HOW MUCH SCOPE
FOR GROWTH- AND
EQUITY-FRIENDLY
CONSOLIDATION?
Speakers:• Boris Cournède, OECD• Antoine Goujard, OECD• Álvaro Pina, OECD
NAEC Seminar 11 October 2013In association with the OECD Economics Department
• The opinions expressed and arguments employed in this document are the authors’ and do not necessarily reflect the official views of the Organisation or of the governments of its member countries.
• This document and any map included therein are without prejudice to the status of or sovereignity over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
• The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
Remarks
• Propose a structured way of looking at the selection of consolidation instruments in the light of their effects on:– growth (short and long term) – income inequality (short and long term)– global rebalancing
• Illustrate this approach with quantitative simulations
• Highlight the role of structural reforms
The objectives:
3
• Bring gross debt to 60% of GDP and keep it stable.
• Other objectives– Output: long-term but
also short-term– Equity– Global rebalancing
Consolidation and other objectives
Defines consolidation needs: short and long term
Guides the choice of instruments
4
Public-sector debt and deficits in 2012
Source: OECD Economic Outlook No. 93.
0 20 40 60 80 100 120 140 160 180 200 220 240
-10
-8
-6
-4
-2
0
2
4
6
-2.6
1.10.3
-2.5
1.2
0.0
1.4
-0.2
-1.8
1.2
-1.8
-1.3
-5.1
3.2
1.0
-1.8
2.6
-1.6
4.4
-8.1
1.4
-0.2
-1.4-1.8 -1.8
-2.4
0.5
-3.1
-0.6
-0.2
-5.4
Government debt (national accounts definition), % of GDP
Underlying primary fiscal balance, % of potential
GDP
5
Further consolidation is needed over the outcomes achieved as of end-2012
Difference between debt-control and baseline underlying primary surplus
% o
f pot
entia
l GD
P
JPN
GBRGRC
USAPRT
IRL
ESPFRA
SVKPOL
FIN ISL
NLDCAN
SVNAUS
HUN
ISR
NZLCZE
BELSW
EIT
ALUX
AUTCHE
DEUDNK
ESTKOR
0
5
10
15
20
0
5
10
15
20
In the year when initial consolidation ends (short to medium term)In 2060 (long term)
6Source: Cournède, Goujard and Pina (2013).
• Education (public consumption)
• Health (public consumption)
• Other public consumption except family policy
• Pensions (cash transfers)
• Unemployment (cash transfers)
• Sickness and disability (cash transfers)
• Family policy (public consumption and cash transfers)
• Subsidies
• Public investment
The instruments of consolidation: spending side
7
• Personal income taxes
• Social security contributions
• Corporate income taxes
• Environmental taxes
• Consumption taxes (non-environmental)
• Recurrent taxes on immovable property
• Other property taxes
• Sales of goods and services
The instruments of consolidation: revenue side
8
• Rough assessment (from -- to ++) are given to the effects of each instrument on:– short- and long-term growth– short- and long-term equity– global rebalancing
• Based on wide body of work including– Study on the Sources of Growth– Going for Growth– Wider literature– New econometric estimates
Assessing the instruments: highlighting trade-offs and complementarities
9
Assessing the instruments
Notes: (a) current account effects refer to a deficit country and would switch signs for a surplus country(b) this + sign relates to welfare effects as the GDP impact may be ambiguous.
Growth EquityCurrent
account(a)
ST LT ST LT STSpending cutsEducation -- -- - -- +Health services provided in kind -- - - - ++
Other government consumption -- + - +Pensions ++ ++Sickness and disability payments - + -- - ++Unemployment insurance - + - ++Family - - -- -- +Subsidies - ++ + + +Public investment -- -- ++
Revenue increasesPersonal income taxes - -- + + +Social security contributions - -- - -Corporate income taxes - -- + + ++
Environmental taxes - +(b) - +Consumption taxes - - - ++
Recurrent taxes on immovable property - +Other property taxes - ++ + +Sales of goods and services - + - - + 10
Source: Cournède, Goujard and Pina (2013).
1. Each plus sign is valued as +1 and each minus sign as -1
2. Equal weights are given to each column: 0.25 each for short- and long-term growth and equity. [the current account is dealt with separately].
3. As a result each instrument gets a score and is ranked accordingly from highest to lowest.
Turning this assessment into a possible generic ranking
11
A possible generic hierarchy of consolidation instruments
Note: The rankings are based on the assessment in Table 2. Scores of +1 and -1 are given to each + and- signs respectively, each objective is given a weight, and the resulting indicator is used to rank instruments. Each individual instrument score based on the assessment in Table 2 is kept with a probability of ¾ or increased by +1 with a probability of 1/8 or reduced by -1 with a probability of 1/8. Weights ranging each from 0.15 to 0.55 and summing to unity have been given to each objective. Weights have been restricted to no smaller than 0.15 because each objective is considered important. A total of 40,000 random draws have been made.
Ranking from most (highest score) to least (lowest score) desirable instrument of consolidation
EducationChildcare and family
Social security contributionsHealth services in kind
Public investmentConsumption taxes Sickness payments
Sales of goods and servicesOther gov. consumption
Rec. taxes on imm. propertyEnvironmental taxes
Corporate income taxesPersonal income taxes
Unemployment insuranceOther property taxes
PensionsSubsidies
0 2 4 6 8 10 12 14 16 18Instrument rank
Equal weights
Simulated interdec i le range
12Source: Cournède, Goujard and Pina (2013).
• Short-term growth: cyclical weakness (output gap) and risk of hysteresis (2007-12 increase in long-term unemployment).
• Equity: income distribution and poverty.• Current account: relative to country and
OECD GDP.
Adapting the hierarchy to country circumstances
• Five country clusters• A specific hierarchy for each cluster
13
1. Consolidation needs
2. Hierarchy of instruments: instruments are used one by one until consolidation needs are met.
3. Room for manoeuvre in each instrument:– Move until reaching the group of the ten OECD countries with
lowest spending or highest taxation for the instrument under consideration (avoid extreme policy settings)
– No move larger than one standard deviation (respect national preferences as revealed by existing spending/tax structures)
– Specific technical adjustments:• Reduced margins for pensions (especially in the short term)
• Adjustments for pensions and education (demography) and for unemployment benefits (structural unemployment level)
• Leeway evaluated jointly for personal income tax and social contributions
The optimal use of instruments depends on:
14
• Short to medium term simulations:– short- to medium-term consolidation needs
– Instrument hierarchies are differentiated by country cluster depending on circumstances (cyclical position, inequality level, current-account position)
• Long-term simulations:– long-term consolidation needs
– Uniform instrument hierarchy (considering only long-term growth and equity effects)
Two sets of simulations for each country
15
Number of countries using instruments in simulations
16
Subsidies
Pensions
Other property taxes
Unemployment insurance
Personal income taxes
Corporate income taxes
Environmental taxes
Recurrent property taxes
Other government consumption
User charges
Sickness and disability payments
Consumption taxes
Public investment
Health services provided in kind
Social security contributions
Family policy
Education
0 5 10 15 20
Short to medium-term packages (25 coun-tries)
Long-term packages (29 countries)
Source: Economics Department Policy Note No. 20.
Fiscal consolidation in practice: the role of public investment cutbacks
ESP GRC SVN CZE ISL KOR IRL PRT NZLEUROGBR ITA USA NOR POL NLD CAN AUS SVK FRA DEU FIN AUT BEL HUN SWE CHE ISR DNK JPN EST
-1
0
1
2
3
2009-12 2012-14
Consolidation achieved through cuts in net public investment,% of potential GDP
17Source: OECD Economic Outlook No. 93.
18
• Top-half instruments only in sixteen countries (e.g. Australia, Canada, Netherlands).
• Top-half instruments mainly in 6 countries (e.g. Finland, France).
• Bottom-half instruments account for most of consolidation in Japan, the United Kingdom and the United States.
How far down the hierarchy of instruments do countries need to go?
Simulated short- to medium-term consolidation packages:
• Top-half instruments only in 20 countries.
• Top-half instruments mainly in 6 countries.
• Bottom-half instruments account for most of consolidation in three countries: Australia, New Zealand and the United States.
How far down the hierarchy of instruments do countries need to go?
Simulated long-term consolidation packages:
19
On average across countries, spending reductions account for:
• 41% of short- to medium-term simulated packages
• 65% of long-term simulated packages
with considerable variation across countries.
Some examples:
• In Japan and the United States, the simulations give a large role to tax increases (70% of consolidation over the medium term).
• France has a very strong potential for spending cuts which make up 73% of the simulated medium-term package.
Spending vs. taxes in simulated packages
20
Ease trade-offs between consolidation and
other objectives
• Spending reductions: e.g. efficiency gains.
• Revenue increases: e.g. base broadening,
reducing tax expenditures.
Structural policy has a key role to play
21
Potential efficiency gains in primary and secondary education
KO
R
ME
X
TU
R
PR
T
CA
N
CH
E
CZ
E
ES
P
FIN
GB
R
JPN
PO
L
SV
K
HU
N
IRL
NL
D
NZ
L
AU
S
AU
T
DE
U
ITA
BE
L
LU
X
SW
E
DN
K
NO
R
US
A
ISL
0
0.2
0.4
0.6
0.8
1
1.2
Per cent of GDP, 2007
22Source: Update of Sutherland et al. (2007) reported in Hagemann (2012).
Unite
d Kin
gdom
(200
6)
Unite
d Sta
tes (
2008
)
Canad
a (2
004)
Spain
(200
8)
Korea
(200
6)
Net
herla
nds (
2006
)
Germ
any (2
006)
0
1
2
3
4
5
6
7
8
9
Tax expenditures in personal and corporate income taxes are difficult to estimate but large
Source: OECD (2010), Tax Expenditures in OECD Countries.
Estimated personal and corporate income tax expenditures, % of GDP
23
Illustrative potential efficiency gains in value-added taxation
NZ
L
LU
X
JPN
CH
E
CA
N
KO
R
ES
T
AU
S
ISR
CH
L
SV
N
AU
T
NL
D
CZ
E
HU
N
NO
R
DE
U
IRL
FIN
DN
K
ES
P
SV
K
SW
E
GB
R
ME
X
BE
L
FR
A
ISL
PO
L
PR
T
GR
C
ITA
TU
R
0
1
2
3
4
5
6
7
8
9Potential efficiency gains in VAT
% o
f G
DP
Note: these highly hypothetical estimates show how much additional revenue could be raised if VAT receipts rose from their current level to become equal to the VAT standard rate times the amount of final consumption expenditure. This is subject to considerable caveats.
24Source: Cournède, Goujard and Pina (2013).
• Successful structural reform does not necessarily ensue from fiscal consolidation
• Joint efforts to consolidate and reform can– make consolidation more durable, and– avoid “quick fixes” to the budget with harmful
side-effects.
A need for integrated policy strategies
25
• OECD Economic Policy Papers No. 07, “Choosing Fiscal Consolidation Instruments Compatible With Growth and Equity”, A Going for Growth Report, July 2013.
• Cournède, B., A. Pina and A. Goujard (2013), “How to Achieve Growth- and Equity-Friendly Fiscal Consolidation? A Proposed Methodology for Instrument Choice With an Illustrative Application to OECD Countries”, OECD Economics Department Working Papers, No. 1088.
• Barbiero, O. and Cournède (2013), “New Econometric Estimates of Long-Term Growth Effects of Different Areas of Public Spending”, OECD Economics Department Working Papers, forthcoming.
• Goujard, A. (2013), “Cross-Country Spillovers from Fiscal Consolidation”, OECD Economics Department Working Papers, forthcoming.
The full results are available in:
26
BACKGROUND SLIDES
5nOT FOR PRESENTATION
27
• Metholodogical details• Further detail on results• Information on the central-subnational split
of best and lowest ranked instruments.
Background slides (not for presentation)
28
• Starts from the underlying primary balance in 2012
• Unchanged fiscal policy except:– measures to keep public pension spending
constant as a share of potential GDP– measures to contain the increase in
government expenditure on health and long-term care as in de la Maissonneuve and Oliveira-Martins (2013)
The baseline
29
• The underlying primary surplus increases by 1% of potential GDP each year until enough is done to put the debt-GDP ratio on a trajectory bringing it to 60% by 2060.
• Afterwards, the underlying primary surplus evolves gradually toward the value that keeps the debt ratio stable .
Main features of the simulated consolidation profiles
30
Defining consolidation needs
Underlying primary balance
Time2012 outturn
Baseline
Steady-stateunderlying primary surplus
Long-term consolidation need
Short- to medium-term consolidation need
Peak underlying primary surplus
2060
Brings debt to 60% of GDP Keeps debt
ratio stable
31
Illustration of the budget consolidation profile and baseline in two countries
Simulated underlying primary balance, per cent of potential GDP
-12-10-8-6-4-20246810
2012 2022 2032 2042 2052
Japan
-12-10-8-6-4-20246810
2012 2022 2032 2042 2052
Belgium
Baseline path Debt-control path
32Source: Cournède, Goujard and Pina (2013).
• Long-term effects only:– growth– equity
• Current-account effects ignored
Spending reductions move up the list when looking at long-term consolidation.
Adapting the hierarchy to the long-term perspective (2060)
33
Rankings are differentiated by country group in the short term
InstrumentsGeneric ST
ranking
Cluster-specific short-term rankingLong-term
ranking1* 2* 3* 4* 5*
Subsidies 1 1 1 2 2 1 1
Pensions 2-3 3 2 1 1 3 2
Other property taxes 2-3 2 3 3 3 2 3-6
Unemployment benefits 4-8 7 4 4 4 9 3-6
Personal income taxes 4-8 5 8 9 9-10 8 10-12
Corporate income taxes 4-8 4 5 7 9-10 12 10-12
Environmental taxes 4-8 8 6 5 4 4 3-6
Recurrent taxes on immovable property 4-8 6 7 6 6 5 7-9
Other government in kind consumption 9-10 9 9 11 11 6 3-6
Sales of goods and services 9-10 10 10 8 7 7 7-9
Sickness and disability payments 11-12 13 11 10 8 11 7-9
Consumption taxes (other than environmental) 11-12 11 12 12 12 13 10-12
Public investment 13 12 13 13 15 15 13-14
Health services provided in kind 14-15 14 14 14 16 16 13-14
Social security contributions 14-15 15 16 15 13 10 15-16
Family 16 16 15 16 14 14 15-16
Education 17 17 17 17 17 17 17
34
1*: AUS, CAN, EST, ISR, ITA, JPN, KOR, NZL, POL, PRT, GBR / 2*: USA3*: GRC, IRL, ESP / 4*: AUT, BEL, CZE, DNK, FIN, FRA, HUN, ISL, NOR, SVK, SVN5*: DEU, LUX, NLD, SWE, CHE.
Source: Cournède, Goujard and Pina (2013).
Results from short- to medium-term simulations
Consolidating more in general implies using more unfavourable marginal instruments (but there are exceptions)
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 160
2
4
6
8
10
12
14
16
18
20
1
12
3
3
4
5
5
6 66
7
9 9 9
9
10
11 1111
12 12
14 1417
Achieved consolidation (percent of potential GDP)
Marginal instrument rank
35
Source: Cournède, Goujard and Pina (2013).
Results from long-term simulations
Consolidating more in general implies using more unfavourable marginal instruments (but there are exceptions)
0 1 2 3 4 5 6 7 8 9 10 110
2
4
6
8
10
12
14
16
2 22 2
3
3
4
3
5
3
3
3
6
5
3
6
9
8
7
7
12
10 10
10
10
14 14
13
15
Achieved consolidation (percentage point of potential GDP)
Marginal instrument rank
36Source: Cournède, Goujard and Pina (2013).
37
A medium-term increase in the tax share
FR
A
FIN
BE
L
SW
E
AU
T
ITA
SV
N
GR
C
HU
N
NLD
LUX
ISL
PR
T
CZ
E
GB
R
ISR
NZ
L
PO
L
CA
N
ES
P
IRL
JPN
SV
K
AU
S
US
A
30
35
40
45
50
55
Cyclically-adjusted primary government revenue, % of potential GDP
Estimated in 2012 Simulated in 2020
Source: Economics Department Policy Note No. 20.
Standard deviations of spending and tax items as a percentage of potential GDP assuming that the simulated long-term consolidation packages are
implemented in full
The proposed consolidation packages respect the diversity of tax and spending structures
Spending 2012 2060 Receipts 2012 2060
Unemployment insurance 0.9 0.5 Other property taxes 0.6 0.5
Subsidies 0.7 0.6 Recurrent property taxes 1.0 1.0
Sickness and disability ben. 0.6 0.5 Environmental taxes 0.7 0.5
Family benefits 1.1 1.1 Sales of goods and services 1.1 0.9
Education 1.1 1.1 Corporate income taxes 0.9 0.9
Health services 1.4 1.2 Personal income taxes 3.3 3.1
Other gov. consumption 2.3 1.9 Consumption taxes 2.4 2.0
Pensions 3.6 2.8 Social security contributions 5.3 5.3
38Source: Cournède, Goujard and Pina (2013).
In many countries, well-ranked instruments are mainly central-level items
Irela
nd
Portu
gal
Unite
d Kin
gdom Ita
ly
Luxem
bour
g
Spain
Hunga
ry
Slove
nia
Austria
Norway
Czech
Rep
ublic
Finla
nd
Eston
ia
Denm
ark
Germ
any
0
10
20
30
40
50
60
70
80
90
100
Direct taxes Subsidies
Share of central government, per cent, 2009
39Source: Cournède, Goujard and Pina (2013).
In many countries, large low-ranked spending instruments are subnational.
Share of subnational government, per cent, 2009
Spain
Germ
any
Czech
Rep
ublic
Norway
Eston
ia
Unite
d Kin
gdom
Hunga
ry
Austria
Slove
nia
Italy
Luxem
bour
g
Irela
nd
Portu
gal
Finla
nd0
10
20
30
40
50
60
70
80
90
100
Education Public investment Health
40Source: Cournède, Goujard and Pina (2013).
THANK YOU FOR YOUR
ATTENTION
FOR MORE INFORMATION ON THE CONTENT OF THIS PRESENTATION PLEASE EMAIL [email protected]