Fiscal Reform Research Articles

Transformation of financial institutions of the states-members of the Eurasian economic union during the COVID-19 pandemic

The search for a balance between reproduction and consu-mption, the need to correct expenditures and the interconnection of national financial institutions have become one of the aspects of further economic integration of the EAEU countries in the period 2020-2021. The governing body of the Eurasian Economic Union (EAEU), the Eurasian Economic Commission (EEC), proposed a fiscal reform to increase the economic growth rate of the union, which predetermined the need for a structural transformation of financial institutions aimed at stimulating innovation in the countries of the Eurasian region. The article analyzes the forecasts of experts from the Bank of Russia, the International Monetary Fund, the World Bank for the period 2021-2022 for the EAEU member states and assesses measures to restructure their financial institutions.

IMPACTS OF CARBON PRICING ON DEVELOPING ECONOMIES

Carbon pricing is widely recognized as an effective policy instrument for climate change mitigation. Carbon pricing have been imposed in 39 developed countries and eight middle-income countries. Eight more middle-income countries are considering its implementation. As experiences from industrialized countries may not be relevant to developing countries, this literature review fills a knowledge gap by collating the impacts of carbon pricing in developing economies to facilitate cross-learning. Some developing countries still have distortionary subsidies in place, while others are going through environmental fiscal reforms to nudge their societies and economies towards greenhouse gases emission reduction. Various studies demonstrated that safeguards introduced with carbon pricing could help firms to transition while maintaining the motivation to innovate to stay competitive. At the household level, given different energy consumption patterns, carbon pricing in developing economies is not necessarily regressive, especially for rural population. Aggregate impacts to employment rate and gross domestic product change over time as the economy restructures towards decarbonization. A well-designed carbon pricing policy package with revenue recycling mechanisms tailored to the socioeconomic circumstances of the country could achieve multiple dividends of economic growth, increased employment, improved equality, national debt reduction or accomplishment of other sustainable development goals.

Fiscal reform: a computable general equilibrium (CGE) analysis for the Kingdom of Saudi Arabia

PurposeThis paper aims to provide a quantitative assessment of the broad economic effects of tax policy reform in the Kingdom of Saudi Arabia (KSA).Design/methodology/approachUsing a dynamic computable general equilibrium (CGE) model of the KSA, three simulations are run. The first simulation is the baseline simulation, which generates growth paths of the Saudi economy in the absence of tax reform. In developing the baseline simulation, this study incorporates forecasts from the International Monetary Fund. The remaining simulations are policy simulations. A policy simulation deviates from the baseline simulation in response to a policy change. In the first policy simulation, this study introduces a value-added tax (VAT) that generates SAR 35bn. This study assumes budget neutrality with the additional tax revenue transferred to households via a lump sum payment. In the second policy simulation, this study introduces a corporate income tax that generates SAR 35bn. This study then calculates and compares the distortion these taxes introduce into the economy.FindingsThis study finds that although the introduction of new taxes increases government tax revenue, markets are distorted lowering efficiency and production. An introduction of VAT increases the cost of consumption relative to the cost of production. As a consequence, the real cost of labour increases lowering employment in the short run. Employment moves to the baseline, as wages adjust capital and real gross domestic product (GDP) is below base throughout the simulation period. The second simulation is an increase in the corporate tax rate with lowers the post-tax rates of return investors receive. This simulation shows that the negative impact on investment, capital and GDP is larger with the introduction of a corporate tax than with the VAT.Research limitations/implicationsLiterature focusing on tax policy reform in the Gulf Cooperation Council and, specifically, Saudi Arabia is limited. This paper contributes to the literature by focusing on the following: understanding the impact and mechanisms through which changes in taxation impact the economy more generally; understanding the potential harm caused to allocative efficiency and production due to taxes; and ways in which fiscal reform might complement other reforms such as efforts to diversify the economy, labour market and energy price reforms. This improves the information base available to policymakers charged with designing an optimal tax system that meets all future requirements of a country such as the KSA.Originality/valueThe authors developed and applied a CGE model for the KSA to analyse the impact of VAT and corporate tax on the Saudi economy. To the best of the authors’ knowledge, there are no recent CGE models for Saudi Arabia that have been used for tax policy or quantifying the potential harm to the economy when new taxes are introduced.

Hyperinflation, depression, and the rise of Adolf Hitler

Hyperinflation, depression, and the rise of Adolf Hitler

Public Deficits in USMCA Economies During the COVID-19 Economic Crisis

This paper aims to evaluate the fiscal policy implemented by the USMCA economies to deal with the COVID-19 economic crisis. We estimate the economic capacity (potential output) and the Cyclical Primary Balance as a percentage of GDP (CPB) of each of the scrutinized economies. Then we obtain the Cyclical Adjusted Primary Balance as a percentage of GDP (CAPB) as the difference between the Primary Balance (PB) and the CPB. Unlike previous CPB estimations, we obtain the potential output reference as the Economic Capacity methodology (Shaikh and Moudud, 2004), which overcome some alternative methodologies problems. According to our empirical analysis, an asymmetric fiscal policy stands across USMCA economies. Canada and the United States are using a countercyclical fiscal policy, while Mexico uses a procyclical one. Mexico should abandon its current fiscal policy, implement an alternative to support households and firms during crisis periods, and execute a progressive fiscal reform. Our paper's limitation is that we use PB and not its components to estimate the CPB; however, we use a more extended time series, contributing to obtaining more robust results.

FISCAL AFTERSHOCKS: TAXES AND CATASTROPHES IN CHILEAN HISTORY

ABSTRACTSocio-natural disasters remain underexplored events in economic history, even though they stress societies in several ways and are known for their relationship with institutional change. In this paper, we explore this issue showing that major earthquakes in Chile have become a window of opportunity for important fiscal reforms. Our findings indicate that there are two mechanisms to explain this relationship: first, reconstruction demands greater state expenditure and intervention; and second, the emergence of narratives that justify these reforms, such as patriotism and solidarity. However, data show that in the case of Chile, changes following disasters have had little impact on the overall tax structure of the country, and the historical preference for indirect taxes has been maintained, with limited power to impose taxes on high-income groups.

Capitalization of Local Government Grants on Land Values: Evidence from Tokyo Metropolitan Area, Japan

This study investigates the capitalization effect of intergovernmental fiscal transfers from central to local government into house prices. The extent to which unconditional fiscal transfers to municipalities in the Tokyo metropolitan area are attributed to land prices will be examined using the event of a drop in the size amount of fiscal transfers following the fiscal reform in the early 2000s. The result shows that the drop in the transfer has decreased the land prices in the municipalities. Furthermore, a reduction of one unit in the per capita grant decreased the value of housing area per capita by one or more units, even if the real discount rate was estimated to be as low as 2%. We can conclude that the fiscal transfer reform focused on in this paper had a more negative impact on the benefits of residing in a municipality in the area than the amount of the reduction.

Impact of a Preliminary Feasibility Study on the accuracy of traffic forecasts in the case of Korea

• This study assesses the traffic forecasting accuracy of the Korean PFS. • Project manager and forecaster traits minimally affected traffic forecasting errors. • Political influence had a minimal effect on traffic forecasting errors. • PFS enhances the accuracy of traffic forecasts. • This study examines policy to increase traffic forecasting accuracy. The financial crisis that beset the Republic of Korea in late 1997 had a tremendous impact on the nation’s economy. In an effort to resolve the fundamental causes of this crisis, one fiscal reform, executed with the goal of improving the efficacy of government investment, was the introduction of the Preliminary Feasibility Study (PFS). PFS was initiated to determine which projects to fund in a transparent and fair way through preliminarily examinations and evaluation of the feasibility of large-scale government projects. This study assesses the achievements of PFS by investigating improvements in the accuracy of traffic forecasting results and analyzing the determinants of traffic forecasting errors in PFS. The traffic forecasting data include 42 road projects for which PFS were conducted and 113 road projects that were not subject to PFS and for which forecasts and actual out-turns were available. The results reveal that 41.3% of traffic forecasts were overestimated before the introduction of PFS. This statistic contrasts with the traffic forecasting error rate of 14.53% since PFS became mandatory. Moreover, traffic forecasts of PFS projects were also unbiased. By analyzing the determinants of traffic forecasting errors in PFS projects using the random forest approach, we also found that the characteristics of the project manager and forecaster, and the influence of politicians or political groups, had minimal effect on traffic forecasting errors. We conclude that PFS enhances the accuracy of traffic forecasts and prevents the initiation of inefficient transportation projects. Our study fills a gap in the existing literature because few studies have focused on the various factors affecting traffic forecasting error based on data and econometrics. This study also examines the effects of policy measures to mitigate overestimation and increase traffic forecasting accuracy. Our results emphasize the significant role of analysts, the need for credible guidelines and an independent evaluation institution, and the importance of a robust governance system in public investment management.

From production to consumption: An inter-sectoral analysis of air emissions external costs in Italy

Aim of the paper is to attempt an estimate of the air emissions external costs related to activity sectors in Italy with both a production and demand perspective and to explore possible appli-cations of the approach in public policies. This is done by adopting an environmentally ex-tended national input-output modelling (about 20 substances are covered, among which CO2 emissions) and law recognized methods for calculating air emissions external costs in Italy. The external costs resulting from this exercise on 2015 emissions sum up to € 77.4 billion, € 51.7 billion of which are related to all economy sectors of activity, while € 25.7 billion are due to household activities. Total external costs of air emissions embodied in final demand sum up to 53.0 billion euro in 2015 if total activated production is considered (including external costs embodied in imports), while they decrease to 36.1 billion euro if only domestic activated pro-duction is considered (assuming zero external costs embodied in imports). The specific exter-nal costs embodied in final demand, calculated for each sector through input-output analysis, are then compared with the specific external costs of direct emissions of the same sector pro-duction, highlighting the additional information provided by input-output analysis: many branches with relatively low direct external costs show much higher external costs when the supply chain branches are included in the assessment. A final chapter discusses the main poli-cy application areas of the suggested approach, focusing particularly on national environmental fiscal reform, company level environmental management, public investments planning and sustainable finance.

Financial inequality: the relationship between consumer taxes and social programs in the Argentine Republic in the period 2015-2019

Despite the implementation of several Conditional Money Transfer Programs (CMT) and the consequent reduction in poverty and indigence rates, without ignoring that said reduction has been controversial due to its low level of evaluation and control; as well as the effective increment in job placement of vulnerable population sectors, Argentina keeps having high levels of inequality. From a financial analysis aspect, this situation is largely due to the consolidation of a highly regressive detractive system, characterized by the imposition of indirect taxes that are levied on productive and intermediate activities and final consumer products without taking into account the effective tax capacity of the actual or incidental recipients of the tax. In a country like Argentina, which belongs to the most unequal continent in the world, it is essential to start being, and not seem; by this, we mean that the fiscal system structure must pursue and encourage the achievement of a structural middle class, starting by having in consideration the severe economic asymmetries, which occur both at a population level as well at a regional geographic context. One of the main situations that countless families suffer is the lack of coordination of fiscal reforms that tend to the development and consolidation of a structural middle class through a progressive, inclusive and liable tax system.

The Impacts of Flattening Fiscal Reform on Health Expenditure in China.

Introduction: A number of provinces have implemented a fiscal reform of flattening government since the first decade of this century in China. This study aims to quantitatively analyze the influences of this government fiscal reform on county-level health expenditure. We also bring forward policy suggestions for improving county-level fiscal system and healthcare delivery.Methods: We collected a novel longitudinal county-level data from 2003 to 2010, including counties' socioeconomic data, fiscal revenue, and health expenditure. Jilin Province, Hebei Province, and Anhui Province were selected as representative samples for this policy evaluation. The study employed a time-varying difference-in-difference model specification to investigate the impacts of flattening fiscal reform on health expenditure.Results: The analyses find that the fiscal system reforms of the three provinces have a significantly positive impact on the health expenditure of county-level governments. However, we find no policy effects on the proportion of health expenditure to fiscal expenditure of county-level governments. The estimation results are robust after controlling several background variables.Conclusion: The results yield important policy insights that public finance and its reform significantly impacts health expenditures in China. The government may still need to strengthen the transfer payment system to guarantee the social welfare provision in healthcare.

Italy and Europe: from competence to Solidarity to competence

ABSTRACT Italy’s relationship with the rest of Europe began 2020 under a watchful eye. Although Giuseppe Conte’s second government was more pro-European than his first, European institutions (and bond markets) wondered whether the coalition was stable enough to undertake meaningful fiscal consolidation and institutional reforms. When the coronavirus struck, the tenor of the relationship changed completely. First, Italy felt abandoned by the rest of Europe – and not without reason – then Conte battled hard to ensure the rest of Europe would show solidarity. Thanks to Franco-German leadership, the rest of Europe delivered an unprecedented agreement to provide funding to help recover from the pandemic and to enhance resilience. At that point, doubts about whether Conte’s second government could deliver arose again. Divisions within the coalition deepened, and the year ended on a cliff hanger. This story has important implications for Italy, for Europe, and for how we understand the relationship between them.

The Crisis is Over but Frugality Must Continue: Post-consolidation Fiscal Policy and the Dualisation of the Swedish Model

Previous research has predominantly analysed the retrenchment of the Swedish welfare state from a long-term perspective, examining restructuring processes from the financial crisis of the early 1990s until recent years. This study instead takes a short-term perspective and focuses on welfare state developments in the post-consolidation phase, after the recovery from the crisis. The aim is to investigate how the fiscal policy reforms introduced during the recovery years forced subsequent governments to continue on the path of "frugality". Specifically, the paper focuses on the effects of austerity politics on two policy domains: income redistribution through the benefit and tax system and the municipalities' role as social service providers and employers. The analysis indicates that the Swedish model is showing increasing signs of dualisation due to the gradual segmentation of prior universalistic welfare programmes and to the worsening of working conditions in the social service sector.

DGE Model for Assessing Macro-Fiscal Vulnerabilities in Algeria

In this paper, we present a Dynamic General Equilibrium (DGE) model to address the macro-fiscal vulnerabilities and the effects of fiscal policy on growth and employment in Algeria. We first discuss a baseline scenario throughout the projection period, 2021-2040 and then conduct several experiments; an increase in the efficiency of public spending on infrastructure investment, a gradual reduction in the share of non-interest government spending in GDP, the same gradual reduction in spending with a permanent increase in the share of investment in infrastructure in total noninterest government expenditure, and a composite fiscal reform program, respectively. The results show that with a well-designed fiscal program, there may be no trade-off between fiscal consolidation and economic growth.

Tracing Fiscal Sustainability in Malaysia

One of the concerns in the economic policy circle is the fiscal sustainability. This current research revisit the notion of fiscal sustainability for Malaysia using the Indicator of Fiscal Sustainability (IFS) developed by Croce and Juan-Ramon (2003) where we employ samples of time-series data from 1970 to 2017. The findings reveal that 40 out of 48 years, during which the calculated IFS algorithm is above the threshold of 1, imply Malaysia was fiscally unsustainable. Despite having been fiscally unsustainable, Malaysia’s fiscal stance shows improvement as a result of fiscal consolidation and fiscal reforms during the sample period. This is shown by the improved calculated IFS algorithm on average, which the value improved from 1.465 in 1970–1993 to 1.377 in 1998–2004 and to 1.146 in the 2006–2013. From the policy front, this indicator can serve as a precautionary early warning measure in formulating future fiscal path for Malaysia. This can be executed by targeting debt ratio and shifting the allocation of expenditures away from less efficient toward more growth-enhancing ones, which eventually would regain fiscal space to counter any incoming economic shocks in the future. This can enhance the fiscal transparency and assist in formulating a fiscal policy strategy in Malaysia.

How State Responses to Economic Crisis Shape Income Inequality and Financial Well-Being

AbstractThis study examines how state government responses to economic crisis, in the form of unexpected changes in state fiscal policy, influence income inequality. State governments are vital actors in times of fiscal stress as nearly every state must make difficult policy decisions related to taxes and spending to address budget deficits, both of which are policies that shape the income gap. Focusing on periods of fiscal stress is important for the study of state inequality as those with fewer resources are the most likely to experience the consequences of their state’s fiscal response during these times. Using time-series cross-sectional data, this research demonstrates that income inequality increases when states respond to economic crisis by relying on unexpected spending cuts. These effects tend to persist even after initial economic downturns. In addition, one individual-level implication of the aggregate relationship between state policy responses and inequality—that people will be worse off financially when their states emphasize budget cuts in response to economic decline—is assessed using several post–Great Recession surveys. The findings have implications for the future of inequality in the United States and provide potential paths for state fiscal reform.

Costa Rica

Costa Rica has been hit hard by the COVID-19 pandemic, notwithstanding the authorities’ proactive policy response and the country’s well-established universal healthcare system. The socio-economic impact has been significant, exacerbating an already fragile outlook and pre-existing imbalances, with a significant toll on economic activity and unemployment—especially among women and the young. The shock has further weakened the country’s fiscal position, undermining the expected yields from the ambitious fiscal reform launched in late 2018, and generated a large financing gap. Financial support through the Fund’s Rapid Financing Instrument (RFI) in 2020 provided temporary relief to respond to the pandemic, including by catalyzing financial assistance from other official partners, but financing needs remain sizable over the medium term.

Transition to social-ecological sustainability using the environmental fiscal reform

PurposeThe purpose of this paper is to examine the introduction of three specific fiscal flexible mechanisms such as VAT surcharges/discounts, surcharges on import/manufacture of risk substances and maturity land tax to implement a new environmental fiscal reform that aims to reduce pollutions and emissions and avoid a regressive impact on low-income households using a feedback system.Design/methodology/approachThe idea behind this article is to explore alternative environmental taxation system that aims to foster the transition to social-ecological sustainability without affect negatively poor and low-income households. It looks at the potential of environmental fiscal reform in terms of environmental benefits and present in the first section, evidence of some economic regressive impact caused by environmental fiscal reform in European Union from previous empirical studies. The article then introduces of a feedback mechanism to create a repayment system, such as rebate or cash transfer to compensate the regressive effect of the levy being added to the consumer price affecting low-income households in a very short period and push consumers to buy alternative eco-friendly products and services and to stimulate the market to offer them.FindingsLowering VAT rate for green products and services has the potential to increase demand for sustainable products and services and stimulate green jobs. Surcharges on import and manufacture of risk substances play a significant role to discourage the import of hazardous and pollutant substances by putting price on them and push the industrial sector towards a medium and long-term transition. Lowering taxes rates for buildings in inner cities encourage improvements and renovations, while raising tax on peri-urban areas discourage land speculation in areas with higher grade of biodiversity. This fiscal mechanism indirectly will reduce private and public transport emissions caused by urban sprawling and travel costs, reduce public infrastructure costs for connecting suburban area to the inner city and reduce the loss of urban-edge farmland area that are vital for smart urban growth.Originality/valueThe previous studies on the economic impact of the on environmental fiscal reform analysis, have focused on environmental aspects, economic growth and employment, but little on the regressive impact in short and medium terms on least wealthy sections of society. The proposed feedback mechanism aims to reduce distortion and inequalities caused by surcharges on existing taxation to low-income using monetary repayment measures, especially for products and services with elastic demand and no substitutes.

Land value creation and benefit distribution in the process of rural-urban land conversion: A case study in Wuhan City, China

With the rapid development of urbanization, industrialization and decentralized fiscal reform in China, large areas of farmlands are being converted from rural land to urban construction (residential, commercial and industrial) land. Taking Wuhan City in Hubei Province, China as a case study, we analyze land value creation by value creators including farmers (collectives), the government and developers at the level of the individual parcel, community, township and district in the process of rural-urban land conversion from farmland to residential, commercial and industrial use. The results show that (1) at the individual analysis level, land prices increase significantly during the process of land acquisition, land leasing and real estate development and sales. Land prices and incremental values differ greatly across the three land types, with higher prices for residential and commercial land, and lower prices for industrial land. In addition, farmers (collectives) receive the lowest share of the land value revenue, while the highest share is obtained by developers, followed by the government. (2) At the community, township and district levels of analysis, the spatial distribution of land values shows similar characteristics at different scales. Moreover, scale effects are found in land value creation and benefit distribution. Average land prices and incremental values decrease from the scale of the community, to the township, to the district. Furthermore, the difference in land values decreases gradually when moving from the community scale to the district scale. This study contributes to a better understanding of land value increments and benefit distribution at multiple levels of analysis, for multiple stakeholders, and for multiple land use types.

Debt Dynamics Among European Municipalities and Their Organizations: Comparative Analysis with Focus on Hungary

Purpose: This paper analyzed the debt of municipal subsystems of public finances and the organizations they own compared to EU member countries' GDP during the 2013-2018 period. Our study's essence is to characterize the EU member states based upon the two areas of investigation. We also analyzed the relationships between the liabilities of the entities, and, through the use of statistical methods, we compared the respective values and examined the effect on debt from both local government system models and geopolitical location. Design/Methodology/Approach: Three hypotheses were formulated, and we conducted our research with statistical methods (regression, cluster and variance analyses, LGCEshare variables). We utilized a case study on Hungary to explore the development of the two areas over time and examined how debt value was affected by the regulatory environment. Findings: Between the two areas of the local system's economic management, a statistical connection can be identified. The liabilities as a percentage of the GDP of local government-owned businesses are considering it has been established. This is especially true in Germany and Scandinavian countries. However, it must be noted that the results of the statistical analyses and the theoretical division are different from each other. Another unique element of this study is considering the debt dynamics of municipalities and their corporations following the comprehensive fiscal reforms post-2010. Practical Implications: The research results can be used to assess the related financial positions of local governments and their economic organizations, to which the European Union is also paying increasing attention. Originality/Value: We examined the relationship between the liabilities of local governments and their economic organizations, and we showed a relationship between the two areas by using statistical methods. We found that the effect of the local government system model and geopolitical location on the debt stock is fundamentally determinant, but not in every case.