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31. Fiscal Space: What Is It? Who Has It? When to Use It?

Author:
James A. Haley
Publication Date:
08-2018
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
This paper reviews the concept of fiscal space, or the capacity to deploy fiscal stimulus should it be needed; identifies the key factors that determine its size; and discusses considerations relevant to its use. The paper is motivated by the remarkably rapid mobilization of fiscal stimulus in the 2008-2009 global financial crisis, coordinated by the International Monetary Fund (IMF), which was followed by the equally remarkable rapid adoption of austerity in key advanced economies. This switch from stimulus to austerity occurred despite the languid pace of the global recovery, in which growth was, as subsequently described by IMF Managing Director Christine Lagarde, “too low, for too long.” At the time, the change was justified in terms of concerns over large debt burdens and diminished capacity for future action. Curiously, however, the principled voices defending the interests of future generations were silent with respect to more recent tax cuts and the adoption of higher budgeted spending.
Topic:
Budget, Fiscal Policy, IMF, and Stimulus
Political Geography:
Global Focus

32. China and International Financial Standards: From "Rule Taker" to "Rule Maker"?

Author:
Hongying Wang
Publication Date:
08-2018
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
Following the global financial crisis, international financial standard-setting bodies granted emerging economies unprecedented representation. Some observers expected the existing system of international financial regulation to be undermined by the larger number of players and their diverging interests from the traditional standard setters. This paper examines whether China, the largest emerging economy, has influenced the international financial regulatory regime. It finds that China has, by and large, been a “rule taker” so far, but points out some important signs of change. It argues that with improved technical capacity, greater stakes in international financial standards and rising structural power, China is poised to increase its participation in the making of international financial standards.
Topic:
Regulation, Global Political Economy, and Fiscal Policy
Political Geography:
China and Asia

33. Estimating the Size and Trends of the Informal Economy in Ghana

Author:
Matthew Kofi Ocran
Publication Date:
01-2018
Content Type:
Research Paper
Institution:
African Economic Research Consortium (AERC)
Abstract:
The purpose of this paper is to quantitatively examine the evolution of the informal economy over the past four decades. The study used the currency demand approach as analytical framework for the assessment. The findings suggest that there has been an upward trend in the size of the informal economy as a proportion of the officially recorded GDP. For instance, the size of the informal economy as a proportion of the official GDP estimates increased steadily, from 14% in 1960 to 18% by 1977. The proportion fell thereafter and started picking up again from 1983 to a new high of 30% between 2003 and 2004. The outcome of the study has policy implications particularly for the design of effective monetary and fiscal policy and the selection of appropriate policy instruments.
Topic:
Development, Economics, International Political Economy, Monetary Policy, Economic growth, Fiscal Policy, and Profit
Political Geography:
Africa and Ghana

34. Study and Reports on the VAT Gap in the EU-28 Member States: 2018 Final Report

Author:
Adam Śmietanka, Alejandro Esteller Moré, Grzegorz Poniatowski, José María Durán-Cabré, and Mikhail Bonch-Osmolovsky
Publication Date:
10-2018
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
In this Report, the Authors present the new Value Added Tax (VAT) Gap estimates for 2016, as well as updated estimates for 2012-2016. In addition to the analysis of the Compliance Gap, this Report examines the Policy Gap in 2016 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses. Moreover, the Report contains an econometric analysis of VAT Gap determinants, which is a novelty introduced from this year’s Study. In 2016, most European Union (EU) Member States (MS) saw positive tailwinds with a combined real GDP growth of 2.0 percent. As a result of a growing base and increasing VAT compliance, VAT revenue increased in all MS with three exceptions. Most pronounced is the case of Romania, where VAT revenue decreased in response to reduction of the standard rate by four percentage points. In nominal terms, in 2016, the VAT Gap in EU-28 MS fell below EUR 150 billion and amounted to EUR 147.1 billion. In relative terms, the VAT Gap share of the VAT total tax liability (VTTL) dropped to 12.3 percent from 13.2 percent in 2015, and is the lowest value in the analysed period of 2012-2016. Denoted at the share of GDP, the VAT Gap in 2016 amounted to 0.99% compared to 1.05% in 2015. Of the EU-28, the VAT Gap share decreased in 22 countries and increased in six—namely, Romania, Finland, the UK, Ireland, Estonia, and France. The biggest declines in the VAT Gap—of over five percentage points—occurred in Bulgaria, Latvia, Cyprus, and the Netherlands. The smallest Gaps were observed in Luxembourg (0.85 percent), Sweden (1.08 percent), and Croatia (1.15 percent). The largest Gaps were registered in Romania (35.88 percent), Greece (29.22 percent), and Italy (25.90 percent). Overall, half of EU-28 MS recorded a Gap below 9.9 percent. The Policy Gaps and its components remained stable. The average Policy Gap level was 44.8 percent, out of which 9.95 percentage points are due to the application of various reduced and super-reduced rates (the Rate Gap). Countries with the most flat levels of rates in the EU, according to the Rate Gap, are Denmark (0.93 percent) and Estonia (2.97 percent). The Exemption Gap, or the average share of Ideal Revenue lost due to various exemptions, is, on average, 35 percent in the EU, whereas the Actionable Policy Gap—a combination of the Rate Gap and the Actionable Exemption Gap—is, on average, 16.5 percent of the Notional Ideal Revenue. The econometric analysis can be considered a successful first attempt at inferring the impact of various determinants. Firstly, it can be observed that the productive structure of the economy exerts an impact on the VAT Gap. The share of retailers has the strongest impact on the VAT Gap; however, telecommunications, industry, and art also have a positive impact. Secondly, liquidity constraints and the productive structure of the economy also play a role in determining VAT compliance. The most interesting results have to do with the impact of the variables under the direct control of the tax administration. We show that the impact of the size of the tax administration and the VAT Gap is concave. On the contrary, in the case of IT expenditure, the impact is convex, albeit small, until productivity vanishes when IT expenditure is about 9.8 percent of the total expenditure of the tax administration.
Topic:
Financial Crimes, Tax Systems, Fiscal Policy, and VAT
Political Geography:
Europe, Poland, and European Union

35. Enhancing Credibility and Commitment to Fiscal Rules

Author:
Grzegorz Poniatowski
Publication Date:
03-2018
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
The objective of this paper is to derive the characteristics of an effective fiscal governance framework, focusing on the incentives that ensure a commitment to the fiscal rules. We study this problem with the use of econometric tools, complementing this analysis with formal modelling through the lens of a dynamic principal-agent framework. Our study shows that both economic and institutional factors play an important role in incentivising countries’ fiscal efforts. Fiscal balances are affected not only by the economic cycle, but, among others, by the level of public debt and the world economic situation. We find that the existence of numerical fiscal rules, their strong legal entrenchment, surveillance mechanisms, and credible sanctions binding the hands of governments have a significant impact on curbing deficits. The relationship between the Commission and European Union (EU) Member States (MS), where the EU authorities act as a collective principal that designs contracts for MS, has elements in common with the assumptions of the principal-agent framework. These are: asymmetry of information, moral hazard, different objectives, and the ability to reward or punish the principal. We use a dynamic principal-agent model and show that to ensure good fiscal performance, indirect benefits should be envisaged for higher levels of fiscal effort. In order to account for the structural differences of exerting effort by different MS, it is efficient to adjust fiscal effort to the level of indebtedness. To ensure a commitment to the rules, MS with difficulties conducting prudent fiscal policies should be required to exert less effort than the MS with more modest levels of debt. The FIRSTRUN project is a European Union funded multinational research project that investigates the need for fiscal policy coordination in the EU.
Topic:
Debt, Economics, Regional Cooperation, European Union, and Fiscal Policy
Political Geography:
Europe and European Union

36. The Significance of the Tobacco Product Manufacturing to Poland’s Economy

Author:
Grzegorz Poniatowski and Krzysztof Głowacki
Publication Date:
01-2018
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
This report, The Significance of the Tobacco Product Manufacturing to Poland’s Economy, presents the results of the first comprehensive analysis of the impact of tobacco product manufacturing on the Polish economy. The comprehensiveness of the study results from the subject range, covering the sector’s entire value chain: from tobacco cultivation, through processing of raw tobacco and manufacturing of tobacco products, to the distribution and sale of ready products. The report includes an in-depth analysis of current conditions, discusses the challenges facing the sector and attempts to estimate the development of the branches of the economy related to manufacturing of tobacco products in the future. The main purpose of this research was to analyze the economic significance of manufacturing of tobacco products. The economic effect of consumption of tobacco products was only a peripheral element of the research. Conducting such complex research was made possible by advanced methodology. The analytical work was built on three pillars: analysis of existing data, expert interviews and a computable general equilibrium (CGE) model expanded to include production and consumption of tobacco products.
Topic:
Economics, Commodities, Fiscal Policy, Manufacturing, and Tobacco
Political Geography:
Europe and Poland

37. Is a Fiscal Policy Council needed in Poland?

Author:
Balazs Romhanyi and Lukasz Janikowski
Publication Date:
11-2018
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
Unsustainability and procyclicality of fiscal policy are problems that many developed countries face. The public debt crisis revealed that fiscal rules are a useful but insufficient instrument for mitigating them. A large and growing group of economists are calling for the creation of ‘fiscal policy councils’ – independent collegial bodies made up of experts whose role is to act as independent reviewers of government policy and advise the government and parliament on fiscal policy. Such councils currently exist in at least 40 countries. Poland is the only EU country that does not have a fiscal policy council. The aim of this paper is to address the issue of whether a fiscal policy council is needed in Poland and what kind of additional contribution such a council might make to the public debate on fiscal policy.
Topic:
Debt, Government, Governance, Economy, and Fiscal Policy
Political Geography:
Europe, Poland, and European Union

38. China’s 40 Years of Fiscal and Tax Reform: A Basic Trajectory

Author:
Peiyong Gao
Publication Date:
05-2018
Content Type:
Working Paper
Abstract:
The present paper describes the trajectory of China’s fiscal and tax reform in thepast 40 years, which can be summarized in five phases. The reform commenced with“decentralizing power and transferring benefits.” Then, under great fiscal pressure,institutional reform was instigated, which aimed to establish a new fiscal and tax system.To regulate the government revenue and expenditure beyond the fiscal and tax system,reforms were put in place to build an institutional framework for public finance. As thefiscal and tax reform had gradually entered the more sophisticated phases, China took aseries of measures to further improve the public finance system. Since 2012, based on theoverall plan of comprehensively deepening reform, China has embarked on establishinga modern public finance system. The present paper characterizes China’s fiscal and taxreform as gradually moving toward a system that aligns with the overall reform andcomplements the goal of marketization and modernization of state governance.
Topic:
Government, Governance, Finance, Economy, Tax Systems, and Fiscal Policy
Political Geography:
China and Asia

39. Emerging economies need safeguards to tackle currency crisis

Author:
Gao Haihong
Publication Date:
08-2018
Content Type:
Policy Brief
Abstract:
The recent appreciation of the US dollar and the uneven pace of monetary policy normalization in many countries have become a headwind for emerging economies. This month, the Turkish lira has sharply depreciated against the US dollar, followed by a jump in Turkish bond yield for fear of high inflation. Earlier this year, after failing to stabilize its currency, Argentina sought the International Monetary Fund's support to stabilize the peso. The IMF agreed to give a $50 billion standby line of credit but on conditions that required necessary domestic fiscal and structural adjustment. These developments reaffirmed the eminent risks facing the emerging economies. A strong dollar and tightened monetary policy in the US are prompting capital flight from countries that have high domestic public debt, huge external liability, and a weak current account balance and relatively open capital account. For example, Turkey’s total external debt to GDP was at 53.5% and its current account deficit was 7.1% to GDP.
Topic:
Economy, Inflation, Fiscal Policy, and Economic Development
Political Geography:
China, Turkey, Asia, Argentina, and United States of America

40. Study and Reports on the VAT Gap in the EU-28 Member States: 2017 Final Report

Author:
Grzegorz Poniatowski, Mikhail Bonch-Osmolovsky, and Misha V. Belkindas
Publication Date:
10-2017
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
CASE prepared a new study for the European Commission on the VAT Gap in the European Union in 2015. The figures offer an important snapshot of the problems of collecting VAT in the EU and what needs to be done to improve revenues and fight tax fraud. During 2015, the overall VAT that should have been collected in EU Member States grew by about 4.2 %, while collected VAT revenues rose by 5.8 %. As a result, the overall VAT Gap in the EU Member States decreased by about €8.7 billion in absolute terms, down to €151.5 billion. As a percentage, the overall VAT Gap decreased by 2.1 % to 12.7 %. In 2015, the highest VAT Gap was recorded in Romania with a figure of 37.18 %. In absolute terms, the highest VAT Gap of €35 billion was in Italy. Overall, the VAT Gap decreased in most Member States, with the largest improvements noted in Malta, Romania and Spain. The VAT Gap measured in this study includes for the first time revenues emerging from new VAT rules for cross-border sales of e-services which came into force on 1 January 2015, following a Commission proposal. CASE's team was led by Grzegorz Poniatowski, Director of Fiscal Policy Studies, and composed of Mikhail Bonch-Osmolovskiy and Misha Belkindas.
Topic:
European Union, Tax Systems, Fiscal Policy, and VAT
Political Geography:
Europe, Poland, and European Union