2 years: stabilizes spending at 2010; best for growth
  • Health care—supply and demand side measures
  • ‘Better targeting’?
  • Incentive effects of means-testing
  • Wage subsidies
  • Tagging by correlates with participation responsiveness; increase UK workforce by 1 percent.
infrastructure and innovation
Infrastructure and innovation
  • Literature gives good reason to suppose strong positive output effect from public capital....
  • ...but little guidance on specifics
  • Institutions matter
  • Likely needs:
  • Climate change—adaptation not costly in most advanced, but likely to be in some emerging
  • Fundamental R&D—energy research, geoengineering?
eliminating wasteful subsidies
Eliminating wasteful subsidies
  • Petroleum subsidies—cost around 0.3 percent global GDP in 2010
  • Exemptions and special treatment—importance of tax expenditure analysis
  • Subsidies to renewables—don’t let spending substitute for proper carbon pricing
in search of immobile tax bases
In search of immobile tax bases
  • VAT:
  • Potential in Japan (and US?)
  • Large scope in most advanced economies to eliminate exemptions and reduced rates—could raise £11 bn in UK even after compensation
  • Property tax
green taxes
Green taxes
  • Revenue potential is:
  • Significant but not transformational in advanced—about $100 bn per year in U.S
  • More in some emerging—If internationally traded
  • But requires that permits not be given away
  • Not much money in other environmental taxes
  • Though potential in congestion pricing
investment and finance
Investment and finance
  • Giving an allowance for notional cost of equity (an ‘ACE’) would
  • Eliminate corporate-level disincentives to invest
  • Reduce debt bias
  • Financial sector
  • Pre-financing resolution/Corrective tax
  • ‘Financial Activities Tax’—a fix for the VAT
  • Gains from enhanced international cooperation
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