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A Macroeconomic Analysis of the Fiscal System in Egypt

Gerhard Glomm () and Juergen Jung ()

No 2010-17, Working Papers from Towson University, Department of Economics

Abstract: We construct a dynamic general equilibrium model to analyze the fiscal situation of Egypt. We model Egypt as a small open economy that takes real interest rates and world prices of fuel as given. Since a large component of the government budget consists of pensions payments, we use an overlapping generations structure. The model contains descriptions of the public and private sector, as well as descriptions of the production sectors for a public good such as infrastructure, energy, and a final aggregate consumption good. The model pays special attention to the energy sector. We then calibrate the model to data from Egypt. The following policy reforms are considered: (i) reductions in pensions to public sector workers, (ii) reductions in pensions to private sector workers, (iii) reductions in the public sector pay premiums, (iv) decreases of the energy subsidies, and (v) a decrease of the public sector workforce. In each case we reduce the "expenditure" by 15 percent. For each of the reforms we adjust consumption taxes, labor taxes, "capital taxes", or public investments in infrastructure to satisfy the government budget constraint. We calculate the new steady states, the transition paths to the new steady states, and the size of the welfare gains or losses for all reforms. We find that due to the modest nature of the reforms, the effect of the policy reforms on GDP and consumption are modest. Often these gains are in the neighborhood of 1 percent. We find that welfare gains or losses can be sizable and that the largest gains from the reforms are attained when the freed up resources are used for infrastructure investments or for lowering the tax on company profits.

Keywords: Fiscal policy reform; public sector reform; energy subsidies; growth. (search for similar items in EconPapers)
JEL-codes: E21 E63 H55 J26 J45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara, nep-dge and nep-mac
Date: 2010-10, Revised 2010-10
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http://webapps.towson.edu/cbe/economics/workingpapers/2010-17.pdf First version, 2010 (application/pdf)

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Persistent link: http://EconPapers.repec.org/RePEc:tow:wpaper:2010-17

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