1. Fiscal Policy and Euro Jaromír Šindel ECES
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Fiscal Policy and Euro
Jaromír Šindel
ECES

2. Topics Fiscal Economic Policy Maastricht and SGP – dreams and facts
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Fiscal Economic Policy
Time inconsistency, rules better than discretion, cyclical adjusted government balance,...
Maastricht and SGP – dreams and facts
Fiscal consolidation under Maastricht criteria, SGP reality, reform of SGP
CEEC and Fiscal Policy, euro linkage
Fiscal reforms, fiscal consolidation, implication for sustainable development and economic growth, Tax Competitiveness

3. Understand to Fiscal Policy
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
EFFICIENCY
non-efficient tax system
non-efficient spending
Source: own layout.

4. Fiscal Economic Policy
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Structural and cyclical governmetn budget
Automatic stabilizers automatically increase deficit during cyclical downturns by taxes based on incomes, especially when progressive or payments for unemployed workers (during downturns, automatic stabilizers moderate the business cycle)
Gap of about 2% between cyclical and structural deficit during recessions shows effect of automatic stabilizers
Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

5. Fiscal Economic Policy
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Time inconsistency
Inconsistency between short-time and long-time effect of fiscal policy.
For example durign good times, government decreases taxes, more generally makes structural changes in fiscal policy.
Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

6. Fiscal Economic Policy
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Time inconsistency and election year
Time inconsistency and the effect of structural changes in fiscal policy is stronger during election year.
Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

7. Ricardian Equivalence in the USA
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Savings in the USA, (% GDP)
Ricardian equivalence?
Source: OECD Economic Studies No. 38, 2004/1

8. Sustainable Fiscal Policy
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
There is many measures of fiscal policy sustainability. We use the unchanging level of debt in GDP term. So:
Because and , using derivation formula for change of d we get
In term of GDP and because we get
Our goal is , so the level of unchanged debt is Then desired balance of fiscal budget is
Source: Obsfeld, Rogoff (2004)

9. Fiscal Policy in Europe
Question of currency union
Maastricht Treaty was not enough for Germany – Stability and Growth Pact was established. Troubles?
If there are troubles with fiscal rules, how to cope with them?

10. Review of the OCA theory
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Benefits outweigh costs if …
Markets are highly integrated
Goods markets, Financial markets, Labor markets
Shocks to currency union members are symmetrical (UK - oil)
Labor markets are flexible
Flexible fiscal policy for fiscal transfers (to cope with shocks)
Question of OCA endogenity
Convergence to OCA and higher flexibility follow integration process
call for flexible and sustainable fiscal policy
Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

11. Why Rules in Eurozone?
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Free rider effect of countries with high debt and higher deficits of government balance, becouse there is common currency and interest rate.
Fiscal imbalance in currency union can increase price level. Central bank have tighten monetary policy through higher common interest rate.
And because you want to avoid increase in interest rate, there is call for fiscal rules.

12. Why Rules in Eurozone?
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Optimal Mix of Monetary and Fiscal Policy in Currency Union is not Feasible
Optimum is sustainable fiscal policy and moderate monetary policy.
But free rider problem with fiscal policy in monetary union.
Some countries have unsustainable fiscal policy and tigher monetary policy is need.
Optimal Mix of Monetary & Fiscal Policy is not Feasible due to Free Rider Problem
Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

13. Rules in Eurozone and Reality
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Debt and Deficit in Eurozone and EU Member Countries
Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

14. Fiscal Policy - Changes, Reforms?
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Fiscal Policy and Tax Burden
structure of tax burden, tax burden according to economic function
Changes and Reforms
Tax Competitiveness

15. Tax Burden
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Tax to GDP ratio in EU countries and the US and Japan (in %, ranked by 2003 level)
Source: Eurostat. Structures of the taxation systems in the European Union

16. Tax Burden
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Structure of tax revenues by major type of taxes (2003, in % of total tax burdens)
Source: Eurostat. Structures of the taxation systems in the European Union

17. Tax Burden accord. to ec. function
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Taxes on labour – empl. and non-employed (pension and social benefits), consum. and capital - capital and business income and stocks (in % of GDP, 2003)
Source: Eurostat. Structures of the taxation systems in the European Union

18. Tax Burden accord. to ec. function
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Shares of tax revenues raised on labour (empl. and non-employed), consumption and capital (capital and business income and stocks) (in % of total taxation, 2003)
Source: Eurostat. Structures of the taxation systems in the European Union

19. Tax Burden accord. to ec. function
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Contribution of taxes on labour, capital and consumption (in % of GDP) to the changes in the total tax-to-GDP ratio ( , diff. in p.p. of GDP)
Note:*LT:
Source: Eurostat. Structures of the taxation systems in the European Union

20. Tax Burden accord. to ec. function
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Development of implicit tax rates for the Member States ( , in %)
Source: Eurostat. Structures of the taxation systems in the European Union

21. Tax Burden accord. to Consumption
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Trend developments of ITRC in the old and new Member States ( , in %)
Source: Eurostat. Structures of the taxation systems in the European Union

22. Tax Burden accord. to Consumption
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Implicit tax rates on consumption in the EU ( changes in the rate in p.p.)
Note: LT, PL, SK: no data available
Source: Eurostat. Structures of the taxation systems in the European Union

23. Tax Burden accord. to Labour
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Decomposition of the implicit tax rate on labour force in EU (2003, in %)
Source: Eurostat. Structures of the taxation systems in the European Union

24. Tax Competitiveness
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Effective top statutory tax rate on corporate income (2005, in %)
NOTE: Only the 'basic' (non targeted) top rate is presented here. Existing surcharges and averages of local taxes are included. The rate for Estonia refers only to distributed profits; as from 2000 the tax rate on retained earnings is zero. The rate for Italy includes 'IRAP'(rate 4.25%) a local tax levied on a tax base broader than corporate income.
Source: Eurostat. Structures of the taxation systems in the European Union

25. Tax Competitiveness
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Top statutory personal income tax rate (2005, in %)
Note: Without surcharges - DK, FI, SE: state taxes plus municipality taxes
Source: Eurostat. Structures of the taxation systems in the European Union

26. Tax Competitiveness
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Develop. of effective top statutory tax rate on corporate income ( in %)
Source: Eurostat. Structures of the taxation systems in the European Union

27. Tax Competitiveness
The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague
Evolution by major type of taxes ( , differences in % points of GDP)
Note: data for EE, CY and HU are not available for 1995.
Source: Eurostat. Structures of the taxation systems in the European Union