- International Monetary Fund. Fiscal Affairs Dept.
- Published Date:
- October 2013
Arab country in transitionCAB
cyclically adjusted balanceCAPB
cyclically adjusted primary balanceCDF
cumulative distribution functionCFC
controlled foreign corporationCIS
Commonwealth of Independent States (WEO classification)GDP
gross domestic productGFSM
Government Finance Statistics ManualGFSR
Global Financial Stability ReportLAC
Latin America and the CaribbeanLIC
Middle East and North AfricaOECD
Organisation for Economic Co-operation and DevelopmentVAT
World Economic Outlook
United Arab EmiratesARG
Antigua and BarbudaAUS
Bosnia and HerzegovinaBLR
Central African RepublicCAN
Congo, Democratic Republic of theCOG
Congo, Republic ofCOL
Micronesia, Federated States ofGAB
Hong Kong SARHND
Saint Kitts and NevisKOR
Macedonia, former Yugoslav Republic ofMLI
Papua New GuineaPOL
São Tomé and PríncipeSUR
Trinidad and TobagoTUN
Taiwan Province of ChinaTZA
Saint Vincent and the GrenadinesVEN
Budgetary measures that dampen fluctuation in real GDP, automatically triggered by the tax code and by spending rules.C-efficiency
Revenue from the value-added tax divided by the product of the standard rate and aggregate private consumption.Contingent liabilities
Obligations of a government whose timing and magnitude depend on the occurrence of some uncertain future event outside the government’s control. Can be explicit (obligations based on contracts, laws, or clear policy commitments) or implicit (political or moral obligations) and sometimes arise from expectations that government will intervene in the event of a crisis or a disaster, or when the opportunity cost of not intervening is considered to be unacceptable.Cyclical balance
Cyclical component of the overall fiscal balance, computed as the difference between cyclical revenues and cyclical expenditures. The latter are typically computed using country-specific elasticities of aggregate revenue and expenditure series with respect to the output gap. Where unavailable, standard elasticities (0, 1) are assumed for expenditure and revenue, respectively.Cyclically adjusted balance (CAB)
Difference between the overall balance and the automatic stabilizers; equivalently, an estimate of the fiscal balance that would apply under current policies if output were equal to potential.Cyclically adjusted (CA) expenditure and revenue
Revenue and expenditure adjusted for temporary effects associated with the deviation of actual from potential output (i.e., net of automatic stabilizers).Cyclically adjusted primary balance (CAPB)
Cyclically adjusted balance excluding net interest payments.Expenditure elasticity
Elasticity of expenditure with respect to the output gap.Fiscal devaluation
A revenue-neutral shift from employers’ social contributions toward value-added tax.Fiscal multiplier
The ratio of a change in output to an exogenous and temporary change in the fiscal deficit with respect to their respective baselines.Fiscal stimulus
Discretionary fiscal policy actions (including revenue reductions and spending increases) adopted in response to the financial crisis.General government
All government units and all nonmarket, nonprofit institutions that are controlled and mainly financed by government units comprising the central, state, and local governments; does not include public corporations or quasi-corporations.Gross debt
All liabilities that require future payment of interest and/or principal by the debtor to the creditor. This includes debt liabilities in the form of special drawing rights, currency, and deposits; debt securities; loans; insurance, pension, and standardized guarantee schemes; and other accounts payable. (See the 2001 edition of the IMF’s Government Financial Statistics Manual and the Public Sector Debt Statistics Manual). The term “public debt” is used in the Fiscal Monitor, for simplicity, as synonymous with gross debt of the general government, unless otherwise specified. (Strictly speaking, the term “public debt” refers to the debt of the public sector as a whole, which includes financial and nonfinancial public enterprises and the central bank.)Gross financing needs (also gross financing requirements)
Overall new borrowing requirement plus debt maturing during the year.Interest rate–growth differential
Effective interest rate (r, defined as the ratio of interest payments over the debt of the preceding period) minus nominal GDP growth (g), divided by 1 plus nominal GDP growth: (r – g)/(1 + g).Net debt
Gross debt minus financial assets, including those held by the broader public sector: for example, social security funds held by the relevant component of the public sector, in some cases.Nonfinancial public sector
General government plus nonfinancial public corporations.Output gap
Deviation of actual from potential GDP, in percent of potential GDP.Overall fiscal balance (also “headline” fiscal balance)
Net lending/borrowing, defined as the difference between revenue and total expenditure, using the 2001 edition of the IMF’s Government Finance Statistics Manual (GFSM 2001). Does not include policy lending. For some countries, the overall balance continues to be based on GFSM 1986, in which it is defined as total revenue and grants minus total expenditure and net lending.Policy lending
Transactions in financial assets that are deemed to be for public policy purposes but are not part of the overall balance.Primary balance
Overall balance excluding net interest payment (interest expenditure minus interest revenue).Public debt
See Gross debt.Public sector
The general government sector plus government-controlled entities, known as public corporations, whose primary activity is to engage in commercial activities.Revenue elasticity
Elasticity of revenue with respect to the output gap.Stock-flow adjustment
Change in the gross debt explained by factors other than the overall fiscal balance (for example, valuation changes).Structural fiscal balance
Difference between the cyclically adjusted balance and other nonrecurrent effects that go beyond the cycle, such as one-time operations and other factors whose cyclical fluctuations do not coincide with the output cycle (for instance, asset and commodity prices and output composition effects).Tax expenditures
Government revenues that are forgone as a result of preferential tax treatments to specific sectors, activities, regions, or economic agents.
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Some of the revenue strength likely reflects one-off factors—such as shifting of tax payments in anticipation of higher marginal rates from January 2013—that are not captured by the cyclical-adjustment procedure. If so, the decline in the measured cyclically adjusted deficit overestimates the actual degree of tightening.
The structural balance excludes the clearance of capital expenditure arrears in 2013.
Future issues of the Fiscal Monitor will discuss spending reform options.
The issue of how much high debt hampers growth—and whether there is a “threshold”—remains quite controversial. However, with few exceptions (including Panizza and Presbitero, 2012), most studies concur that the effect on potential growth is not trivial. That being said, the desirable level of debt need not be the same for all countries, as factors such as the investor base, volatility in the interest rate–growth differential, and the level of contingent liabilities also have a bearing on the appropriate debt target. See the April 2013 Fiscal Monitor for a review of the literature and related issues.
The April 2013 Fiscal Monitor discusses these scenarios as well as underlying assumptions in detail.
Depending on, among other factors, the starting debt level, the resulting structural balance targets vary between a 1 percent surplus and a 3 percent deficit. It is assumed that countries attain their medium-term structural targets no later than 2020 and maintain that level thereafter.
The primary balance gap is defined as the difference between the actual primary balance and the primary balance required to stabilize the debt at current levels, taking 2013 as the year of reference.
For example, in Brazil policy lending to public financial institutions amounted to 8 percent of GDP from 2008 to 2012. In China, local-government financing vehicles and off-budget funds are estimated to account for about 19 percent of GDP.
This assumes a full pass-through of the cuts for the share of aid provided as grants (about 80 percent). For a discussion of possible domestic offsets to the scaling down of aid, see Section 2.
Estimates based on a sample of nine emerging market economies representing a cross-section of commodity exporters suggest that a 10 percentage point across-the-board fall in commodity prices would lead to a decline of more than 1 percent of GDP in budget revenues annually (see the April 2011 Fiscal Monitor).
The scenario assumes that foreign holdings of local-currency government debt fall by 30 percent, U.S. Treasury note yield increases by 100 basis points, and the Chicago Board Options Exchange Market Volatility Index (VIX) is up by 10 percentage points. For more details, see the October 2013 Global Financial Stability Report.
Data on guarantees and other contingent liabilities for emerging market economies are scant. For a discussion on the contingent liabilities in India and China, see the April 2013 Fiscal Monitor.
This is the unweighted average for advanced economies with debt-to-GDP ratios above 60 percent or cumulative fiscal adjustment higher than 3 percent of GDP.
Greater-than-planned reliance on revenue measures partly reflects spending rigidities; it is also a feature of previous consolidations (Mauro, 2011).
Earthquake-related reconstruction outlays explain the absence of spending offset in Japan.
The concept and measurement of tax expenditures, and experience in their elimination, were discussed in the April 2011 Fiscal Monitor.
One would, of course, expect nominal increases simply to maintain the real value of excises levied as fixed monetary amounts.
In Germany, for instance, the solidarity surcharge introduced in the wake of unification in 1991 is still in place.
Some have expanded in-work tax credits, with effects similar to a rate cut on lower earnings.
An important exception is Brazil, where the employers’ contribution has been converted to a low rate and a sectorally differentiated turnover tax.
The central estimate of U.S. IAWG (2013) for the social cost of carbon.
On climate policies in hard macroeconomic times more generally, see Jones and Keen (2011).
This bias affects all types of company but is especially troubling in regard to financial institutions, given the great damage that their excess leverage can cause.
Including novel taxes on high-frequency trades. These taxes have appeal if such trades are seen as socially costly, although it remains unclear whether regulatory measures would be superior.
See especially Boxes 3 and 4.
Meaning here that the proportionate fall in disposable income is higher at higher income levels.
In Greece, for instance, although the loss of disposable income as a result of consolidation measures increased with income over the top nine deciles, the lowest income decile experienced a particularly large reduction.
The sample is a cross-section of 164 countries in 2012 (panel estimation would be preferable, but data limitations preclude it). Revenues exclude the proceeds from capital income, grants, natural resources, and taxes on international trade. Explanatory variables include per capita GDP, the old-age dependency ratio, population growth, net exports of oil and gas, and the political participation rate. For further details see Torres (2013).
For instance, one cannot say that increasing effort from 30 percent to 40 percent is “easier” than increasing it from 80 percent to 90 percent, or that it would be equally easy for two countries with effort of 70 percent to raise it to 80 percent.
The underlying assumptions about economic growth and interest rates follow World Economic Outlook projections until 2018 and are model determined thereafter. See Statistical Table 13b for more details.
IMF (2011) discusses this potential in more detail.
As Cnossen (2003) argues, the EU VAT, nearly 50 years old, is showing its age.
A cost of means-tested compensation of this kind is that its withdrawal, as income increases, leads to higher marginal effective tax rates over some income range—as Apps and Rees (2013) stress in the Australian context—so that equity gains need to be traded against efficiency losses.
It is possible, for instance, to decompose the policy gap further into components related to rate differentiation and exemptions, as Keen (2013) does for the EU countries above.
The research has focused on advanced economies. See, in particular, Arnold and others (2011). OECD (2013b) uses this and a similar hierarchy on the spending side as a starting point to assess alternative compositions along consolidation paths.
The precise nature of the injustice in low tax rates on business income is rarely articulated. The implications for the distribution of income at the personal level are not as obvious as is often supposed: shareholders, including through pension funds, are not necessarily especially well off, the overall burden also depends on personal-level taxes on dividends and capital gains, and in some circumstances the benefits of low corporate tax rates may be passed on in part to workers—though this is less likely the more widely the low rates apply and the more they apply to profits in excess of normal, for reasons set out, for instance, in IMF (2010a). The implications of the devices now discussed for the distribution of tax revenue across countries are no less a concern, pointing to the deeper question of how rights to tax international activities should be allocated.
In his “Special Message to the Congress on Taxation” on April 20, 1961; the text of the message is available at http://millercenter.org/president/speeches/detail/5669.
Klemm and van Parys (2009) find that tax measures have attracted foreign direct investment in lower-income countries, and van Parys and James (2010) find some effect in the Caribbean too. Kinda (2013), on the other hand, finds little impact on the foreign share of the capital stock, with other factors much more important.
This is true even in terms of national self-interest: investment can be increased in high-tax countries if more-tax-sensitive firms can use low-tax jurisdictions to reduce their effective tax rate (Desai, Foley, and Hines, 2006).
Instead of allocating a multinational’s taxable profits across jurisdictions by the use of arm’s-length (market-mimicking) prices, “formula apportionment” would allocate a multinational’s global profit by reference to indicators of its activity in each jurisdiction (such as sales, payroll, or workforce). This alternative approach, used at the subnational level in both Canada and the United States, has attracted considerable interest from civil society organizations, and the European Commission has proposed a system of this kind—a Common Consolidated Corporate Tax Base—for the European Union. These and other efficiency aspects of coordination are reviewed in Keen and Konrad (2013).
Peter, Buttrick, and Duncan (2010) show that the trend toward lower top marginal personal income tax rates over the last 30 years has been worldwide and that the wider progressivity of the system—measured in terms of the distribution of tax liabilities over the full income range—has trended down in all but the lowest-income countries.
Piketty, Saez, and Stantcheva (2011) note that the cuts in top marginal rates generally preceded increased income shares of the top 1 percent.
The same is true of essentially all tax issues, of course, but is especially evident when, as here, the focus is explicitly on raising more from a particular group.
Because the household surveys from which these figures are calculated underrepresent those with very high incomes.
In April 2013 the United Kingdom reduced its top rate from 50 percent to 45 percent.
The adoption of the “flat tax” in Russia in 2001 is a famous example of a reform that cut the top marginal rate (from 30 percent to 13 percent) and was followed by a large increase in personal income tax revenue. Close analysis has concluded, however, that this primarily reflected nontax developments (Ivanova, Keen, and Klemm, 2005; Gorodnichenko, Martinez-Vasquez, and Peter, 2009). These analyses also concluded that the reform did improve compliance, suggesting that the revenue-maximizing top personal income tax rate is likely to be lower where compliance is weak.
This change alone would reduce Gini coefficients by less than 0.01 on average.
More precisely, it shows what the weight attached to the welfare of those in the highest incomes (relative to that on those with lower incomes) must be if (given the assumption on behavioral responses in the figure) the current top marginal rate exactly balances the welfare loss to the richest (from a slight increase in the marginal rate they face) against the social value of the additional revenue they pay.
By the same token, the trend toward lower top rates over the last three decades is consistent with an increase in the valuation of the welfare of those with the highest incomes relative to those with lower ones. It remains an open question whether social preferences are now reverting to their earlier pattern.
An estate tax is one levied on the value of assets at death; an inheritance tax is levied on the recipients.
Kopczuk (2013) reviews the evidence, which is more informative about shorter-term responses to incentives—one macabre distortion being to the timing of death (Kopzcuk and Slemrod, 2003)—than it is about longer-term effects on capital accumulation. Theoretical results on optimal bequest taxation differ widely. Fahri and Werning (2010) find that it is optimal to subsidize bequests (because donors do not take full account of the social benefit to the recipients). In a different setting, Piketty and Saez (2012) find the optimal rate to be positive, and in some cases substantial. For general discussion, with an eye to practicalities of implementation, see Boadway, Chamberlain, and Emmerson (2010).
From the Eurosystem’s Household Finance and Consumption Survey (Household Finance and Consumption Network, 2013).
There is evidence, for instance, that when some jurisdictions commit to exchange of information, deposits partly move to those that do not (Johannesen and Zucman, 2013).
For example, in the Slovak Republic poorer households were compensated for the effect of income tax reform in 2004; in Chile, tax reform in the early 1990s, including reform of the VAT, was accompanied by an increase in social spending (Brys, 2011).
In Latin American and Caribbean countries, for instance, the focus of reforms has shifted from simplification and the reduction of distortions in the early 1990s to revenue mobilization in later years, largely in response to crises (IDB, 2013).
If all tax reforms produced clear winners and losers, policymakers could, in principle, implement the most efficient reform in conjunction with a compensation mechanism for losers. Weingast, Shepsle, and Johnsen (1981) explain the persistence of inefficiency as a divergence between economic and political costs and benefits.
On the other hand, as discussed in Table 14, sometimes a big-bang approach to implementation may be desirable to stem opposition.
From that perspective, fiscal councils could be helpful in assessing the implications of alternative tax proposals. This is one of their responsibilities, for example, in Australia and Korea.
User charges were raised for private health insurance in the United States (Ryu and others, 2013).
See IMF (2013a) for a similar model.
Two-thirds of the gap between actual and predicted growth rates in 2011 was driven by these four countries and Korea.
The projections up to 2018 are based on the macroeconomic projections from the World Economic Outlook (economic growth, general government public debt–to–GDP ratios, and unemployment rate). Beyond 2018, the projections assume that excess cost growth (the difference between the growth of real health spending and GDP growth, after the effect of aging is adjusted for) will gradually return to its historical average by 2030.
Some studies argue that part of the recent slowdown in health spending in the United States could reflect structural changes in the health care system that affect long-term spending growth, including those happening under the ongoing implementation of the country’s health care reform act (Cutler and Sahni, 2013).
With obvious amendments when estimation is on panel data, which also has the advantage (among others) of providing fixed effects that could be interpreted as giving some indication of social preferences. Data limitations—the desire to apply both methods to the same data set—mean the analysis here is on a cross-section.
See for instance, Pessino and Fenochietto (2010), including on the econometrics involved. Note that equation (2) implies a bias in ordinary least squares estimation of equation (1) if, as one might expect, policy choices are correlated with the xi.
Though the presence of the error vi means that actual revenue may exceed the estimated maximum.
Estimation is by maximum likelihood, with U(zi) assumed to have a half-normal distribution and v to be normally distributed. See Grigoli and Muthoora (2013).
Cross-section estimation techniques, whether in the context of the peer analysis or of stochastic frontier analysis, cannot fully capture the effects of country-specific circumstances and may bias estimates of the revenue gaps or tax effort. Given these and other data limitations, results should be interpreted with caution.
This appendix is based on Norregaard (2013).
And sometimes transaction and/or capital gains taxes too.
Theorists have shown interest in self-assessment schemes (an idea attributed to Sun Yat-sen) under which taxpayers declare a value but are then required to accept bids for some specified amount in excess. Practical experience is limited, however, though such a scheme has been used in Bogotá, Colombia.