Inefficiency in fiscal policy is measured in billions
How can fiscal policy be best shaped so as to secure public finances but not harm taxpayers or discourage private investors? What are the benefits and drawbacks to predictable fiscal policy? These topics were discussed by international experts during CASE’s discussion panel “Fiscal Policy: Moving towards Predictability” at the 26th Economic Forum in Krynica.
Diverse revenue portfolio
“The main benefits of fiscal predictability are political. And the main costs are economic,” commented Michael Smart from the University of Toronto. He noted that a predictable fiscal policy could make politicians’ lives easier in terms of helping them to better manage budgets and reducing the incidence of fiscal crises. However, stabilizing the fiscal balance could come at the cost of the taxpayers.
Smart’s suggestion for governments was to create a diversified revenue portfolio and to avoid volatile revenue sources. Governments should give preference to consumption taxes, namely VAT, redesigning it so that it is less sensitive to business cycles.
Fiscal framework and independent institutions
According to Manoucher Mokhtari from the University of Maryland, to avoid crises, governments should set credible fiscal frameworks. This entails the introduction of expenditure rules and the creation of predictable medium-term budgetary frameworks. Fiscal councils, which are independent, non-partisan institutions that monitor fiscal performance and/or advise the government on fiscal policy matters, can ensure a credible and efficient fiscal policy.
Fiscal unpredictability harms the private sector
Ivailo Izvorski from the World Bank touched upon the issue of the poor execution of EU rules regarding the stabilization of public finances. “None of the EU countries have been punished for breaching the Stability and Growth Pact,” noted the panel speaker. He also referred to the negative consequences of an unpredictable fiscal policy on the private sector. “The private sector does not like uncertainty, especially in the field of taxation. Unpredictability affects investment,” he stressed.
Gabiel Biris from the Romanian Ministry of Finance pointed out that another important factor in shaping an effective fiscal policy is setting proper tax rates. “The higher tax rates are, the bigger tax avoidance we have,” said the Minister. As a result, fiscal unpredictability grows. Therefore, governments should keep tax rates at a minimum level, create simple tax systems, and simplify tax procedures.
Rules alone do not guarantee the predictability of a fiscal policy
Jarosław Neneman, a former Undersecretary of State in the Polish Ministry of Finance, said that rules alone do not guarantee fiscal predictability. The missing elements are a clear vision, the maturity of the politicians, and the maturity of the institutions.
He referred to excise taxes and the unsuccessful case of raising the tobacco tax in Poland. Poland recently implemented several tax increases to quickly comply with an EU directive. A drawback to these abrupt changes has been decreased revenue from excise taxes.
Dr. Neneman stressed that there is no clear answer for how to increase excise taxes, nor does the Ministry have a vision of an overall tax system. However, entrepreneurs need to know in advance what they are required to pay.
Grzegorz Poniatowski, Director of Fiscal Policy Studies at CASE, concluded that inefficiency in fiscal policy is measured in billions, which is clearly visible in Poland, where, according to a recent CASE study, VAT non-compliance alone costs around 40 billion PLN annually.
