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Fiscal Policy 6
Fiscal Policy 6
Advanced Economies
70.0
60.0
50.0
40.0
Expenditure % of GDP
30.0
20.0
10.0
0.0
15.0
20.0
25.0
30.0
35.0
40.0
Revenue % of GDP
45.0
50.0
55.0
60.0
Types of Taxes
Taxes on Value Added and Imports
+ Taxes on Income and Wealth
(Income Taxes, Corporate Profits Tax, Capital Gains
Taxes, Property Taxes)
Principles of Taxation
1. Implementability. Cheap to collect, easy to
calculate, difficult to avoid.
2. Equitable.
a) Vertical
b) Horizontal
20
15
10
Equity
Considerations
1. Personal Equality Poll Tax
2. Benefit Principle Flat Tax
3. Ability to Pay Graduated Tax
25000
20000
15000
10000
5000
0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
Tax Incidence
Lost income may not be borne entirely by
direct target of tax.
Corporate Tax
Raise prices, borne by consumers
Reduce wages, borne by workers
Reduce dividends, borne by shareholders
Reduce investment, born by future consumers
workers, or shareholders
Debt
Interest Rates:
Cost of borrowing $1 for 1 year $1+i. Net
interest rate: i.
e.g. if you lend me $100 today, I will pay you $104
in one year, 1+i = 1.04.
Debt End
Last Year
Primary Deficit
Simplified Government Budget
Primary Revenue (less Interest Income)
- Primary Expenditure (less Interest Paid)
Primary Budget Deficit
+ Net Interest Payments on Existing Debt
Overall Budget Deficit
Primary Balance
% of GDP
Greece
V
GDPThis Year (1 g ) GDPLast Year
GDPThis Year
V
V
(1 g ) GDPLast Year (1 g ) GDPLast Year
GDPThis Year
Overall DeficitThis Year
g V Debt Last Year
GDPThis Year
(1 g V ) GDPLast Year
Sustainable Deficit
If
GDPThis Year
(1 g V ) GDPLast Year
If
GDPThis Year
GDPThis Year
GDPThis Year
~
Debt Last Year
i
(1 g V ) GDPLast Year
Average Interest
If
GDPThis Year
(1 g V ) GDPLast Year
then
staysDebt
stable.
GDP
http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm
32.9062534
.5
34.5
Debt as % of GDP
Gross Debt
Net Debt
233.1
165.6
72.3
94.6
84.1
79.9
52.5
22.8
7.7
86.9
82.6
81.0
50.2
41.1 44.3
34.9
109.3
101.2 98.8
67.1
57.2
31.6
130.6
106.0
101.8
93.5
100.4
71.1
67.5
65.5
55.4
35.3
32.0
30.830.6
100.0
44.9 43.6
67.4
56.0
80.8
72.972.6
52.4
50.8
36.0
7.8
1.86.0
0.0
121.1
0.0 0.0
-1.7
-59.7
-161.0
Consequences of Deficits
Austerity
Financial Repression
Seigniorage
Default
Link
IMF
Financial Repression
Indebted governments
often draw financing
from captive financial
institutions to keep
interest rates low.
Domestic banks,
public pension funds
Increased reserve
requirements
International capital
controls.
Link
Link
Default
Link
Sources: Bloomberg L.P.; Consensus Economics; and IMF staff estimates and
projections.
Note: Euro area countries, subject to data availability. Bond yield spreads,
measured vis--vis German Bunds, are an average of August 2011. Average
consensus real GDP growth forecasts for 201112. Standard & Poors Ratings
Background Reading