Fiscal Consolidation in Israel: A Global Fiscal Model Perspective

Selim Ali Elekdag, Moreno-Badia, Marialuz and Natan P. Epstein

No 06/253, IMF Working Papers from International Monetary Fund

Abstract: Fiscal consolidation has become an important policy prescription for many emerging market countries (EMCs), particularly for the highly indebted ones. Although prudent fiscal policies tend to reduce vulnerabilities, their implementation is usually postponed. This paper represents, to the best of our knowledge, one of the first attempts in the literature to quantify the costs of delaying fiscal consolidation in an EMC. In particular, using the IMF's Global Fiscal Model (GFM), we find that early consolidation through expenditure cuts would result in a substantial increase in Israel's long-term output growth relative to the case with delayed fiscal adjustment. Using an alternative fiscal instrument, we find that delaying tax cuts would result in cumulative real GDP that is much larger than otherwise.

Keywords: Fiscal consolidation; distortionary taxes; government debt; Fiscal policy; Israel; Fiscal reforms; Tax reductions; Government expenditures; Public debt; Gross domestic product; Economic growth; Emerging markets; Economic models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pbe
Date: 2006-11-10
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