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

George Kudrna () and Chung Tran

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: In this study, we quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using a computable 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 examined 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, and especially the poor. 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. Overall, the welfare trade-offs between current and future generations, as well as between the rich and poor, highlight key political constraints and point to challenging policy choices for the wellbeing of future generations.

Keywords: Fiscal Deficit; Public Debt; Fiscal Consolidation; Welfare; Dynamic General Equilibrium; Small Open Economy (search for similar items in EconPapers)
JEL-codes: C68 E21 E63 H31 H60 J26 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2016-12
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-mac, nep-opm and nep-pbe
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Related works:
Journal Article: Comparing budget repair measures for a small open economy with growing debt (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2016-73

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