jaromír Šindel eces fiscal policy and euro the puzzles of central and eastern europe...

Jaromír Šindel

ECES

Fiscal Policy and Euro

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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

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Understand to Fiscal PolicyT

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Source: www.energystar.com, own layout.

non-efficient spending

non-efficient tax system

EFFICIENCY

http://www.energystar.com/

Fiscal Economic PolicyStructural and cyclical governmetn budget

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Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

Automatic stabilizers automatically 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

Fiscal Economic PolicyTime inconsistency

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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.

Fiscal Economic PolicyTime inconsistency and election year

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• Time inconsistency and the effect of structural changes in fiscal policy is stronger during election year.


Ricardian Equivalence in the USA

Source: OECD Economic Studies No. 38, 2004/1

Savings in the USA, 1970-2003 (% GDP)

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Ricardian equivalence?

• 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 .

Sustainable Fiscal PolicyT

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Source: Obsfeld, Rogoff (2004)

DB Y

Dd

2Y

YDYD

Y

D

dY

Y

Y

Dd

g

Y

Y

dgY

Bd

0d

g

bd

gdb

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?

Review of the OCA theoryT

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• 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

Why Rules in Eurozone?T

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• 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.

Why Rules in Eurozone?Optimal Mix of Monetary and Fiscal Policy in Currency Union is not Feasible

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• 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

Rules in Eurozone and RealityDebt and Deficit in Eurozone and EU Member Countries

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Fiscal Policy - Changes, Reforms?• Fiscal Policy and Tax Burden

– structure of tax burden, tax burden according to economic function

• Changes and Reforms

• Tax Competitiveness

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Tax BurdenTax to GDP ratio in EU countries and the US and Japan (in %, ranked by 2003 level)

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Source: Eurostat. Structures of the taxation systems in the European Union

Tax BurdenStructure of tax revenues by major type of taxes (2003, in % of total tax burdens)

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Tax Burden accord. to ec. functionTaxes on labour – empl. and non-employed (pension and social benefits), consum. and capital - capital and business income and stocks (in % of GDP, 2003)

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Tax Burden accord. to ec. functionShares of tax revenues raised on labour (empl. and non-employed), consumption and capital (capital and business income and stocks) (in % of total taxation, 2003)

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Tax Burden accord. to ec. functionContribution 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)

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eNote:*LT: 2000-2003Source: Eurostat. Structures of the taxation systems in the European Union

Tax Burden accord. to ec. functionDevelopment of implicit tax rates for the Member States (1995 - 2003, in %)

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eSource: Eurostat. Structures of the taxation systems in the European Union

Tax Burden accord. to ConsumptionTrend developments of ITRC in the old and new Member States (1995-2003, in %)

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Tax Burden accord. to ConsumptionImplicit tax rates on consumption in the EU (1995-2003 changes in the rate in p.p.)

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Note: LT, PL, SK: no data availableSource: Eurostat. Structures of the taxation systems in the European Union

Tax Burden accord. to LabourDecomposition of the implicit tax rate on labour force in EU (2003, in %)

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Tax CompetitivenessEffective top statutory tax rate on corporate income (2005, in %)

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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

Tax CompetitivenessTop statutory personal income tax rate (2005, in %)

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eNote: Without surcharges - DK, FI, SE: state taxes plus municipality taxesSource: Eurostat. Structures of the taxation systems in the European Union

Tax CompetitivenessDevelop. of effective top statutory tax rate on corporate income (1995-2005 in %)

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Tax CompetitivenessEvolution by major type of taxes (1995-2003, differences in % points of GDP)

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eNote: data for EE, CY and HU are not available for 1995.Source: Eurostat. Structures of the taxation systems in the European Union

jaromír Šindel eces fiscal policy and euro the puzzles of central and eastern europe...

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