## wp17286

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### I. Introduction
- Purpose:
  - Revisit options for fiscal anchors guiding Commonwealth government fiscal policy in Australia.
  - Analyze a scenario shifting from the current medium-term budget balance anchor to a debt-anchored fiscal rule using the IMF’s model, G20MOD, to enhance macro stabilization and debt control.
- Current anchor:
  - The Government is pursuing a 1 percent of GDP budget surplus (the ‘medium-term budget balance anchor’).
- Fiscal framework context and reporting:
  - Charter of Budgetary Honesty Act 1998 advocates “constrained discretion.”
  - Reporting: annual budget, Mid-Year Economic and Fiscal Outlook, final budget outcome report, election-period reporting, and an Intergenerational Report every five years assessing policy sustainability 40 years ahead.
- Historical practice:
  - Since 1998, budget balance policies central to fiscal strategy statements since 1996.
  - Auxiliary strategies: net debt, net financial worth, caps on tax share in GDP, caps on expenditures.
- Paper organization:
  - Section II: analytical tool (G20MOD).
  - Section III: Government’s medium-term fiscal strategy and anchor.
  - Section IV: longer-term demographic issues from the Intergenerational Report.
  - Section V: compare alternative fiscal anchors using model simulations.
  - Section VI: concluding comments.

### II. G20MOD — model structure and fiscal implementation
- General description and key mechanisms:
  - Annual, multi-region, general equilibrium model combining micro-founded and reduced-form formulations.
  - Country/regional blocks structurally close to identical but with different steady-state ratios and behavioral parameters.
  - Real GDP determined by aggregate demand components in the short term and potential output in the long term.
  - Two key prices: consumer price index (CPI) and wages, modeled by inflation and wage inflation Phillips’ curves.
  - Commodities sector modeled globally and by country; metals important for Australia.
  - Financial sector provides a 1-year interest rate (monetary policy instrument) and a 10-year interest rate.
  - External sector based on aggregate trade; global real interest rate and real exchange rate equilibrate saving-investment positions.
- Demand side specifics:
  - Consumption block based on the Blanchard-Weil-Yaari OLG model (Blanchard 1985, Weil 1989 and Yaari 1965).
  - OLG creates non-Ricardian properties: government bonds treated as wealth for some households.
  - Presence of liquidity-constrained households (LIQ) who consume out of current income.

- Fiscal block and budget implementation:
  - Eight government instruments:
    - Spending: government consumption; infrastructure spending; general lumpsum transfers to all households (pensions, aged care, unemployment insurance); lumpsum transfers targeted to LIQ households (welfare, certain pensions).
    - Revenue: consumption tax (GST); personal income tax (PIT) on wage and dividend income; company income tax (CIT); taxes and royalties from mining and metals production.
  - Government block for Australia amalgamates Commonwealth and State governments; focus largely on Commonwealth accounts.
  - Budget constraint met by choice of a long-term deficit target relative to GDP; deficit = expenditures + interest − revenues.
  - One instrument (general lumpsum transfers by default) continuously adjusted to ensure the budget constraint holds.
  - Relationship between deficit target and long-term debt target:
    - b_t = ((1+π)(1+g)/(1+π)(1+g) − 1) g_target_t  (as presented in source notation)
    - Where π is inflation, g is steady-state growth rate, b_t is long-term debt target, g_target_t is long-term deficit target.
  - Explicit deficit target pins down long-term government debt and affects global interest rates and the real exchange rate.

### III. Fiscal rules in G20MOD and implementation variants
- Rule types (IMF (2009) taxonomy):
  - Expenditure rule (ER): restricts component of spending.
  - Budget balance rule (BBR): ensures budget meets specified target.
  - Debt rule (DR): brings government debt to a specified target over some horizon.
- Strict vs. flexible:
  - ‘Strict’ BBR/DR: target met in full each year.
  - ‘Flexible’ BBR/DR: target met on average over some horizon (e.g., business cycle, 3 years).
- G20MOD implementation details:
  - G20MOD’s deficit target is a strict BBR with an embedded short-term countercyclical feature.
  - Automatic social transfers (part of general lumpsum transfers) smooth business cycle; level negatively correlated with output gap.
  - Under strict BBR, deficit-to-GDP target translates into deficit-to-GDP ratio with countercyclical adjustment (source notation preserved).
- Flexible-rule parameterization:
  - Flexible BBR: weight on deficit gap = 0.8.
  - Flexible DR: weight on debt gap = inverse of number of years (0.1 for 10 years, 0.2 for 5 years); weight on deficit gap = 0.25. Flexible DR uses first difference of debt-to-GDP ratio.
  - Average correlation of automatic social transfers with output gap: advanced OECD countries 0.44; Australia 0.39.

### IV. Calibrating Australia and salient quantitative facts
- External and commodity calibrations (preserved exactly):
  - Australia’s share of global GDP: approximately 1.6 percent.
  - Australia’s share of global metals production in G20MOD basket: 13.6 percent.
  - Resources combine for roughly 9.1 percent of Australian real GDP.
  - Conventional calibrations of resource share: 10 to 15 percent of GDP.
  - Australia’s openness:
    - Exports: about 24.6 percent of GDP.
    - Imports: 23.5 percent of GDP.
    - G-20 averages: exports 26.6 percent of GDP, imports 26.9 percent of GDP.
    - United States: exports 17.3 percent of GDP, imports 16.2 percent of GDP.
- Domestic calibration notes:
  - Australia draws much more of its tax income from CIT as a percent of GDP relative to the rest of the G-20.
  - Net foreign liability position is large relative to other G-20 debtor countries.
  - Australia has low general consolidated government debt on a net basis: only 20 percent of GDP.
  - Share of LIQ households is 35 percent, same as other advanced countries in G20MOD.
  - Price and wage Phillips’ curves, financial accelerator, and behavioral parameters match non-European advanced economies in G20MOD.
- Metals sector and resource revenues:
  - Real global metals price governed by global equation with production and global demand effects proxied by output gaps.
  - Share of metals royalties and resource taxes in Australia calibrated at 0.75 percent of GDP.
  - Royalties channel is second order and not a prime driver of scenarios.

### V. Medium-term fiscal strategy, historical performance, and outlook
- Government medium-term strategy (Commonwealth of Australia, 2017, Statement 3, p. 7):
  - Broad goal: encourage economic growth via sensible spending and revenue policy, aiming for budget surpluses on average over the business cycle.
  - Four policy elements: investing in quality investment; maintaining strong fiscal discipline with payments-to-GDP ratio falling and stabilizing/reducing net debt; supporting revenue growth via policies that drive earnings and growth; strengthening balance sheet by improving net financial worth.
- Performance before and after GFC:
  - Pre-GFC: budget generally in surplus except FY2001/02; net asset-to-GDP peaked at 7.3 percent in FY2007/08.
  - GFC response: fiscal stimulus of roughly 4.5 percent of GDP at onset, leading to high deficits and reversal of debt trajectory from FY2008/09.
  - Post-GFC repair: deficit reduced to 2.7 percent of GDP by FY2012/13; commodity boom aided revenues until 2011.
  - Commodity bust and end of mining investment weakened revenues; PIT bracket-creep and CIT collections affected until LNG and coal capacity added after 2016.
- Budget repair strategy design:
  - Deliver sustainable surpluses of at least 1 percent of GDP as soon as possible.
  - Requirements: new spending offset by cuts; unexpected revenue improvements to reduce deficit; decision-making to maintain clear path to desired surplus.
  - Historical rule: limit real expenditure growth to 2 percent in above-trend growth periods (Budget 2009-10).
  - Goal restatements: debt exit strategies set target surplus of 1 percent of GDP by FY2023/24 (later “as soon as possible”).
  - Medium-term projections to end of FY2020/21 forecast a surplus of 0.5 of GDP, matching IMF October 2017 WEO forecasts for 2021 and 2022.
  - Repeated underperformance and postponements may have weakened credibility; net debt increased rapidly after GFC; S&P placed AAA outlook at negative in 2015; Moody’s and Fitch maintained stable outlooks.
- Fiscal outlook and two probable paths:
  - Government projects real payments growth of 2.9 percent per annum on average over FY2021/22 to FY2027/28, which is 1 percentage point higher than the estimated 1.9 percent per annum on average over FY2017/18 to FY2020/21.
  - Two probable outcome paths:
    - Government path: successful delivery of budget repair relying on strong nominal growth.
    - Alternative path: consolidation thrown off track; market discipline pressures possible given reliance on foreign purchasers of debt, requiring refocus on consolidation.
  - Scenario of markets unwilling to finance countercyclical spending during a recession is not contemplated under current medium-term fiscal strategy.

### VI. Intergenerational pressures and long-term fiscal projections
- IGR 2015 findings:
  - Long-term fiscal challenges from ageing population and rising demand for health care and aged care.
  - IGR 2015 ‘proposed policy’ scenario based on policies active at Mid-Year Economic and Fiscal Outlook 2014-2015.
  - By 2050, Government will need to spend an additional 2.5 percent of GDP on health, aged care, and pensions assuming unchanged policy framework.
  - Assuming a linear trend from zero in 2021 reaching long-term value after 30 years, extra spending adds up to 21 percent of GDP of net debt by 2050.
  - In the very long term, net debt would stabilize after increasing by 58 percent of GDP (the ‘No Policy Action Scenario’).

### VII. Policy scenarios and macroeconomic impacts (model simulation findings)
- Benchmark / No Policy Action Scenario:
  - If nothing is done, net government debt and net foreign liabilities deteriorate in the medium term.
  - Real GDP stronger by less than 1 percent after 30 years despite strong increase in general transfers.
  - Household consumption increases in the long term by about 2 percent.
  - Private investment roughly at baseline level in the long term (crowded out by government debt).
  - Australian net foreign liability position increases by about 20 percent of GDP.
  - Real appreciation of around 2 percent relative to baseline in the long term.
- Tax Switching Scenario (revenue-neutral):
  - Switches: reduce CIT by 0.7 percent of GDP and PIT by 1.4 percent of GDP, offset by increase in GST of 2.1 percent of GDP (similar to Pitt (2015) proposal).
  - Effects relative to No Policy Action:
    - Consumption gains 0.5 percentage point.
    - Investment gains 4.0 percentage points.
    - Real GDP is about 1.4 percentage points higher.
  - RBA may raise overnight cash rate by over 50 basis points to maintain inflation on target in short term.
  - Decomposition (Box 1):
    - Component 1: CIT → PIT (0.7 percent of GDP): investment increase outweighs initial consumption negative impact; consumption negative impact offset within first 5 years.
    - Component 2: PIT (wage) → GST (2.1 percent of GDP): GST dampens consumption immediately; net real GDP effect relatively weak at 0.3 percent of GDP; implied multiplier 0.14.
- Simple Balanced Budget Scenario:
  - Builds on Tax Switching Scenario plus consolidation to achieve debt control.
  - Includes cuts in other lumpsum transfers (outside aged care and pensions).
  - Key channel: crowding in of private investment as government saving improves; tax switching encourages expansionary real exchange rate depreciation of 1.2 percent relative to baseline in the long term.
- Long-term macro effects summary:
  - Tax switching strengthens domestic demand relative to debt-only consolidation but does not prevent large run-up in debt without additional consolidation.

### VIII. Aggregated fiscal rules, simulations, and operational recommendations
- Aggregated fiscal-rule rationale:
  - Aggregated fiscal rule (composite of component rules) can operationalize a long-term debt anchor while preserving countercyclical space via escape/revision clauses.
  - Medium-term target horizon: 2021 to 2050 in analysis.
  - ‘Debt norm’: reduction in net debt of 10 percent of GDP relative to benchmark scenario; treated as ‘benchmark consolidation’ case.
- Component rules and aggregated variants:
  - ER: Government consumption and general transfers grow at only 2 percent a year for 10 years starting in 2021 (relative to Budget 2017-18, a reduction in spending growth by 0.9 percentage points each year).
  - DR variants: long-term government debt target met after 5 or 10 years by varying GST to achieve 10 percent GDP debt norm; strict or flexible pursuit from 2021 to 2050.
  - Aggregated rules:
    - ER + strict DR: 90 percent of debt norm achieved by 2030; strict adherence.
    - ER + flexible DR (10-year): 90 percent of debt norm by 2030 (over 10 years); implies average decrease in deficit of around 1 percent of GDP relative to ‘benchmark scenario’.
    - ER + flexible DR (5-year): 90 percent of debt norm by 2025 (over 5 years); implies average decrease in deficit of around 2 percent of GDP relative to ‘benchmark scenario’.
- Effects under benchmark consolidation:
  - Real GDP always stronger in benchmark consolidation due to tax switching, but consolidation imposes short-term downward pressures.
  - Shorter consolidation horizon (5 years) has largest short-term costs; flexible rules allow positive GDP response to tax switching while letting debt adjust gradually.
  - Domestic demand:
    - Short term: consumption weakened by GST increase; private investment stronger due to lower CIT and crowding in.
    - Long term: private investment expands productive capacity, raises labor demand and wages; consumption contributes positively to GDP.
  - Monetary policy and exchange rate:
    - Short term: GST increase makes consumption weakness disinflationary; RBA increases overnight cash rate less on impact, followed by further cuts in medium term under some rules.
    - Reduced government debt → households demand more foreign assets → higher current account to accumulate foreign assets; real exchange rate depreciates to sell more goods abroad.
  - More aggressive DR (5-year) produces faster convergence, larger short-term consumption reduction, looser monetary policy, stronger private investment, quicker real exchange rate depreciation, and larger current account surpluses on impact.
- Performance under illustrative shocks (aggregate demand spike; terms-of-trade boom-bust):
  - ER always restricts government spending; countercyclical in expansions, procyclical in contractions.
  - DR always reduces government debt; countercyclical in expansions, procyclical in contractions.
  - ER + strict DR: less flexible and restricts faster real GDP growth under alternative scenarios, increasing countercyclicality.
  - ER + flexible DR: more procyclical under alternative scenarios but more countercyclical under benchmark consolidation, especially with 5-year horizon; flexibility allows automatic social transfers to operate.
- Simple scoring (five criteria, three scenarios):
  - Best score: 26 — flexible DR over 10 years.
  - Next: flexible DR over 5 years, score 29.
  - Worst: strict DR, score 35.
  - Score range context: lowest possible 15; highest possible 45.
- Operational recommendations and tax instrument considerations:
  - A long-term debt anchor would avoid upward drift in net public debt ratios and increase certainty about future debt path and sustainability, aiding long-term planning, but could increase procyclical consolidation during slowdowns.
  - Comparative performance: debt anchor performs as well as, and sometimes better than, the medium-term balance anchor across five criteria and three scenarios; debt rules reach anchor more quickly and have lower absolute mean deviations of net debt-to-GDP.
  - Implementing via GST as adjusting instrument requires tactical planning: Commonwealth and State governments could reconfigure GST so a portion accrues strictly to the Commonwealth and usable as a policy instrument.
  - Options: propose schedule of GST increases in tax switching and announce schedule of tax credits that increase as needed later; or announce tax credits now and offset revenue weakening by broadening tax base now.

### IX. Key numeric facts and magnitudes (exactly as presented)
- Government medium-term anchor: 1 percent of GDP budget surplus.
- Australia’s share of global GDP: approximately 1.6 percent.
- Australia’s share of global metals production (G20MOD basket): 13.6 percent.
- Resources share of Australian real GDP: roughly 9.1 percent.
- Conventional resource share calibrations: 10 to 15 percent of GDP.
- Exports: about 24.6 percent of GDP.
- Imports: 23.5 percent of GDP.
- G-20 averages: exports 26.6 percent of GDP; imports 26.9 percent of GDP.
- United States: exports 17.3 percent of GDP; imports 16.2 percent of GDP.
- Metals royalties and resource taxes calibrated at 0.75 percent of GDP.
- Australia’s general consolidated government debt (net basis): 20 percent of GDP.
- Share of LIQ households: 35 percent.
- Government projected real payments growth: 2.9 percent per annum on average over FY2021/22 to FY2027/28; estimated 1.9 percent per annum on average over FY2017/18 to FY2020/21.
- GFC fiscal stimulus at onset: roughly 4.5 percent of GDP.
- Post-GFC deficit reduced to 2.7 percent of GDP by FY2012/13.
- IGR 2015 long-term spending need by 2050: additional 2.5 percent of GDP.
- IGR implied net debt addition to 2050 under linear trend: 21 percent of GDP.
- IGR very long-term net debt increase under No Policy Action Scenario: 58 percent of GDP.
- Tax Switching sizes:
  - CIT reduction: 0.7 percent of GDP.
  - PIT reduction: 1.4 percent of GDP.
  - GST increase: 2.1 percent of GDP.
- Tax Switching outcomes relative to No Policy Action:
  - Consumption +0.5 percentage point.
  - Investment +4.0 percentage points.
  - Real GDP +1.4 percentage points.
  - RBA policy response: may raise overnight cash rate by over 50 basis points in short term.
- Decomposition component magnitudes:
  - CIT → PIT switch size: 0.7 percent of GDP.
  - PIT (wage) → GST switch size: 2.1 percent of GDP.
  - Net real GDP effect for PIT→GST component: 0.3 percent of GDP.
  - Implied multiplier for PIT→GST component: 0.14.
- Aggregated-rule debt norm: reduction in net debt of 10 percent of GDP relative to benchmark.
- ER parameter: government consumption and general transfers grow at only 2 percent a year for 10 years starting 2021 (relative reduction 0.9 percentage points each year vs Budget 2017-18).
- Flexible DR weights: 0.1 for 10-year, 0.2 for 5-year on debt gap; 0.25 on deficit gap.
- Scoring outcomes:
  - Best score 26 (flexible DR over 10 years).
  - Next 29 (flexible DR over 5 years).
  - Worst 35 (strict DR).
  - Score range 15 to 45.

*Source: wp17286 - References _______________________________________________________________ 33 (source PDF content provided).*

### References _______________________________________________________________ 33

### wp17286 - References _______________________________________________________________ 33

### I. Introduction
- Purpose:
  - Revisit options for fiscal anchors guiding Commonwealth government fiscal policy in Australia.
  - Analyze a scenario shifting from the current medium-term budget balance anchor to a debt-anchored fiscal rule using the IMF’s model, G20MOD, to enhance macro stabilization and debt control.
- Current anchor:
  - The Government is pursuing a 1 percent of GDP budget surplus (the ‘medium-term budget balance anchor’).
- Fiscal framework context:
  - Australia’s fiscal policy framework is laid out in the Charter of Budgetary Honesty Act 1998.
  - The Charter advocates “constrained discretion,” a principles-based approach rather than a numerically-oriented, rules-based framework.
  - Extensive reporting requirements: annual budget, Mid-Year Economic and Fiscal Outlook, final budget outcome report, election-period reporting, and an Intergenerational Report released every five years assessing policy sustainability 40 years into the future.
- Historical practice:
  - Since 1998, budget balance policies have been central to successive Governments’ fiscal strategy statements since 1996.
  - Other auxiliary strategies have included policies on net debt, net financial worth, caps on tax share in GDP, and caps on expenditures.
- Paper organization (sections summary):
  - Section II: analytical tool (G20MOD).
  - Section III: Government’s medium-term fiscal strategy and anchor.
  - Section IV: longer-term demographic issues from the Intergenerational Report.
  - Section V: compare alternative fiscal anchors using model simulations.
  - Section VI: concluding comments.

### II. Understanding the model (G20MOD)
- General description:
  - G20MOD is an annual, multi-region, general equilibrium model combining micro-founded and reduced-form formulations.
  - Each country/regional block is structurally close to identical but with different key steady-state ratios and behavioral parameters.
  - Real GDP determined by aggregate demand components in the short term and potential output in the long term.
  - Two key prices: consumer price index (CPI) and wages, modeled by inflation and wage inflation Phillips’ curves.
  - Commodities sector modeled on global and country basis; metals play an important role for Australia.
  - Financial sector: provides a 1-year interest rate (monetary policy instrument) and a 10-year interest rate.
  - External sector: based on aggregate trade with the rest of the world rather than bilateral tracking.
- Demand side:
  - Consumption block based on the Blanchard-Weil-Yaari overlapping generations (OLG) model (Blanchard 1985, Weil 1989 and Yaari 1965).
  - OLG households create non-Ricardian properties: government bonds are treated as wealth because tax liabilities may fall beyond households’ expected lifetimes.
  - Endogenous determination of national saving and demand for net foreign assets given government debt.
  - Global real interest rate adjusts long-term to equilibrate global saving and investment; real exchange rate equilibrates a country’s supply/demand for savings relative to global position.
  - Presence of liquidity-constrained households (LIQ) who consume out of current income.

### II.B Fiscal sector details
- Government instruments (eight featured):
  - Spending side: government consumption; infrastructure spending; general lumpsum transfers to all households (e.g., pensions, aged care, unemployment insurance); lumpsum transfers targeted to LIQ households (e.g., welfare, certain pensions).
  - Revenue side: taxes on consumption (GST); personal income tax (PIT) on wage and dividend income; company income tax (CIT); taxes and royalties from mining and metals production.
- Government composition:
  - For Australia, the government block amalgamates Commonwealth and State governments; focus of the paper is largely on Commonwealth accounts.
- Budget constraint implementation:
  - Budget constraint met by choice of a long-term deficit target, relative to GDP.
  - Deficit defined as expenditures plus interest payments on the debt, less revenues.
  - One instrument (general lumpsum transfers by default) is constantly adjusted to ensure the budget constraint holds.
- Relationship between deficit target and long-term debt target (as presented in the source):
  - 푏푏
    푡푡푡푡푡푡
    =
    (
    1+휋휋
    )
    (
    1+푔푔
    )
    (
    1+휋휋
    )
    (
    1+푔푔
    )
    −1
    푔푔푔푔푔푔푔푔
    푡푡푡푡푡푡
  - Where 휋휋 is inflation, g is the steady-state growth rate, 푏푏
    푡푡푡푡푡푡
    is the long-term debt target, and 푔푔푔푔푔푔푔푔
    푡푡푡푡푡푡
    is the long-term deficit target.
  - The explicit deficit target pins down the long-term government debt and thereby affects global interest rates and the real exchange rate.
  - The government meets its deficit target using a fiscal rule (see next subsection).

### II.C Fiscal rules in G20MOD
- Types of fiscal rules (as defined in IMF (2009)):
  - Expenditure rule (ER) – restriction on some component of spending; does not directly restrict budget balance or borrowing.
  - Budget balance rule (BBR) – restriction to ensure the budget meets a specified target level after some horizon; balanced budget is a special case.
  - Debt rule (DR) – brings government debt to a specified target level over some horizon.
- Strict vs. flexible:
  - ‘Strict’ BBR or DR: target level/path met in full each year.
  - ‘Flexible’ BBR or DR: target met on average over some horizon (e.g., "over the business cycle" or "over the course of three years").
- Implementation in G20MOD:
  - G20MOD’s deficit target is a strict BBR with an embedded short-term feature providing flexibility.
  - General lumpsum transfers include automatic social transfers that smooth the business cycle (more unemployment insurance in recession, less in expansion).
  - Under the strict BBR, the deficit-to-GDP target translates into the deficit-to-GDP ratio with a countercyclical adjustment:
    - 푔푔푔푔푔푔푔푔
      푡푡푡푡푡푡
      =푔푔푔푔푔푔푔푔
      푡푡푡푡푡푡
      −푔푔
      푦푦푔푔푡푡푦푦
      푦푦
      푔푔푡푡푦푦
    - Where 푔푔
      푦푦푔푔푡푏푦
      is the countercyclical weight on the output gap measure 푦푦
      푔푔푡푡푦푦
    - Automatic social transfers are added to general lumpsum transfers and provide part of this flexibility.

### II.D Calibrating the Australian economy (salient calibration notes and external sector)
- Calibration approach:
  - Most parameters calibrated for the model as a whole per Andrle and others (2015).
  - Calibration informed by estimation work on older G20MOD versions, stylized facts, and properties of IMF structural models.
  - Goal: obtain sensible system-wide properties; steady-state calibration may not match raw data but should capture qualitative significance.
- External sector and commodities (key quantitative facts preserved exactly):
  - Australia’s share of global GDP: approximately 1.6 percent.
  - Australia’s share of global metals production in G20MOD basket: 13.6 percent.
  - Resources combine for roughly 9.1 percent of Australian real GDP.
  - Conventional calibrations of resource share: 10 to 15 percent of GDP.
  - Australia’s openness:
    - Exports: about 24.6 percent of GDP.
    - Imports: 23.5 percent of GDP.
    - G-20 averages for comparison: exports 26.6 percent of GDP, imports 26.9 percent of GDP.
    - United States comparison: exports 17.3 percent of GDP, imports 16.2 percent of GDP.
- Implications noted:
  - Australia’s small global GDP share (1.6 percent) implies its permanent fiscal shocks have little impact on global real interest rates relative to larger economies.
  - Australia is a large participant in the global metals market (13.6 percent), making commodities important for calibration.
  - Openness implies policy actions have potential leakage; example implication starts a sentence in source but is incomplete in the provided excerpt.

*Source: wp17286 - References _______________________________________________________________ 33 (source PDF content provided)*

### 0.3 percent in Australia, versus 0.4 percent in the case of the United States. Similarly, a two-year

### wp17286 - 0.3 percent in Australia, versus 0.4 percent in the case of the United States. Similarly, a two-year

### Metals sector and resource revenues
- Real global metals price is governed by a global equation with production and global demand effects proxied by output gaps.
- Demand responsiveness is weighted by metal consumption weights; supply responsiveness by metal production weights.
- Price level and dynamics are calibrated consistent with the April 2017 WEO metals price.
- In Australia, the share of metals royalties and resource taxes is calibrated to be 0.75 percent of GDP.
- Given the magnitude of royalties, the royalties channel is second order and is not a prime driver of the scenarios.

### Domestic economy calibration (Australia)
- Calibration uses roughly current national accounts ratios and fiscal ratios; G-20 ratios provided for contrast.
- Australia draws much more of its tax income from CIT as a percent of GDP relative to the rest of the G-20.
- Net foreign liability position is large relative to other G-20 debtor countries; U.S. interest rate shocks in G20MOD can potentially pose a greater threat to Australia.
- Australia has low general consolidated government debt on a net basis: only 20 percent of GDP.
- Share of LIQ households is 35 percent, same as other advanced countries in G20MOD.
- Price and wage Phillips’ curves, financial accelerator, and other behavioral parameters match those of the non-European advanced economies in G20MOD.

### Fiscal rules in G20MOD
- Short-term component: automatic social transfers with level of general lumpsum transfers negatively correlated with the output gap.
  - Average correlation for advanced OECD countries: 0.44.
  - Australia’s correlation: 0.39.
- Long-term component: either general consolidated government deficit or debt as a ratio of nominal GDP.
  - Deficit-to-GDP target used for strict BBR; debt-to-GDP target for strict DR.
- Government sets deficit or debt target ratio to GDP (with adjustment for automatic social transfers) and adjusts one fiscal instrument so government budget constraint holds.
- Flexible rules: adjusting fiscal instrument reacts to deviations (deficit or debt gap); lower weight on gap implies longer time to reach target.
- Flexible BBR: weight on deficit gap = 0.8.
- Flexible DR: weight on debt gap = inverse of number of years (0.1 for 10 years, 0.2 for 5 years); weight on deficit gap = 0.25. Flexible DR uses first difference of debt-to-GDP ratio.

### Medium-term fiscal strategy (Commonwealth of Australia, 2017, Statement 3, p. 7)
- Broad goal: encourage economic growth through sensible spending and revenue growth from good policy, aiming for budget surpluses, on average, over the business cycle.
- Four policy elements:
  - “investing in a stronger economy by redirecting Government spending to quality investment to boost productivity and workforce participation;
  - “maintaining strong fiscal discipline by controlling expenditure to reduce the Government’s share of the economy over time in order to free up resources for private investment to drive jobs and economic growth, with: the payments-to-GDP ratio falling; stabilizing and then reducing net debt over time;
  - “supporting revenue growth by supporting policies that drive earnings and economic growth; and
  - “strengthening the Government’s balance sheet by improving net financial worth over time.”
- Version of medium-term fiscal strategy dates to 2016 but principles predate the global financial crisis.

### Performance before and after the Global Financial Crisis (GFC)
- Pre-GFC: economy broadly at capacity, budget generally in surplus except for FY2001/02; net asset-to-GDP ratio peaked at 7.3 percent in FY2007/08.
- At onset of GFC: Australia implemented a fiscal stimulus of roughly 4.5 percent of GDP, leading to high deficits and reversing debt trajectory from FY2008/09.
- Post-GFC budget repair reduced deficit to 2.7 percent of GDP by FY2012/13, aided by continued commodity boom until 2011 and strong mining investment boosting PRRT and CIT.
- Commodity price bust and end of mining investment boom weakened revenue outcomes due to:
  - (i) weaker than expected nominal growth reducing PIT bracket-creep tax gains;
  - (ii) weakening of CIT collection until new revenues from LNG and coal capacity after 2016.

### Budget repair strategy: design and performance
- Budget repair strategy designed to deliver sustainable surpluses as soon as possible, of at least 1 percent of GDP (Commonwealth of Australia, 2017, Statement 3, p. 7).
- Strategy requirements:
  - new spending measures offset by other spending cuts;
  - unexpected revenue improvements used to reduce the deficit;
  - decision-making to maintain a clear path to desired surplus.
- Historical rules:
  - Budget 2009-10 emphasized limiting real expenditure growth to 2 percent in periods with above-trend growth.
  - Budget repair strategy replaced earlier deficit exit strategy in FY2014/15 with goal of a budget surplus of 1 percent of GDP by FY2023/24 (later restated as “as soon as possible”).
- Medium-term projections to end of FY2020/21 forecast a surplus of 0.5 of GDP, matching IMF October 2017 WEO forecasts for 2021 and 2022.
- Government has sometimes postponed consolidation to increase infrastructure spending (Budget 2017-18), justified as productivity enhancing.
- Repeated underperformance and lengthening of consolidation horizon may have weakened credibility of budget repair strategy.
- Net debt increased rapidly after GFC; Standard and Poor’s placed Australia’s AAA rating outlook at negative in 2015; Moody’s and Fitch maintained stable outlooks.
- Strictly speaking, current budget repair strategy has not yet delivered the medium-term fiscal strategy.

### Fiscal outlook and two probable paths going forward
- Government projects real payments growth of 2.9 percent per annum on average over FY2021/22 to FY2027/28, which is 1 percentage point higher than the estimated 1.9 percent per annum on average over FY2017/18 to FY2020/21.
- Two probable fiscal outcome paths:
  - Government path: successful delivery of budget repair relying on strong nominal growth.
  - Alternative path: consolidation thrown off track; could lead to market discipline pressures given reliance on foreign purchases of debt, potentially requiring refocus on consolidation.
- Scenario of markets unwilling to finance countercyclical spending during a recession is not contemplated under current medium-term fiscal strategy.

### Intergenerational Report (IGR 2015) and long-term pressures
- IGR 2015 highlights long-term fiscal challenges from ageing population and rising demand for health care and aged care.
- IGR 2015 ‘proposed policy’ scenario is baseline long-term projection based on policies active at Mid-Year Economic and Fiscal Outlook 2014-2015.
- By 2050, IGR 2015 estimates Government will need to spend an additional 2.5 percent of GDP on health, aged care, and pensions assuming unchanged policy framework.
- Assuming a linear trend starting from zero in 2021 and reaching long-term value after 30 years, extra spending adds up to 21 percent of GDP of net debt by 2050.
- In the very long term, net debt would stabilize after increasing by 58 percent of GDP (referred to as the ‘No Policy Action Scenario’).

### Policy scenarios and macroeconomic impacts
- Tax Switching Scenario:
  - Revenue-neutral tax switching: reduce CIT by 0.7 percent of GDP and PIT by 1.4 percent of GDP, offset by increase in GST of 2.1 percent of GDP (similar to proposal in Pitt (2015)).
  - Tax switching strengthens domestic demand relative to debt-only consolidation but does not prevent large run-up in debt.
  - Under Tax Switching Scenario relative to No Policy Action Scenario:
    - Consumption gains 0.5 percentage point.
    - Investment gains 4.0 percentage points.
    - Real GDP is about 1.4 percentage points higher.
  - RBA may raise overnight cash rate by over 50 basis points to maintain inflation on target in short term.
- Simple Balanced Budget Scenario:
  - Builds on Tax Switching Scenario and includes fiscal consolidation to achieve debt control.
  - Includes cuts in other lumpsum transfers (outside of aged care and pensions).
  - Key channel: crowding in of private investment as government saving improves; embedded tax switching encourages expansionary real exchange rate depreciation of 1.2 percent relative to baseline in the long term.
- Benchmark / No Policy Action Scenario:
  - If nothing is done, net government debt and net foreign liabilities deteriorate in the medium term.
  - Additional risks (sovereign risk premia raising government borrowing costs) are not explored under this benchmark.

### Long-term macroeconomic effects under the Benchmark Scenario
- Real GDP is stronger by less than 1 percent after 30 years despite strong increase in general transfers.
- Household consumption increases in the long term by about 2 percent.
- Private investment is roughly at baseline level in the long term (crowded out by government debt).
- Australian net foreign liability position increases by about 20 percent of GDP.
- Real appreciation of around 2 percent relative to baseline in the long term.
- Rebalancing: worsening net trade balance offsets strength in consumption; overall real GDP barely changes.

*Source: IMF staff analysis from wp17286.*

### Box 1. Decomposition of the Tax Switching Scenario

### Box 1. Decomposition of the Tax Switching Scenario

### Overview of the decomposition
- The tax switching scenario is decomposed into two components:
  - A switch from the CIT to the PIT (on both wage and dividend income) of 0.7 percent of GDP.
  - A further switch from PIT (on wage income alone) to GST, of 2.1 percent of GDP.
- A roughly linear combination of these two switches produces the results for the Tax Switching Scenario in Figure 6.
- PIT is payable on all households’ wage income and also on dividend income, which is exclusively received by OLG households.

### Component 1: Switch from CIT to PIT (0.7 percent of GDP)
- Mechanism and distributional effects:
  - When the CIT is cut, OLG households receive fewer “franked” dividends and automatically face a greater tax liability for their dividend income.
  - There is only a slight increase in taxes on wages; dividend income bears the brunt of the PIT increase.
- Macroeconomic dynamics:
  - When the cut in CIT is netted with the aggregate increase in PIT, the increase in investment outweighs the direct negative impact of the PIT shift on consumption.
  - The negative impact on consumption is offset within the first 5 years.

### Component 2: Further switch from PIT (wage) to GST (2.1 percent of GDP)
- Mechanism and distributional effects:
  - The wage portion of the PIT is decreased (instead of increased) and offset by a 2.1 percent of GDP increase in the GST.
  - The GST increase dampens consumption for both OLG and LIQ households immediately, while the PIT cut serves to stimulate consumption.
- Macroeconomic outcome:
  - The net effect on real GDP is relatively weak at 0.3 percent of GDP.
  - This translates into a small multiplier of 0.14.
  - The result is consistent with Treasury work (Commonwealth of Australia, 2016) as cited.

### Key implications from the decomposition
- Tax-base interactions matter: dividend taxation and franking effects are central to distributional and macro outcomes when shifting from CIT to PIT.
- Timing of effects:
  - Investment response to the CIT-to-PIT switch is sufficiently strong to offset consumption losses within 5 years.
  - The PIT-to-GST shift produces an immediate consumption dampening and only a small positive effect on real GDP overall.
- Magnitudes to note:
  - CIT → PIT switch size: 0.7 percent of GDP.
  - PIT (wage) → GST switch size: 2.1 percent of GDP.
  - Net real GDP effect for the PIT→GST component: 0.3 percent of GDP.
  - Implied multiplier for the PIT→GST component: 0.14.

*Source: IMF staff calculations (Box 1, “Decomposition of the Tax Switching Scenario”).*

### Box 4. The “New Mediocre” and its Implications on Australia (concluded)

### Box 4. The “New Mediocre” and its Implications on Australia (concluded)

### Measure of procyclicality and comparison of anchors
- Procyclicality measure: centered around zero, compares change in the primary surplus with change in the output gap. Fiscal policy is procyclical if the output gap becomes more positive (negative) and primary surplus decreases (increases). Preference is for countercyclicality (primary surplus and output gap positively correlated).
- Summary findings from Table 3:
  - RMSD ([1] of the criteria in the table) indicates more flexibility (debt would respond better to shocks) under the flexible debt rule (DR) and under the medium-term balance anchor.
  - AMD [2] is lower for both debt rules, implying the debt rule is more precise in the long term.
  - Real output is less variable under the debt rules [5], implying more certainty and more rapid adjustment by households and firms.
  - The DR achieves faster convergence to the desired debt-to-GDP ratio [3], more consistently under the strict DR.
  - While the medium-term balance anchor is more countercyclical, the flexible DR demonstrates notable countercyclicality [4].
  - The long-term debt anchor under the flexible DR performs relatively strongly, despite uncertainty in the announced medium-term balance anchor not being fully captured.

### Implementing the long-term debt anchor with aggregated fiscal rules
- Rationale:
  - An aggregated fiscal rule (composite of component fiscal rules) can operationalize a long-term debt anchor if appropriate to macro-fiscal conditions and institutional settings.
  - Fiscal rules involve trade-offs between inter-temporal consistency and flexibility for countercyclical policy and automatic social transfers; these can be moderated by escape and revision clauses.
- Analytical setup:
  - Medium-term target horizon: extends between 2021 and 2050.
  - Benchmark scenario: large run-up in debt.
  - Tax switching is implemented.
  - ‘Debt norm’ defined as a reduction in net debt of 10 percent of GDP relative to the benchmark scenario; treated as the ‘benchmark consolidation’ case.

### Candidate component rules and their combinations
- Component rules used:
  - Expenditure rule (ER): Government consumption and general transfers grow at only 2 percent a year for 10 years starting in 2021. Relative to Budget 2017-18, this means a reduction in spending growth by 0.9 percentage points each year.
  - Variants of a debt rule (DR): Long-term government debt target is met after 5 or 10 years by varying the GST rate to achieve the debt norm of 10 percent, with either strict or flexible pursuit from 2021 to 2050.
- Aggregated fiscal rules constructed:
  - ER + strict DR: 90 percent of debt norm achieved by 2030, strict adherence to the debt target each year.
  - ER + flexible DR (10-year): 90 percent of debt norm achieved by 2030 (over 10 years), allowing variability consistent with an average business cycle frequency of six to seven years; implies an average decrease in the deficit of around 1 percent of GDP relative to the ‘benchmark scenario’.
  - ER + flexible DR (5-year): 90 percent of debt norm achieved by 2025 (over 5 years), allowing variability consistent with an average business cycle frequency of six to seven years; implies an average decrease in the deficit of around 2 percent of GDP relative to the ‘benchmark scenario’.

### Effects under the benchmark consolidation
- General:
  - Real GDP is always stronger in the benchmark consolidation due to tax switching, but consolidation imposes short-term downward pressures.
  - Shorter consolidation horizon (5 years) has largest short-term costs; more flexible rules allow real GDP to react positively to tax switching, with debt reacting more gradually.
- Domestic demand components:
  - Short term: Consumption is weakened by GST increase (dominating PIT cut positive effects). Private investment is stronger due to lower CIT and crowding in from reduced government dissaving. Dichotomy reinforced by DR with 5-year adjustment.
  - Long term: Positive investment effect expands productive capacity, increases labor demand and wages; consumption flips to contribute positively to GDP.
- Monetary policy and exchange rate:
  - Short term: Monetary policy acts as a drag (except under five-year horizon). GST increase makes consumption weakness disinflationary; RBA increases overnight cash rate less on impact, followed by further cuts in medium term.
  - Reduced government debt means fewer domestic assets for households; households demand more foreign assets → higher current account to accumulate those assets, especially short term. Real exchange rate depreciates to sell more goods abroad.
- Stronger effects when DR is more aggressive (five-year horizon): faster convergence implies rapid changes in economic flows, larger short-term consumption reduction, looser monetary policy, stronger private investment, quicker real exchange rate depreciation, and larger current account surpluses on impact.

### Evaluating aggregated fiscal rules under illustrative shocks
- Scenarios revisited:
  - Unexpected temporary but substantial increase in aggregate demand (Box 2).
  - Terms-of-trade-driven boom-bust cycle (Box 3).
- Key dynamics:
  - Temporary aggregate demand increase relative to benchmark:
    - More slack, potential for higher revenues, lower automatic transfers, additional inflationary pressures requiring monetary tightening.
    - Aggregated fiscal rules modify the GST increase needed to meet debt rules; GST increase also dampens the shock, sharing stabilization role with monetary policy.
  - Terms-of-trade boom-bust:
    - Real GDP more volatile, automatic social transfers more variable, greater interactions with aggregated fiscal rules but constrained by ER.
    - Real exchange rate movements dominated by commodity swings, enhancing stabilization roles for both monetary and fiscal policy.
- Performance summary (Table 4 referenced):
  - ER always restricts government spending; countercyclical in expansions, procyclical in contractions.
  - DR always reduces government debt; countercyclical in expansions, procyclical in contractions.
  - Rules with ER + strict DR are less flexible ([1] and [2]) and restrict faster real GDP growth under alternative scenarios, pushing towards greater countercyclicality [4].
  - Rules with ER + flexible DR become more procyclical under alternative scenarios but are more countercyclical under the benchmark consolidation [4], especially with the 5-year horizon; flexibility allows automatic social transfers to operate, slightly increasing real GDP variability [5], which can be reduced by faster consolidation (5 years).
- Simple scoring across five criteria and three scenarios:
  - Best (lowest) score is 26: flexible DR over 10 years.
  - Next: flexible DR over 5 years, score of 29.
  - Worst: strict DR, score of 35.
  - Score range context: lowest possible (best) 15; highest possible (worst) 45.
  - Note on procyclicality criterion under boom-bust scenario: where all three perform equally badly, all three rules assigned same ranking of 2.

### Conclusions and operational recommendations
- The Government has not yet achieved its budget repair strategy; net debt-to-GDP ratio continues to drift upwards and the medium-term balance anchor horizon has drifted further into the future.
- A long-term anchor would avoid upward drift in net public debt ratios, increasing certainty about future debt path and sustainability, aiding long-term planning by households and firms, but could increase procyclical fiscal consolidation during economic slowdowns.
- Comparative performance:
  - A fiscal rule based on a long-term debt anchor performs as well as, and sometimes better than, the medium-term balance anchor across the five criteria and three scenarios.
  - Debt rules reach their anchor more quickly and have lower absolute mean deviations of net debt-to-GDP ratio.
  - The analysis does not fully capture increased uncertainty in economic behavior due to historical drift under the medium-term balance anchor, a factor that strengthens the case for a debt anchor.
- Operationalization via component rules:
  - Combining expenditure rules (ER) and debt rules (DR) to reach a 10 percent of GDP reduction in net debt (the ‘debt norm’) was evaluated; the flexible DR returning debt to target after 10 years performed strongest on average across criteria and scenarios.
  - Flexible DR offers greater responsiveness of debt to shocks (higher RMSD) which helps achieve less variable real GDP, at some cost to precision of achieving the target (higher AMD).
- Practical tax instrument considerations (GST):
  - Using the GST as the adjusting fiscal instrument requires tactical planning: Commonwealth and State governments could reconfigure GST so a portion accrues strictly to the Commonwealth and is usable as a policy instrument.
  - Options include: proposing a schedule of GST increases in tax switching and announcing a schedule of tax credits that increase as needed later; or announcing tax credits in the short term and offsetting revenue weakening by broadening the tax base now.

*Source: IMF staff calculations (Box 4 concluded, from wp17286).*

### Appendix I:  Overview of the Theoretical Structure of G20MOD

### Appendix I:  Overview of the Theoretical Structure of G20MOD

### Demand side: households, consumption, investment, and trade
- Model type: annual, multi-region, general equilibrium combining micro-founded and reduced-form sectors; country/regional blocks structurally close to identical but with different steady-state ratios and behavioral parameters.
- Households:
  - Consumption block: discrete-time OLG (overlapping generations) model as in Blanchard (1985), Weil (1989) and Yaari (1965); constant-elasticity-of-substitution utility dependent only on household consumption.
  - OLG generates non-Ricardian properties: households treat government bonds as wealth because tax liabilities may fall beyond expected lifetimes; national savings are endogenously determined given government debt; global real interest rate equilibrates global saving and demand for savings.
  - Financial markets incomplete; international financial flows tracked as net positions (net foreign assets or net foreign liabilities) denominated in U.S. dollars.
- Liquidity-constrained households:
  - LIQ households have no access to financial markets, do not save, consume all income each period.
  - LIQ amplifies non-Ricardian effects, especially for temporary fiscal shocks.
- Private investment:
  - Tobin's Q formulation with quadratic real adjustment costs; negatively correlated with real interest rates.
  - Investment cumulates to private capital stock chosen by firms to maximize profits.
  - Capital-to-GDP ratio inversely related to cost of capital, which depends on depreciation, real corporate interest rate, company income tax rate, and relative prices.
  - Corporate interest rate: mix of the 1-year and 10-year interest rates, with a risk premium negatively correlated with the output gap to capture a financial accelerator (Bernanke and others (1999)).
- Government spending:
  - Government absorption = government consumption (affects aggregate demand) + infrastructure investment (exogenous; cumulates into public capital stock → permanent rise in economy-wide productivity if increased permanently).
- External sector:
  - Net exports respond to long-term determinants: real competitiveness index (RCI); current account adjusts to support desired net foreign asset position.
  - Exports and imports are reduced-form: exports increase with foreign activity and RCI depreciation; imports increase with domestic activity and REER appreciation.
  - RCI is export-weighted and accounts for third-country competition; REER is import-weighted. Real exchange rate mentions apply qualitatively to both RCI and REER.
  - Time-varying trade shares depend on relative tradable and nontradable productivity; model reproduces Balassa-Samuelson effects.
  - Aggregation: only aggregate exports/imports tracked per country but mechanisms ensure global exports and imports sum to zero.
  - Current account / net foreign asset positions linked to household saving decisions; non-zero current accounts can be steady-state features in OLG framework.

### Supply side and prices
- Aggregate supply:
  - Potential output based on Cobb-Douglas technology with trend total factor productivity, steady-state labor force, NAIRU, and actual capital stock.
  - Output gap computed and drives prices via excess demand/supply.
- Labor market:
  - Endogenous labor sector; steady-state population growth exogenous.
  - Participation rate: substitution effect (real wage) and income effect (total wealth), behavior based on GIMF and GEM properties.
  - Unemployment: short-term deviations around NAIRU governed by Okun's law from the output gap.
- Prices and wages:
  - Core price: CPI excluding food and energy (CPIX) determined by an inflation Phillips curve; CPIX inflation sticky and reflects expected exchange rate paths and output gap. Degree of forward-looking behavior is country specific.
  - Possibility that persistent oil price changes can leak into core inflation despite exclusion of direct food and energy effects.
  - Relative prices follow national accounts structure: weighted average of domestic consumer price and import price.
  - Export prices include third-country effects; import prices are an import-weighted average of other countries' export prices.
  - Wage inflation: Phillips curve for nominal wage growth with stickiness; real wages revert gradually depending on expected activity and labor supply-demand deviations.

### Commodity sector (oil, food, metals)
- Commodities modeled: oil, food, metals. Note: Australia modeled as an oil importer but notable metals exporter.
- Demand and supply:
  - Demand driven by global demand; relatively price inelastic short-term due to limited substitutability across the three commodity classes.
  - Supply also price inelastic short-term.
  - Countries trade commodities; households consume food and oil explicitly enabling headline vs core CPI distinction.
- Role in macro stabilization and amplification:
  - Commodities can moderate business cycles: global excess demand → commodity price rises → some downward pressure on global aggregate demand; global excess supply → falling commodity prices soften deterioration.
  - Commodity shocks can be highly disruptive.
  - If local business cycle is out of sync with global cycle, commodity prices can amplify rather than dampen local fluctuations.

### Financial features and monetary policy
- Interest rates:
  - Short-term: 1-year interest rate (overnight cash rate for Australia) used in monetary policy reaction function.
  - Long-term: 10-year interest rate based on expectations theory plus a term premium.
  - Interest rates on consumption, investment, government debt and net foreign assets are weighted averages of the 1-year and 10-year rates, allowing a role for the term premium.
- Monetary policy:
  - Standard form: inflation-forecast-based rule under flexible exchange rates (as for Australia).
  - Monetary policy links nominal and real sides; can work at cross-purposes or in tandem with fiscal policy.
  - Under constrained monetary policy space and rising probability of hitting the effective lower bound, overly ambitious fiscal consolidation can exacerbate economic costs.

### Fiscal block and government sector
- Fiscal architecture:
  - Detailed government sector reproducing simplified fiscal accounts for each country.
  - Eight policy instruments:
    - Spending side: government consumption; infrastructure spending; general lumpsum transfers to all households (pensions, aged care, unemployment insurance); lumpsum transfers targeted to LIQ households (welfare, certain pensions).
    - Revenue side: consumption tax (GST); personal income tax (PIT) on wage and dividend income; company income tax (CIT); taxes and royalties from mining and metals production.
  - For Australia: government modeled as Commonwealth + State amalgam; many paper issues focus on Commonwealth accounts and balances.
- Dividend taxation and Australian specifics:
  - Greater detail on firm/company income taxation for Australia. Firms pay CIT and issue dividends.
  - Households notionally pay marginal tax on dividend income as part of PIT. In Australia dividends are “franked”: households are rebated the tax already paid by firms as CIT.
  - Implication: lowering CIT reduces franked dividends OLG households receive → increases dividend income tax portion of PIT liability for OLG households.
  - A tax switch from CIT to PIT increases household PIT liability; burden of the increase falls on OLG households for dividend portion; wage-income portion of PIT increase shared with LIQ households.
- Budget constraint and targets:
  - Budget constraint met by choosing a long-term deficit target relative to GDP. Deficit = expenditures + interest payments − revenues.
  - One instrument (general lumpsum transfers by default) is continuously adjusted to ensure the budget constraint holds.
  - Long-term government debt target relative to GDP derived from the deficit target and nominal growth:
    - 푏푏
      푡푡푡푡푡푡
      =
      (
      1 +휋휋
      )
      (
      1 +푔푔
      )
      (
      1 +휋휋
      )
      (
      1 +푔푔
      )
      −1
      푔푔푔푔푔푔푔푔
      푡푡푡푡푡푡
    - Where 휋휋 is inflation, g is the steady-state growth rate, 푏푏
      푡푡푡푡푡푡
      is the long-term debt target, and 푔푔푔푔푔푔푔푔
      푡푡푡푡푡푡
      is the long-term deficit target.
  - The explicit deficit target pins down long-term government debt, a fundamental decision variable for firms and households worldwide.
  - Government debt level affects the global interest rate (equilibrating global saving and investment) and the real exchange rate (country’s relative price for contributions and use of global saving-investment pool).
  - Deficit target operational implementation complemented by fiscal rules (explained in body of paper).

*Source: Appendix I: Overview of the Theoretical Structure of G20MOD (wp17286).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17286.pdf_