Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)

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Taxing Times

This Fiscal Monitor discusses how fiscal policies can help achieve redistributive objectives. It focuses on three salient policy debates: tax rates at the top of the income distribution, the introduction of a universal basic income, and the role of public spending on education and health.

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Login or Register Information of interest. Back to Top Chapter 1: Tackling Inequality Full Text At the global level, inequality has declined substantially over the past three decades, but within national boundaries, the picture is mixed: some countries have experienced a reduction in inequality while others, particularly advanced economies, have seen a significant increase that has, among other things, contributed to growing public backlash against globalization. Excessive levels of inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth, but whether inequality is excessive depends on country-specific factors, including the growth context in which inequality arises, along with societal preferences.

Guidelines for Public Debt Management. Coordinated Portfolio investment Survey. Australia: Benefiting from Economic Reforms. IMF History Volume 1. World Economic Outlook, October System of National Accounts A Guide to Direction of Trade Statistics. Guidelines for Foreign Exchange Reserve Management. Balance of Payments Manual, Sixth Edition. Banking Crises: Cases and Issues. IMF History Volume 2. Zimbabwe: Challenges and Policy Options after Hyperinflation.

A Study of the Soviet Economy. Report on the World Current Account Discrepancy. IMF History Volume 3. IMF History Volume 2 Fund and China in the international Monetary System. How to write a great review. The review must be at least 50 characters long. The title should be at least 4 characters long. Your display name should be at least 2 characters long. At Kobo, we try to ensure that published reviews do not contain rude or profane language, spoilers, or any of our reviewer's personal information.

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Continue shopping. Item s unavailable for purchase. Please review your cart. You can remove the unavailable item s now or we'll automatically remove it at Checkout. Remove FREE. Unavailable for purchase. Continue shopping Checkout Continue shopping. Chi ama i libri sceglie Kobo e inMondadori. Choose Store. Or, get it for Kobo Super Points! Public sector support for the financial system, fiscal stimulus and the automatic stabilizers, as well as the revenue decline from the downturn in commodity and asset prices, are leading to sharp increases in deficits and debt stocks around the world.

Expansionary fiscal policy continues to be necessary in the short term to stimulate economic recovery. But it is now essential that governments reassess the state of their public finances in light of the global crisis and adopt strategies that will ensure medium- and long-term fiscal sustainability. Many of the advanced economies most affected by the crisis are also those where age-related spending will increase markedly in the coming years, adding particular urgency to the need to identify medium-term consolidation strategies. This new paper, which focuses mainly on advanced and emerging market economies, employs projections based on the April World Economic Outlook to quantify the fiscal implications of the crisis for a cross-section of countries.

The authors assess the post-shock fiscal balances and debt outlook, and suggest ways for governments to clarify their strategies for maintaining fiscal solvency. In this series View all. Skip this list. Ratings and Book Reviews 0 0 star ratings 0 reviews. Overall rating No ratings yet 0. How to write a great review Do Say what you liked best and least Describe the author's style Explain the rating you gave Don't Use rude and profane language Include any personal information Mention spoilers or the book's price Recap the plot.

Close Report a review At Kobo, we try to ensure that published reviews do not contain rude or profane language, spoilers, or any of our reviewer's personal information. Would you like us to take another look at this review? No, cancel Yes, report it Thanks! You've successfully reported this review. We appreciate your feedback. Moreover, nearly half of this debt is on making efforts to put deficits and debt firmly on a nonconcessional terms, which has resulted in a dou- downward path toward their medium-term targets. In record levels in the case of emerging market and economies operating at or near potential output and developing economies.

In the United States—where concern. Moreover, experience years—fiscal policy should be recalibrated to ensure shows that countries can be subject to large, unex- that the government debt-to-GDP ratio declines over pected shocks to public debt-to-GDP ratios, which the medium term. Where fiscal space is limited, there. A few advanced economies that increase indirect tax collection at the border by up to have ample fiscal space and are operating at or close to 1—2 percent of GDP per year.

Digitalization could also capacity have room for using fiscal policy to facilitate help governments track down taxes on wealth sheltered the implementation of pro-growth structural reforms. Although the potential revenue prices, commodity exporters should continue to adjust gains from this traditionally inaccessible tax base are to ensure that spending is aligned with medium-term low at current tax rates, digitalization could facilitate revenue prospects.

Several low-income countries need future tax collection on income at the source before it to make room in their budgets to accommodate the escapes the reach of tax authorities. On the spending implementation of infrastructure plans by mobilizing side, the experiences of India and South Africa show revenues, rationalizing spending, and improving spend- how digitalization can help improve social protection ing efficiency. At the same time, all countries need to keep their In the future, the increasing digitalization of busi- sights on policies to lift their medium-term growth nesses—and the emergence of digital giants such as outlook.

Indeed, recent fiscal adjustment in some Google, Apple, Facebook, and Amazon—may exac- countries has not necessarily prioritized growth-friendly erbate challenges faced by the current international measures, as illustrated by the decline in public invest- tax system. Digitalization raises new questions, such ment spending as a share of GDP among advanced as how commercially valuable information generated economies and commodity exporters.

Advanced by users of online services should affect taxing rights economies should focus on seeking efficiency gains in of countries. Should aspects of destination—that is, spending and rationalizing entitlements to make room where the final consumers reside—play a more promi- for more public investment, incentives for labor mar- nent role in assigning taxing rights?

Efforts to modify ket participation, and improvements in the quality of the international tax framework should preferably be education and health services. Some advanced econo- coordinated and consistent with a long-term vision for mies would also benefit from broadening tax bases and the international tax architecture. For emerg- Governments will need to mitigate new digital risks. All countries vulnerable households with limited access to technol- should promote inclusive growth to avoid excessive ogy. Digitalization itself also creates new opportunities inequality that can impede social mobility, erode social for fraud and disruption of government functions.

This includes the use of digital means to evade taxes or illegally claim benefits. The world is becoming digital and so are govern- Digitalization is not a panacea. It calls for a pro- ments, albeit at sharply different paces. Almost all active, forward-looking, and comprehensive reform country governments now have national websites and agenda. Governments must address multiple political, automated financial management systems.

Digitaliza- social, and institutional weakness and manage digi- tion presents both opportunities and challenges for tal risks. They must also budget adequate resources fiscal policy. How can digitalization change the design to finance investments in digital infrastructure and and implementation of policies now and in the future? Last but not least, digitalization makes And what stands in the way?

Greater availability and access to timely and reliable But digitalization is already an overwhelming trend. It is likely to accelerate further. Governments can try Digitalization can reduce the private and public costs to resist it and adapt late and reluctantly; or they can of tax compliance and can improve spending efficiency.

With near-term growth on stronger footing, policy- trend. Although the current level is below stimulus to support demand is no longer the priority. Underpinning need to build fiscal buffers now by reducing govern- debt dynamics are large primary deficits, which are ment deficits and putting debt on a steady downward at their highest in decades in the case of emerging path.

In of a downturn and prevent fiscal vulnerabilities from the case of advanced economies, there has been little becoming a source of stress on the economy if financing improvement in primary balances since Second, such a fiscal adjust- There are several reasons why high government debt ment needs to be anchored on structural fiscal reforms and deficits are a cause for concern and should moti- that support potential growth by promoting human vate countries to build buffers by reducing deficits and and physical capital, and by increasing productivity. A high debt-to-GDP ratio in global debt, with little improvement expected could cause a spike in risk premiums if investors over the medium term.

Average debt-to-GDP ratios are at historic highs. Advanced Economies, — 2. Emerging Market and Middle-Income 3. Note: Average is calculated using GDP at purchasing power parity. Dashed lines refer to the debt level in Average primary balances are at historic lows among emerging market and developing economies. Low-Income Developing Countries, Economies, — — 4 3 6. Average is calculated using GDP at purchasing power parity. Dashed lines refer to primary balance in General Government Debt in Figure 1.

Their cial regulation, other factors are often not easily anticipated. Bova study covers countries over to and identifies and others provide a comprehensive data set of contingent fiscal crisis episodes, with countries facing on average two crises in liability realizations in advanced and emerging market economies for this period.

General Government Debt and Fiscal IMF finds that fiscal risks can be highly Stabilization correlated with each other, with a distinct bunch- Fiscal policy is less stabilizing in countries with higher debt to GDP. They 0. The combination 0. This is because fiscal Spain policy tends to be procyclical in these cases. Romer 1. In particular, 0. FISCO was introduced in the April debt ratios among the hardest hit countries during the global Fiscal Monitor; its sample coverage was expanded and updated in the April Fiscal Monitor. Technical details the balance arising from the crystallization of an array of other on FISCO estimation are in Annex 2.

Therefore, countries should tion Dotsey Following medium-term targets. In economies that are operating at or demand is no longer the priority. At the same time, near potential output, and where debt to GDP is at fiscal multipliers—which measure the short-term high levels, fiscal adjustment should be implemented. Without a sufficiently high growth banks would be expected to raise interest rates to, dividend, fiscal expansions in these countries could at least partly, neutralize the inflationary impact of exacerbate fiscal risks.

For a few advanced econo- mies that have ample fiscal space and are operating 8Fiscal policies have generally been more stabilizing in advanced at or close to capacity, fiscal policy could be used economies than in emerging market and developing economies. Despite output stability. See the April Fiscal Monitor. By contrast, Irons ing revenues, rationalizing spending, and improving and Bivens , Panizza and Presbitero , Eberhardt and Presbitero , and Chudik and others find evidence spending efficiency.

Some of the forces propelling the lower taxes relative to a preexisting baseline, without endangering market access and debt sustainability. See IMF a. Ramey and Zubairy , by contrast, recipient economies. See Blagrave and others Ilzetzki, 13Fiscal targets, including those set under formal rules, should be. See Eyraud and others responses across low- and high-debt states.

It also identifies potential more balanced growth. Meanwhile, the medium-term fiscal risks.

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The third section discusses growth-friendly growth outlook remains subdued among advanced fiscal policies, touching upon the pace and composi- economies, and emerging market and developing tion of fiscal adjustment tailored to country-specific economies need stronger growth to facilitate con- circumstances.

Several countries among this ment, incentives for labor market participation, and last group have debt-to-GDP levels close to those improvements in the quality of education and health seen when debt relief was decided under the Heavily services. All countries should seek to avoid excessive ing implicit liabilities linked to pension and health inequality, which can erode social cohesion, lead to care spending.

The next section quality. Net debt could be an additional metric in countries with sizable liquid financial assets that can be outlook in advanced economies, emerging markets, readily drawn upon to meet debt obligations, and has been used in and low-income developing countries. Advanced Economies Emerging Market and Middle-Income Economies Low-Income Developing Countries Europe Source: IMF staff estimates and projections.

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Note: All fiscal data country averages are weighted by nominal GDP converted to US dollars at average market exchange rates in the years indicated and based on data availability. In many countries, data are still preliminary. Projections are based on IMF staff assessments of current policies.

A large number of countries have debt-to-GDP ratios above critical levels. Advanced Economies 2. Emerging Market and 3. Source: IMF staff estimates. Percent of GDP Even with favorable global financing conditions, In a number of countries, debt to GDP is close to the level when higher debt ratios are pushing up the interest burden, debt relief was previously determined.

Debt-to-GDP ratios more than double when implicit liabilities linked to aging are included. Source: IMF staff calculations. In addition, external borrowing from tighten suddenly. Furthermore, the share of foreign commercial creditors including commodity traders currency debt remains high at one-third of general gov- has grown quickly from a low base, taking various ernment debt in emerging market and middle-income forms, including Eurobonds and syndicated loans.

In some low-income developing both refinancing risk—as nonconcessional debt countries, loans to state-owned enterprises backed by instruments typically have shorter maturity and grace future commodity exports have increased exposure to periods—and the risk of capital flow reversal—as non- commodity price shocks. First-time and lower-rated issuers in becomes an important tool.

Indeed, as global interest international capital markets may be particularly vul- rates declined, many countries have taken the oppor- nerable to loss of market access if financial conditions tunity to lengthen their debt maturity structure and. Low-Income Developing Countries: Share Expense as a Share of Tax Revenue and Total of Nonconcessional Financing Expenditure Percent of total public and publicly guaranteed debt Percent Low-income developing countries are increasingly relying on Interest payments as a share of tax revenues have doubled in nonconcessional debt.

Share of Nonconcessional Financing, —16 1. Interest Expense as a Share of Tax Revenue 80 and Total Expenditure, — 30 Interest expense as percent of tax revenue 70 Interest expense as percent of total expenditure 25 Note: Figure 1. Standardization ISO country codes. Foreign-Currency-Denominated General rollover risk. Since , average maturities have risen Government Debt, Percent of total debt by 1. This includes the growing issu- 1.

Low-Income Developing Countries unchanged at 2. See OECD A broadly neutral stance means that this ratio is broadly constant relative to the previous year. Table excludes nonmarket access countries. Average Note: For most countries, data on maturing debt refer to central government securities. For some countries, general government deficits are reported on an accrual basis. Average 5. Note: Data in the table refer to general government data.

On the revenue side, improvements in —12, and some countries have made efforts to some countries largely reflected cyclical gains in tax expand investment to support growth Greece, Nor- collection, including a strong pickup in revenues way. Social benefits have remained roughly stable. Revenues as a share of GDP have improved less so since Spending has declined by 1.

Investment spending has also adjustment in outer years. However, The small reduction in debt is achieved mainly thanks the magnitude of the decline was smaller than during to higher projected inflation from low levels , in. Memorandum World Output percent 3. Advanced Economies: General Figure 1. EST 1. The fiscal outlook for the United States is driv- Note: Cyclical component refers to improvements in the primary balance ing the average for advanced economies.

This adds to the ris- 0. Part of the expansion is expected to be unwound when certain provisions start —0. The estimates show that all income groups —1. Those in the top quintile Investment. Goods and services. France The draft multiyear budget aims to reduce annual real spending growth gradually to close to zero by , so as to bring the overall deficit to 0. Specific spending reforms to achieve this objective are yet to be defined.

At the same time, the authorities are reducing the corporate tax rate and implementing structural and tax reforms that support employment, including conversion of an existing tax credit into a permanent tax cut in They are also replacing the wealth tax with a less distortionary tax on real estate. Germany The draft budget for envisages a mild expansion through a revision of tax brackets and more generous child-related tax credits, together with higher social benefits.

Following the expansion, structural primary balances would remain unchanged over the medium term. Italy Plans for an increase in value-added tax rates in have been canceled and fiscal policy is expected to remain broadly neutral. Japan A supplementary budget amounting to 0. Plans for a consumption tax hike in —delayed from —remain unchanged.

Part of the revenue increase would be used for childcare support and education. Spain The authorities envisage a gradual consolidation through expenditure restraint, to bring the overall deficit to 0. The consolidation plans include cuts to welfare and current spending, with the exception of defense, education, and health.

Part of the expansion would be unwound in when the provisions on the personal income tax are set to expire. Selected Emerging Market and Middle-Income Economies: Fiscal Developments in Brazil Fiscal consolidation continued in —supported by a recovery of revenues, containment in discretionary expenditure, and lower interest on debt—with the overall deficit declining from 9.

China The on-budget deficit continued to rise to 4 percent of GDP in Stimulus measures included reforms to reduce multiple value-added tax rates and tax cuts for some small enterprises that more than offset on-budget investment spending cuts. Relatively buoyant revenues supported by base-broadening efforts and lower capital expenditures were offset by higher spending including higher compensation to states for the rollout of the new goods and service tax and lower profit transfers from the Reserve Bank of India due to costs incurred during the demonetization.

Indonesia While the overall deficit remained at 2. Mexico The overall deficit was cut to 1. Russia The overall deficit is projected to have fallen by over 2 percentage points to 1. Saudi Arabia The overall deficit was reduced from over 17 percent of GDP in to 9 percent in This was driven by a combination of key non—oil revenue measures—such as the introduction of excises on tobacco and beverages, increased fees on expatriate labor, and savings from energy price reforms—and spending cuts of close to 2. Thailand The overall balance of the public sector weakened by slightly over 1 percent of GDP as sales of licenses and income tax revenues declined.

These results contrast with static lus to the economy China, India, Thailand. The aver- analyses, which show lower-income households gain- age trend among emerging market and middle-income ing the least from the reform. Developments in did little to reverse the Emerging Market and Middle-Income revenue and spending trends of the past five years. Economies: Progress, but Not Enough Tax-to-GDP ratios have been declining, whereas Overall fiscal deficits in emerging markets and spending rigidities have crowded out investment.

On average, the overall deficit declined Turkey and in others due to cyclical consider- from 4. For commodity exporters, tax revenues have GDP in , with diverging fiscal developments also been declining, in some cases because of lower across countries. Although non—commodity revenues oil prices. The headline fiscal balances improved in have held their ground supported by recent reforms most commodity exporters, supported by a pickup Mexico, Saudi Arabia , in many cases the improve- in commodity prices and by expenditure cuts Gulf ment has not been enough to offset the earlier Cooperation Council members, Mexico, and Russia.

Tax revenue to GDP has been falling since , although recent reforms by commodity exporters have lifted non-commodity revenues. Tax Revenue, —23 2. For and over the medium term, spending The composition of spending has shifted away from investment to wages, transfers, and social assistance. Coun- tries aim to contain current expenditure growth below nominal GDP growth, including the wage bill.

It is important to Total expenditure note that the expected improvement in overall balances —0. Several commod- ity exporters are expected to continue reducing their Source: IMF staff estimates. Several non—commodity exporters are also expected to adjust over the medium term Brazil,.

Selected Emerging Market and Middle-Income Economies: Fiscal Stance in and the Medium Term Brazil The fiscal rule introduced at the end of —which establishes a limit on the real growth of primary spending at the federal level—will imply a primary spending reduction of about 0. However, approval of a pension reform, which could generate savings of about 9.

Debt is expected to stabilize just under percent of GDP in the mids. China A tightening of local government spending on infrastructure investment has been announced. However, a recalibration of the economy toward consumption and reform of state-owned enterprises will leave the on-budget deficit stable at about 4 percent of GDP over the medium term, with a moderate decline in off-budget spending. Kuwait Three-year rolling indicative expenditure ceilings have been set, which, combined with recent revenue measures, would keep the overall balance in surplus.

Mexico A constant fiscal deficit target of 2. Russia The —20 budget targets an annual reduction of 1 percent of GDP in the overall deficit, to be achieved mostly through a continued nominal spending freeze. Saudi Arabia Fiscal consolidation will continue to be pursued to balance the budget by To support growth and redistribution, the authorities plan to raise capital spending, provide a direct targeted cash transfer to low- and middle-income households, and offer support to the private sector through specialized funds in the real estate and industrial sectors.

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Thailand The fiscal balance is expected to weaken owing to a moderate boost to infrastructure spending expected over the coming years, and a gradual rise in public spending on health and pensions, in line with demographics. Turkey Fiscal expansion is expected in — The revenue gains from the expiration of temporary tax breaks and earlier reforms to the corporate income tax rate would be offset by recently announced value-added tax exemptions, continuation of minimum wage subsidies, and several new employment incentives, some of which will be effective until the end of Meanwhile, non— commodity exporters let spending drift upward across Low-Income Developing Countries: most items, except for investment spending, which Vulnerabilities Drifting Upward remained unchanged.

In some cases, higher current Overall fiscal deficits in low-income developing spending reflected increases in education spending, countries were broadly unchanged at 4. Furthermore, among commodity exporters, notwithstanding the there has been limited progress among both com- improvement in commodity prices during the second modity and non—commodity exporters in mobilizing half of the year that raised revenue slightly.

The deterioration in fiscal balances over the past Protracted fiscal deficits have contributed to rap- five years does not reflect a scaling up of investment. Debt was rising. Low-Income Developing Countries: Figure 1. Investment has taken a hit as commodity exporters adjust to Since , both commodity and non—commodity exporters have lower prices. Tax Revenue, — Note: The weights were used to calculate averages for — Non-Commodity Revenue, — 18 16 14 Figure 1.

The rise in debt since was mainly driven Department Expenditure Assessment Tool. Note: Change in education outcome refers to change in net secondary by deteriorating primary deficits and rising interest bur- school enrollment. Other factors have also contributed in some cases, Organization for Standardization ISO country codes. Furthermore, in , eight countries were classified as in debt distress. Low-Income Developing Countries: work, almost double the number from one year ago. Spending control is expected to help bring fiscal 40 deficits down in and over the medium term.

However, several countries are Source: IMF staff estimates and projections. Meanwhile, medium-term revenue forecasts for commodity exporters are dis- appointing. While there is an expected pickup in both public and private deleveraging. Stronger demand commodity revenues in , these are expected to could also result in higher-than-expected commodity moderate over the medium term, and little improve- prices, a boon for commodity exporters.

In con- Nonetheless, there are a number of downside risks, trast, some non—commodity exporters are expected to particularly for the medium and longer term. Narrowing deficits contribute economies, emerging markets, and low-income to declining debt in about one-third of the countries developing countries see the April GFSR and Cameroon, Ghana, Kenya. A faster-than-expected increase in global interest rates—in response to a faster pickup in inflation in the United States, for Risks to the Fiscal Outlook example—would add to the public debt burden, Risks appear broadly balanced in the near term especially among countries with large gross financing owing to the economic upswing.

On the upside, the needs and still low growth, and could disrupt market cyclical recovery could prove stronger and support access. Similarly, a and debt service indicators, relevant debt distress thresholds as large depreciation or correction in asset prices could determined by historical episodes, and tailored stress test results to give rise to potential strains on private sector balance assign risk ratings low, moderate, or high risk of debt distress, or in debt distress for individual low-income developing countries sheets wherever currency mismatches are prevalent, so IMF e.

Governments should avoid the idation policies could eventually undermine market temptation of spending the revenue windfalls during confidence in some countries, as projected economic good times. Starting to rebuild buffers now will ensure growth alone would be insufficient to significantly that policymakers have sufficient fiscal ammunition bring debt ratios down.

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  6. Brexit negotiations remain to respond in case of a downturn and prevent fiscal a key source of risk. In several advanced economies, vulnerabilities themselves from hurting the economy. Nonetheless, sion or because of complacency given the favorable economic costs should be moderate if adjustment is economic environment. Geopolitical risks—such as based on policies that support medium-term growth. It to country-specific circumstances, taking into account would directly raise the debt-to-GDP ratio because cyclical conditions and available fiscal space of a lower denominator, unless fully offset by lower Fiscal policy in advanced economies should turn effective interest rates.

    It would further add to debt to consolidation over the medium term, but addi- because of weaker primary balances unless expendi- tional support in the near term would be helpful in ture growth is also curtailed. While oil prices are projected to rise gaps and where debt has reached high levels, fiscal modestly, they could fall if, for example, cohesion policy support should be withdrawn sooner. In the of the cartel among oil producers weakened or oil United States, where tax reform and the two-year production in Africa were to recover. Oil exporters budget agreement provide a procyclical stimulus would see a significant drop in revenues, putting and a less favorable debt outlook, fiscal policy pressure on fiscal balances.

    In countries where should be recalibrated to ensure that the govern- fuel prices are administered by the government, a ment debt-to-GDP ratio declines over the medium decrease in oil prices would lead to lower subsidies term. This should be achieved by mobilizing higher and thus support the fiscal position. A shrinking labor force much-needed infrastructure investment. In the in some advanced economies will create headwinds United Kingdom, a steady but gradual fiscal consoli- to potential growth Germany, Japan, Korea , and dation to rebuild buffers against future shocks could the fiscal cost of retirement benefits and age-related have greater reliance on revenue measures, as earlier health expenditures could put the sustainability of adjustment fell heavily on expenditure.

    In Belgium, current policies at risk Korea, United States. In Ireland, where the economy may be The ongoing recovery presents a golden opportunity approaching full capacity, consolidation may need to to focus fiscal policy on rebuilding buffers and raising accelerate to take advantage of the favorable cyclical potential growth. Forecasts indicate that economic condition to continue rebuilding buffers.

    In Spain, activity will continue to accelerate, which implies that where economic momentum remains strong, a con-. However, the speed of adjust- room for measures lying mostly on the revenue side. Given the strength of the recovery, growth. In France, public spending as a share of Brazil should quicken the pace of consolidation and GDP needs to be reduced wage bill and local front-load the fiscal effort. In Argentina, the primary government spending and its efficiency improved deficit targets set forth by the authorities for —20 the targeting of social benefits and health spending put fiscal policy on the right track, but a faster pace with a view to gradually reducing the fiscal deficit of deficit reduction would decrease financing needs while creating room to reduce taxes.

    In Italy, the and support the disinflation effort. In Turkey, a priority should be to start a credible and ambitious stronger, front-loaded fiscal consolidation—achieved fiscal consolidation to put debt on a robust down- by rationalizing untargeted transfers, containing wage ward path, based on cutting current primary spend- bill increases and subsidies, and cutting discretion- ing while supporting the vulnerable, raising capital ary investment incentives—would support internal spending, lowering tax rates on productive factors, and external rebalancing, help avoid overburdening shifting taxation toward wealth and property and monetary policy, and buoy investor sentiment.

    In consumption, and broadening the tax base. This would also support external rebal- revenue underperformance resulting in cuts to capital ancing by helping to narrow unduly large current expenditures. In China, a consolidation of 0. In the Netherlands, of spending away from infrastructure investment and the loosening of the fiscal stance through increased toward health, education, and social security is neces- spending on education and research and develop- sary over the medium term to curb the rapid buildup ment and a reduction of the tax burden will help of debt and support the rebalancing of the economy.

    In Korea, where cyclical Consolidation should only be interrupted if growth shortfalls remain, reducing the structural balance were to fall significantly. In Angola, the medium-term non-oil pri- including targeted transfers to the most vulnerable, mary balance needs to improve by at least 4. In Mongolia, mated 0. In momentum and promote structural reforms, while Nigeria, a growth-friendly fiscal adjustment—driven the debt trajectory needs to be anchored by a credi- by the front-loading of non-oil revenue mobilization ble medium-term fiscal consolidation plan.

    Members of the Central African. Advanced Economies revenues—combined with sufficient financing to 8 smooth the adjustment path.

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    Several countries 2 will need to keep debt under control Ethiopia, Ghana, Tajikistan. In Sudan, deficit reduction 0 could also support the disinflation effort, as it would —2 reduce central bank direct budget financing. In some countries that have planned a consolidation —4 path, concrete measures should be better identified —6 Vietnam. Other countries will have to mobilize 80 90 10 20 revenues, rationalize spending, and improve invest- ment spending efficiency to create the fiscal space 2. Emerging Market and Middle-Income Economies needed to accommodate the implementation of 8 infrastructure plans Guinea, Tanzania.

    In Saudi Arabia, availability of fis- cal space has enabled the authorities to appropriately 2 slow the pace of the projected budgetary retrench- 0 ment starting in to smooth economic activity. In Malaysia, fiscal consolidation could proceed gradually —2 over the medium term; however, priority should be —4 given to revenue measures, including broadening the tax base and raising the tax rate on goods and services.

    Low-Income Developing Countries Structural Fiscal Policies to Buttress Growth 8 Adjustment strategies should center on structural 6 fiscal policies that strengthen medium-term growth 4 prospects. In turn, stronger medium-term growth helps reduce fiscal vulnerabilities, including through stron- 2 ger balances and lower risk premiums. In the case of 0 advanced economies, real GDP per capita growth is expected to remain subdued after declining for several —2 decades. Growth-friendly fiscal policies can act through both Source: IMF staff estimates and projections.

    They can impact growth directly through structural tax and expenditure measures that boost employment, the accumulation of physical and human capital, and productivity. They can work indi- rectly by reducing macroeconomic volatility and by facil-. Value-Added Tax, Compliance, and Policy structural reforms in labor and product markets. Also, Gaps as discussed in the October Fiscal Monitor, fiscal Even among advanced economies, there is room to improve VAT policies can be used to avoid excessive inequality.

    Countries can directly raise growth by upgrading their 1. Several studies have shown that budget-neutral 0. SVK trast with tax rate hikes, measures that broaden tax bases such as limiting interest deduction or preferential tax 2. The United States 8 7 has several areas for reform not addressed with the 6 recent tax legislation. For example, the eligibility 5 and generosity of the earned income tax credit 4 should be expanded to boost labor supply and sus- 3 tain wages for the working poor.

    There is also scope 2 to rely more on other revenue sources, including a 1 federal-level consumption tax, a broad-based carbon 0 Low income Lower middle Upper middle Higher income tax, and a higher federal gas tax. The compliance gap is incentives for company growth. In Italy, Spain, and the difference between the potential VAT revenue that could have been the United Kingdom, reducing value-added tax gaps collected given the current policy framework and actual accrued VAT revenue.

    For the reforms in 23 advanced and emerging market economies from compliance gap, potential revenue refers to the VAT revenue that could to , using narrative information from Organisation for Economic have been collected given the current policy framework. The database contains granular received technical assistance from the IMF through the Revenue information on rate and base changes for personal income taxes, Administration—Gap Analysis Program.

    The number of countries in each group is 4 low income, 4 lower middle income, 10 upper middle income, corporate income taxes, and value-added taxes. It also provides specific and 8 higher income. See Amaglobeli, Crispolti, and others forthcoming. In Japan, eliminating the spousal tax deduction digitalization may also create new fraud opportu- should boost female labor force participation. Expenditure measures that raise public investment A well-designed Medium-Term Revenue Strategy and enhance human capital can also support growth MTRS can provide a useful road map.

    After three decades of decline, istration, removing exemptions to VAT and income public investment remains at historical lows in taxes, and introducing excise taxes on vehicles and advanced economies. It has begun to recover in fuel. IMF c finds that coun- rates and undertaking administrative initiatives to tries that significantly improve public investment strengthen revenue institutions. Many countries efficiency could potentially double the impact have room to raise revenues by narrowing VAT of investment on output. PIMAs also case of commodity exporters, greater tax capacity reveal that countries need not only to improve can make room for spending on human capital and their institutional framework existence of formal infrastructure, as well as on other structural reforms rules and procedures , but also to make sure the to facilitate diversification.

    By improving access to taxpayer data, these of government. The United States should increase technologies can help countries reconcile payment public investment in infrastructure, currently at differences, monitor revenue collection in real time, historically low levels, while ensuring the right perform audits, and identify anomalous behavior of balance is achieved between maintenance and new taxpayers. This in turn has helped improve domes- projects. Germany should improve public invest- tic revenue mobilization, tackle tax evasion from ment management at the local level, including by cross-border fraud, and lower revenue losses from rebuilding staffing capacity.

    Canada should enhance personal income and wealth sheltered in tax havens. Public Investment, — There are many weaknesses to be addressed both in the Percent of GDP, simple average institutional framework and in the effectiveness of public 9. Fiscal rules 2. National and sectoral 7. Monitoring of assets 10 planning 6. Project 8 management 3. Central-local 6 coordination 5. Transparency 4 4. Management 4. Availability 5. Company 2. Protection of 6.

    Multiyear investment budgeting 0. Project selection 7. Budget 9. Project 8. Budget comprehensiveness appraisal unity 2. Based on how many of these key features are in 40 place, countries are given a PIMA score between 0 no key features in place and 10 all key features fully in place. For details see IMF c. Public capital stock per capita input. For more details, see IMF c. Countries with limited fiscal space, such as South Africa, should continue to attract private sector participation and strengthen the evaluation and management of investment Ireland should improve the integration between projects.

    Among advanced econo- mies where population is aging Germany, Italy, 32The recently published National Development Plan highlights. Emerging market and developing education spending. Health 80 education, and social protection among vulnera- ble groups. In China, continued increases in public spending in these sectors would boost medium-term growth, 60 while reducing income inequality and facilitating economic rebalancing. Encouraging female labor 50 force participation in India and Saudi Arabia will go a long way in improving the quality of the labor force.

    Education There is scope for the implementation of the policies Net school enrollment—secondary percent. Frontier outlined above to be budget neutral. For example, Gap France can obtain important fiscal savings by gradually 90 reducing the wage bill, consolidating subnational gov- 80 ernments, better targeting social benefits, improving 70 the efficiency of health spending, and implementing measures to further raise the effective retirement age.

    Digital tools can also enhance financial management, service delivery, and spending efficiency. They can be used to disseminate important information and monitor public servants. In the euro area, a central volatility and facilitating the implementation of fiscal capacity for macroeconomic stabilization would productivity-enhancing structural reforms.

    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)
    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)
    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)
    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)
    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)
    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)
    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)
    Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys) Fiscal Monitor, October 2013: Taxing Times (World Economic and Financial Surveys)

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