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Comparing budget repair measures for a small open economy with growing debt

Kudrna, George; Tran, Chung

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We quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using an overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts. The simulation results indicate that all three fiscal measures result in favourable long-run...[Show more]

dc.contributor.authorKudrna, George
dc.contributor.authorTran, Chung
dc.date.accessioned2018-01-11T01:27:02Z
dc.identifier.issn0164-0704
dc.identifier.urihttp://hdl.handle.net/1885/139166
dc.description.abstractWe quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using an overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts. The simulation results indicate that all three fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but have adverse consequences in the short run that are particularly severe under the immediate fiscal consolidation plan. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. The adverse effects on wellbeing of current generations highlight political constraints when implementing a fiscal consolidation plan. However, after compensating current generations for all welfare losses, there is still an overall efficiency gain. This implies possibilities to devise a fiscal consolidation plan supported by a compensation scheme to improve wellbeing of future generations.
dc.description.sponsorshipThis research was supported by the Australian Research Council Centre of Excellence in Population Ageing Research (CEPAR) under grant CE110001029.
dc.format.mimetypeapplication/pdf
dc.publisherElsevier
dc.rights© 2017 Elsevier B.V.
dc.sourceJournal of Macroeconomics
dc.subjectFiscal deficit
dc.subjectPublic debt
dc.subjectFiscal consolidation
dc.subjectWelfare
dc.subjectDynamic general equilibrium
dc.subjectSmall open economy
dc.titleComparing budget repair measures for a small open economy with growing debt
dc.typeJournal article
local.identifier.citationvolume55
dc.date.issued2018
local.identifier.ariespublicationa383154xPUB8798
local.publisher.urlhttps://www.elsevier.com/
local.type.statusAccepted Version
local.contributor.affiliationTran, T., Research School of Economics, The Australian National University
dc.relationhttp://purl.org/au-research/grants/arc/CE1101029
local.bibliographicCitation.startpage162
local.bibliographicCitation.lastpage183
local.identifier.doi10.1016/j.jmacro.2017.10.005
dcterms.accessRightsOpen Access
dc.provenancehttp://www.sherpa.ac.uk/romeo/issn/0164-0704/..."Author's post-print on open access repository after an embargo period of between 12 months and 48 months" from SHERPA/RoMEO site (as at 11/01/18).
CollectionsANU Research Publications

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