Aizenman et al (2021) outline four stylized patterns from large fiscal impulses (expansions and adjustments) in Chile, Poland, South Africa, and Thailand:
- Fiscal expansions led to higher growth rates and reduced negative trade-offs, e.g., pollution and poor-health mortalities associated with economic growth.
- Fiscal adjustments led to a more inclusive economy, lowered poverty headcounts, improved sanitation, and cleaner technology access.
- Fiscal expansions followed an increase in direct taxes (especially corporate taxes) and a decline in social contributions, and preceded a decline in other direct taxes and an increase in wage bills.
- Fiscal adjustments followed a decline in other direct taxes and social contributions, an increase in wage bills, and preceded a decline in government consumption expenditure and transfers.
Key takeaways include:
- Countries have distinct fiscal challenges, underlined by their economic and institutional structure. VAT accounted for 30%-60% of total revenues in the countries. Domestic public resources of commodity-exporting countries are vulnerable to commodity TOT shocks. The fiscal conditions of manufacturing-exporting countries are dependent on the GVCs, the global business cycle, and supporting services.
- The associations between fiscal expenses, taxes, and sustainable development outcomes (prosperity, resilience, and inclusivity) differ across countries.
- DRM should consider the time paths of the taxes and expenditure components to understand their empirical linkages with the sustainable development outcomes in the respective countries.
- It is practically useful to have a template for tracing the linkages between fiscal stance and the sustainable development outcomes.
- More data may shed more light on correlations between the fiscal conditions and DRM for sustainable development in the coming years.
Some basic definitions used in the working paper (all % of GDP):
- Primary deficit = Primary expense (wage+non-wage+subsidies+transfer)-total tax revenue (personal income tax+corporate tax+payroll and workforce tax and property tax+indirect tax+social security contributions
- Fiscal episode is defined as significant change in primary deficit (% of GDP) from the previous year.
Cyclically adjusted variables:
- Fiscal impulse = Cyclically adjusted primary deficit in year t – primary deficit in year t-1.
- Cyclically adjusted primary deficit = Cyclically adjusted primary expenses – Cyclically adjusted total tax revenue
- Cyclically adjusted total tax revenue = Summation of cyclically adjusted components of total tax revenue.
- Cyclically adjusted primary expense = Cyclically adjusted transfer + wage + non-wage + subsidies.
Cyclically adjusted variables are computed by first regressing each fiscal variable on time trend and unemployment, followed by estimation of each fiscal variable in year t if unemployment rate were to remain the same in the previous year t-1.
Fiscal adjustment and fiscal stimulus:
- Strong fiscal adjustment is referred to as fiscal impulse (% of GDP) less than -1.5.
- Strong fiscal stimuli is referred to as fiscal impulse (% of GDP) larger than 1.5
