## IMF Survey : Strong and Equitable Growth: Fiscal Policy Can Make a Difference

_IMF News, June 30, 2015_

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## Bibliographic details
- Published: June 30, 2015

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### Overview
- Publication: IMF Survey ; authors Jeff Danforth, Eva Jenkner, and Rossen Rozenov; IMF Fiscal Affairs Department; June 30, 2015.
- Central finding: Fiscal policy can lift potential growth, especially when complemented by supportive structural reforms and attention to equity.
- Evidence base: Nine country case studies (Australia, Chile, Germany, Ireland, Malaysia, the Netherlands, Poland, Tanzania, and Uganda) and an analysis of growth accelerations (defined as increases of at least 1 percentage point in five-year average growth following fiscal reforms) across 112 countries.

### Key empirical findings
- Average growth increased substantially during the decade following reforms in most countries studied: by about ¾ percentage point on average in advanced economies (excluding Ireland) and by even more in emerging markets and low-income countries.
- Analysis of growth acceleration episodes in 112 countries finds that such accelerations occurred significantly more often when countries had implemented fiscal reforms.
- Examples from country cases:
  - Germany increased its labor force participation by 8 percentage points between 2000 and 2013 through active labor market programs and other labor market reforms.
  - Between 1985 and 1995, Malaysia more than doubled its existing infrastructure capacity in most sectors—and annual growth surged to close to 8 percent.
  - Tanzania increased its education spending significantly over 1998–2005, from 1.8 percent of GDP to 3.5 percent of GDP, including measures targeted to less-developed regions; the reforms helped boost enrollment rates and spur sustained economic growth.
  - Ireland saw investment surge after it streamlined and reduced its corporate income tax structure.

### Anatomy of successful fiscal reforms (four main channels)
- Employment
  - Cutting labor taxes, especially when they are high, increases take-home pay and incentives to work.
  - Improving design of social benefit programs and active labor market programs can strengthen work incentives and assist job seekers.
  - Targeted measures to support labor market participation for women, youth, older workers, and low-skilled workers are important (example: India applies a lower effective tax rate on women’s labor income; most advanced economies subsidize hiring of unemployed youth).
- Investment
  - Tax policies influence private investment decisions; taxing all capital income can jeopardize investment by reducing returns.
  - Focusing capital income taxation on returns beyond a normal, risk-free rate of return can stimulate private investment and reduce debt-financing bias.
  - Favor incentives that directly reduce cost of capital (investment tax credits) over open-ended profit-based incentives (tax holidays) which erode the tax base.
  - Public investment in infrastructure can yield significant returns; attention to quality and efficiency is critical.
- Human capital
  - Fiscal policy ensures access to education and health, especially for disadvantaged groups, accelerating accumulation of human capital.
  - Priority measures: increase investment in primary education, provide a basic health care package, reduce user charges for poor households.
- Innovation
  - Targeted tax incentives (tax credits and deductions) can promote R&D investment and productivity, especially in R&D-intensive industries such as pharmaceuticals and telecommunications.

### How to pay for growth-friendly reforms
- Revenue-side measures (preferred):
  - Broaden the tax base by eliminating tax exemptions and preferential tax rates for certain types of income.
  - Shift tax composition from direct taxes to indirect and property taxes.
  - Improve revenue administration.
  - Introduce environmental taxes to price negative externalities (can generate fiscal resources while boosting environmentally sustainable growth).
  - Examples: Poland reduced the share of direct taxes in overall revenue and generated increased investment and employment; Chile simplified taxpayer forms and streamlined filing and payment procedures to improve enforcement and tax collection.
- Expenditure-side measures:
  - Improve targeting and increase efficiency of spending.
  - Lower the government wage bill while protecting quality of public services (examples: Germany, Ireland, Malaysia, and the Netherlands).
  - Eliminate generalized subsidies (such as energy subsidies) that disproportionately benefit higher-income groups in favor of targeted measures.
- Budget-neutral options:
  - Countries with little room to increase revenue or trim expenditure can change the composition of taxes and spending to boost growth.

### Design and implementation: the “how” matters
- Packaged reforms: Inclusion of fiscal measures in a package with complementary structural reforms increases the likelihood of success; in most studied countries, fiscal reforms were implemented together with structural reforms and macroeconomic policies.
  - Example complementarities: strengthened work incentives combined with labor market reforms (streamlined hiring and firing procedures, changes in wage bargaining, minimum wage cuts); reducing government debt and deficits to create room for corporate tax decreases combined with deregulation and privatization.
- Social dialogue and public support:
  - Social dialogue with stakeholders enhances implementation and sustainability of politically difficult reforms (examples: the Wassenaar agreement in the Netherlands in 1982; the tripartite agreement in Ireland in 1987).
  - Strategies to foster support include effective communication emphasizing benefits or costs of the status quo, and inclusion of compensatory measures for those expected to be worse off.
- Balancing efficiency and equity:
  - Reforms that increase efficiency may have adverse distributional consequences; trade-offs can be avoided by pairing measures.
  - Example: Increasing the share of consumption taxes may hurt lower-income households, but if proceeds finance higher health and education spending from which these households benefit, they may be better off overall.

*IMF Survey : Strong and Equitable Growth: Fiscal Policy Can Make a Difference, June 30, 2015.*

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## Content in this bundle

- [042015 (PDF)](/external/np/pp/eng/2015/042015.pdf){rel="external" type="application/pdf"}
- [042015pdf (PDF)](/-/media/websites/imf/imported/external/np/pp/eng/2015/_042015pdf.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Policy](https://www.imf.org/en/news/search)
- [Blog: Fiscal policy and structural reform](http://blog-imfdirect.imf.org/2015/03/27/fiscal-policy-and-structural-reform/)
- [Blog: Fiscal policy and growth](http://blog-imfdirect.imf.org/2015/04/15/measure-to-measure-the-effect-of-fiscal-policy-on-growth-and-stability/)
- [April 2015 Fiscal Monitor](http://www.imf.org/external/pubs/ft/survey/so/2015/NEW041515A.htm)
- [public investment in infrastructure](http://www.imf.org/external/pubs/ft/weo/2015/01/index.htm)
- [environmental taxes](http://blog-imfdirect.imf.org/2014/09/17/carbon-pricing-good-for-you-good-for-the-planet/)
- [energy](http://blog-imfdirect.imf.org/2015/05/18/global-energy-subsidies-are-big-about-us5-trillion-big/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol063015a_