Enhancing Fiscal Stabilizers -- an IMF Staff Position Note

Posted by Michel Lazare

 

The global financial crisis has, inter alia, resulted in renewed discussions on the merits of fiscal policy, be discretionary fiscal policy or automatic stabilizers. While fiscal policy can be useful, especially when the financial crisis hinders effectiveness of monetary policy, discretionary fiscal policy can present some shortcomings; it can presents implementation lags and is not automatically reversed when the economic cycle improves. In this context, letting automatic fiscal stabilizers play is tempting, but these stabilizers will only make a useful contribution to stabilizing demand, if they are sizable.

However as noted by our colleagues from the IMF's Fiscal Affairs Department, Thomas Baunsgaard and Steven A. Symansky, "stabilizers are by-products of choices regarding fiscal policy and institutions that are not focused on macroeconomic stabilization. The automatic stabilizers depend on the size of government and the cyclical responsiveness of the tax system—a rule of thumb is that the size of the stabilizers approximately equals the share of government in the economy times the output gap. In turn, the size of government and the design of the tax system reflect societal, philosophical, and political views on the role of the state, equity, and social safety nets. Increases in government size beyond a certain level may also weaken economic efficiency. An important policy question is, therefore, how the automatic stabilizers can be increased without raising the size of government."

The IMF has just published the result of their work in a new Staff Position Note (SPN) on Automatic Fiscal Stabilizers: How Can They Be Enhanced Without Increasing the Size of Government?. In this work, Baunsgaard and Symansky argue that automatic stabilizers can indeed be increased without raising the size of the government.

South-East European Seminar, Washington, D.C.

Posted by the Revenue Administration Division of the IMF's Fiscal Affairs Department

Southeast Europe has been impacted significantly by the economic crisis with many countries facing the prospects of lower growth, lower absorption and imports and, therefore, quite likely, lower tax-to-GDP ratios over the medium term. The crisis has also given rise to a number of common tax compliance risks that hinders revenue collection in the region. Several of the countries have entered into (or are considering entering into) Fund programs and most are receiving (modest) amounts of FAD TA in tax administration.