Bayoumi, T., D. Botman, and M. Kumar, 2005, “Effects of Social Security and Tax Reform in the United States,” United States-Selected Issues, IMF Country Report No. 05/258 (Washington D.C.: International Monetary Fund).
Bičáková, A., J. Slačálek, and Slavík, M. 2006, “Fiscal Implications of Personal Tax Adjustment in the Czech Republic,” Czech National Bank Working Paper No. 7/2006, (Prague: Czech National Bank).
Botman, D., D. Laxton, D. Muir, and A. Romanov, 2006, “A New-Open-Economy-Macro Model for Fiscal Policy Evaluation,” IMF Working Paper 06/45 (Washington DC: International Monetary Fund).
Botman, D., and M. Kumar, 2007, “Global Aging Pressures: Impact of Fiscal Adjustment, Policy Cooperation and Structural Reforms,” IMF Working Paper 07/196 (Washington D.C.: International Monetary Fund).
Botman, D., and D. Iakova, 2007, “Policy Challenges of Population Aging in Ireland,” IMF Working Paper 07/247 (Washington D.C.: International Monetary Fund).
Dalsgaard, Thomas, 2008, “Tax and Welfare Reforms in the Czech Republic—Structural Implications and Challenges,” IMF Working Paper 08/52 (Washington D.C.: International Monetary Fund).
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Appendix I. Analytical Framework
Appendix II. Sensitivity Analysis
The authors would like to thank, without implicating, Subhash Thakur, Thomas Dalsgaard and participants at the seminars at the Czech National Bank and the International Monetary Fund for useful comments. Research assistance from Juan Carlos Flores is also gratefully acknowledged.
See IMF Country Report 07/85.
The long term age-related spending projections are based on a Generational Accounting model that assumes the replacement rate for pensions are maintained while health care spending per capita increases at a rate slightly above productivity growth rates. For further details, see IMF Country Report No. 05/275.
See Botman, Laxton, Muir and Romanov (2005) for a detailed discussion of the model features. See Bayoumi, Botman and Kumar (2005) for an examination of the impact of tax reform and pension reform in the United States.
These estimates differ from the authorities estimates (October 2007 Fiscal Outlook) due to adjustments made to exclude savings accruing from the postponement of some laws such as the casualty and sickness insurance.
The estimates used in the simulations, which are based on an earlier government proposal, differ from the above as they do not take into account some additional measures incorporated in the final version approved by the Parliament such as the reduction of personal income tax to 12.5 percent in 2009 and faster reduction of corporate income tax in 2008. Thus, the tax reform scenario in the simulations presents a more favorable impact than is foreseen in the approved package. The simulations also provide a more optimistic scenario given that certain expenditure measures for 2009/10 (such as health care) that have been included are not yet fully identified and approved.
Since the model assumes a small open economy, the interest rate is predominantly determined by the euro area interest rate. Deviations from this rate reflect the presence of a risk premium that depends on the size of external borrowing. The sensitivity of the premium is set at a relatively low level in the model, while external indebtedness increases substantially only in the medium term under the no-policy-change scenario. Since the model does not incorporate nominal rigidities, monetary policy is absent. In reality, monetary policy would be expected to offset such a rise in interest rates, mitigating the impact on consumption. For further details, please see chapter 3 on monetary policy implications of the fiscal reform program.
In the absence of consumer durables, the model does not predict a decline in consumption in 2008 from anticipation effects from the VAT hike in 2008, that would lead to higher consumption towards the end of 2007. Furthermore, the increase in the lower VAT rate generally applies to non-durables such as food, education materials, for which forward buying would be limited.
Since GFM does not endogenously model the direct effect on labor supply from increasing the retirement age, the impact on the working age population and revenue is estimated exogenously using a microeconomic model. The macroeconomic effects of this projected deficit are then simulated using the GFM.
It is assumed that the higher social security contributions are applied on employees. In GFM, the impact would be identical if instead social security contributions paid by employers would increase.