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Jaromír Šindel ECES The Puzzles of Central and Eastern Europe Transformation and Integration Fiscal Policy and Euro ECES, Prague • 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 The Puzzles of Central and Eastern Europe Transformation and Integration Topics • CEEC and Fiscal Policy, euro linkage ECES, Prague – Fiscal reforms, fiscal consolidation, implication for sustainable development and economic growth, Tax Competitiveness EFFICIENCY The Puzzles of Central and Eastern Europe Transformation and Integration Understand to Fiscal Policy non-efficient tax system Source: www.energystar.com, own layout. ECES, Prague non-efficient spending Structural and cyclical governmetn budget 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) Source: Prof. E. Dolan, Lecture at VSE Prague, 2005. ECES, Prague Gap of about 2% between cyclical and structural deficit during recessions shows effect of automatic stabilizers The Puzzles of Central and Eastern Europe Transformation and Integration Fiscal Economic Policy Time inconsistency 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. ECES, Prague Source: Prof. E. Dolan, Lecture at VSE Prague, 2005. The Puzzles of Central and Eastern Europe Transformation and Integration Fiscal Economic Policy Time inconsistency and election year • Time inconsistency and the effect of structural changes in fiscal policy is stronger during election year. ECES, Prague Source: Prof. E. Dolan, Lecture at VSE Prague, 2005. The Puzzles of Central and Eastern Europe Transformation and Integration Fiscal Economic Policy Savings in the USA, 1970-2003 (% GDP) Ricardian equivalence? ECES, Prague Source: OECD Economic Studies No. 38, 2004/1 The Puzzles of Central and Eastern Europe Transformation and Integration Ricardian Equivalence in the USA • There is many measures of fiscal policy sustainability. We use the unchanging level of debt in GDP term. So: • Because B D and D d Y , using derivation formula for change of d we get • In term of GDP D Y d d Y Y D D Y D Y Y Y2 and because . Y g Y we get d B g d . Y • Our goal is d 0 , so the level of unchanged Then desired balance of fiscal budget is b d g . Source: Obsfeld, Rogoff (2004) ECES, Prague debt is b d g . The Puzzles of Central and Eastern Europe Transformation and Integration Sustainable Fiscal Policy 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? • 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) call for flexible and sustainable fiscal policy The Puzzles of Central and Eastern Europe Transformation and Integration Review of the OCA theory • Question of OCA endogenity – Convergence to OCA and higher flexibility follow integration process ECES, Prague Source: Prof. E. Dolan, Lecture at VSE Prague, 2005. ECES, Prague • 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. The Puzzles of Central and Eastern Europe Transformation and Integration Why Rules in Eurozone? Optimal Mix of Monetary and Fiscal Policy in Currency Union is not Feasible Optimal Mix of Monetary & Fiscal Policy is not Feasible due to Free Rider Problem Source: Prof. E. Dolan, Lecture at VSE Prague, 2005. ECES, Prague • 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. The Puzzles of Central and Eastern Europe Transformation and Integration Why Rules in Eurozone? Debt and Deficit in Eurozone and EU Member Countries ECES, Prague Source: Prof. E. Dolan, Lecture at VSE Prague, 2005. The Puzzles of Central and Eastern Europe Transformation and Integration Rules in Eurozone and Reality • Fiscal Policy and Tax Burden – structure of tax burden, tax burden according to economic function • Changes and Reforms • Tax Competitiveness The Puzzles of Central and Eastern Europe Transformation and Integration Fiscal Policy - Changes, Reforms? ECES, Prague Tax to GDP ratio in EU countries and the US and Japan (in %, ranked by 2003 level) ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden Structure of tax revenues by major type of taxes (2003, in % of total tax burdens) ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden Taxes on labour – empl. and non-employed (pension and social benefits), consum. and capital - capital and business income and stocks (in % of GDP, 2003) ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden accord. to ec. function and capital (capital and business income and stocks) (in % of total taxation, 2003) ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden accord. to ec. function Shares of tax revenues raised on labour (empl. and non-employed), consumption changes in the total tax-to-GDP ratio (1995-2003, diff. in p.p. of GDP) ECES, Prague Note:*LT: 2000-2003 Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden accord. to ec. function Contribution of taxes on labour, capital and consumption (in % of GDP) to the ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden accord. to ec. function Development of implicit tax rates for the Member States (1995 - 2003, in %) Trend developments of ITRC in the old and new Member States (1995-2003, in %) ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden accord. to Consumption Implicit tax rates on consumption in the EU (1995-2003 changes in the rate in p.p.) ECES, Prague Note: LT, PL, SK: no data available Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden accord. to Consumption Decomposition of the implicit tax rate on labour force in EU (2003, in %) ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Burden accord. to Labour Effective top statutory tax rate on corporate income (2005, in %) ECES, Prague 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 The Puzzles of Central and Eastern Europe Transformation and Integration Tax Competitiveness Top statutory personal income tax rate (2005, in %) ECES, Prague Note: Without surcharges - DK, FI, SE: state taxes plus municipality taxes Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Competitiveness Develop. of effective top statutory tax rate on corporate income (1995-2005 in %) ECES, Prague Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Competitiveness Evolution by major type of taxes (1995-2003, differences in % points of GDP) ECES, Prague Note: data for EE, CY and HU are not available for 1995. Source: Eurostat. Structures of the taxation systems in the European Union The Puzzles of Central and Eastern Europe Transformation and Integration Tax Competitiveness