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GTAP Resource #4127

"The Costs of Fiscal Thrift"
by Honkatukia, Juha, Peter Dixon, Maureen Rimmer and Saara Tamminen

The deepening economic crisis in the euro-area has brought thrift measures to the fore of economic policy debate. Most European countries anticipate rising levels of age-related spending in the decades to come, calling for some measure of austerity to ensure fiscal sustainability, but in most of these countries, there are few signs of a resumption of economic growth. Since raising more revenue and saving on public expenditure comes with a price, a comprehensive evaluation of the structure of the whole tax system and the effects of public spending is called for.
The aim of this study is to compare the welfare costs of improving fiscal stance by raising revenue with different types of taxes, as well as by cutting public spending. We provide a framework that can be used in the evaluation of thrift. We use the Finnish economy as an example, focussing on the effects of tax hikes taking effect from 2013 on, comprising both income taxes and value added taxes. We also take into account the spending cuts taking effect in 2013. The cuts reduce government spending on certain central government functions and on education, as well as slashing certain subsidies and public investments. Our analysis introduces several extensions on standard models.
We are using VATTAGE, an AGE model of the Finnish economy, to compare the welfare effects of the policies designed to reduce Finland’s budget deficits by using the concept of marginal cost of funds (MCF). VATTAGE is a MONASH-style model of Finland documented in Honkatukia (2009). However, unlike the original MONASH model, VATTAGE has been extended to include leisure and savings choice in the specification of household behaviour. We also allow for differences between household behaviour between income deciles. These extensions are necessary for useful MCF calculations because the essence of these calculations is tax-induced distortions in choices between consumption, leisure and savings, and because the progressivity of income ta...

Resource Details (Export Citation) GTAP Keywords
Category: 2013 Conference Paper
Status: Published
By/In: Presented at the 16th Annual Conference on Global Economic Analysis, Shanghai, China
Date: 2013
Created: Tamminen, S. (4/14/2013)
Updated: Tamminen, S. (4/14/2013)
Visits: 1,596
- Dynamic modeling
- Economic crisis
- Economic growth
- Europe (Northern)

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