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Fiscal Policy

Fiscal Policy. IMF Fiscal Monitor. Advanced Economies. IMF Fiscal Monitor. Types of Taxes. Taxes on Value Added and Imports + Taxes on Income and Wealth (Income Taxes, Corporate Profits Tax, Capital Gains Taxes, Property Taxes) + Social Security Contributions Total Taxes.

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Fiscal Policy

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  1. Fiscal Policy

  2. IMF Fiscal Monitor

  3. Advanced Economies IMF Fiscal Monitor

  4. Types of Taxes Taxes on Value Added and Imports + Taxes on Income and Wealth (Income Taxes, Corporate Profits Tax, Capital Gains Taxes, Property Taxes) + Social Security Contributions Total Taxes

  5. PWC Corporate Income Tax Report

  6. KPMG Corporate and Indirect Tax Report %

  7. Principles of Taxation • Implementability. Cheap to collect, easy to calculate, difficult to avoid. • Equitable. • Vertical • Horizontal • Efficient. Neutral effect on market decisions. Some Underlying Principles ofTax Policy byRichard K. Vedder and Lowell E. Gallaway Link

  8. Debt

  9. Reinhart & Rogoff, Debt in the Time of Growth, Link Debt and Growth

  10. Interest Rates: • Cost of borrowing $1 for 1 year $1+i. Net interest rate: i. • e.g. if you lend me $100 today, I will pay you $104 in one year, 1+i = 1.04. • Interest Rates are reported in % terms, e.g. 4%, or basis points, 400 points.

  11. Crisis spreads to other countries IMF Fiscal Monitor Background Reading

  12. IMF Fiscal Monitor Sources: Bloomberg L.P.; Consensus Economics; and IMF staff estimates and projections. Note: Euro area countries, subject to data availability. Bond yield spreads, measured vis-à-vis German Bunds, are an average of August 2011. Average consensus real GDP growth forecasts for 2011–12. Standard & Poors Ratings

  13. Primary Deficit • Simplified Government Budget Primary Revenue (less Interest Income) - Primary Expenditure (less Interest Paid) Primary Budget Deficit + Net Interest Payments on Existing Debt Overall Budget Deficit

  14. Primary Balance % of GDP

  15. Includes Interest Rates Greece

  16. Can you run a deficit every year?

  17. Sustainable Deficit • If then Debt-to-GDP ratio stays stable. • If > then deficit is “unsustainable” A growing economy allows the government to borrow some money every year and still keep debt in line with overall GDP

  18. Sustainable Primary Deficit • If • then stays stable.

  19. http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm

  20. Consequences of Deficits • Austerity • Financial Repression • Inflation • Default

  21. Link

  22. Austerity has a negative effect on business cycles. • IMF

  23. Financial Repression • Indebted governments often draw financing from captive financial institutions to keep interest rates low. • Domestic banks, public pension funds • Increased reserve requirements • International capital controls. Link

  24. Default Link

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