Fiscal Consolidation in Israel: A Global Fiscal Model Perspective

Author/Editor: Elekdag, Selim ; Epstein, Natan P. ; Moreno Badia, Marialuz
Publication Date: November 01, 2006
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: Fiscal consolidation has become an important policy prescription for many emerging market countries (EMCs), particularly for the highly indebted ones. Although prudent fiscal policies tend to reduce vulnerabilities, their implementation is usually postponed. This paper represents, to the best of our knowledge, one of the first attempts in the literature to quantify the costs of delaying fiscal consolidation in an EMC. In particular, using the IMF's Global Fiscal Model (GFM), we find that early consolidation through expenditure cuts would result in a substantial increase in Israel's long-term output growth relative to the case with delayed fiscal adjustment. Using an alternative fiscal instrument, we find that delaying tax cuts would result in cumulative real GDP that is much larger than otherwise.
Series: Working Paper No. 06/253
Subject(s): Fiscal policy | Israel | Fiscal reforms | Tax reductions | Government expenditures | Public debt | Gross domestic product | Economic growth | Emerging markets | Economic models

Author's Keyword(s): Fiscal consolidation | distortionary taxes | government debt
Publication Date: November 01, 2006
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2006253 Pages: 31
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