The Devil Is in the Details

Author:Era Dabla-Norris and Aleksandra Zdzienicka
Position:ERA DABLA-NORRIS is a division chief in the IMF's Asia Pacific Department, and ALEKSANDRA ZDZIENICKA is an economist in the IMF'S Fiscal Affairs Department. This article is based on Chen and others (2019).
Pages:37-39
SUMMARY

If properly designed, tax-based fiscal consolidation does not have to be politically costly.

 
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June 2020 | FINANCE & DEVELOPMENT 37
M
ost countries around the world
have rightfully t aken a “whatever
it takes” approach to combating
the COVID-19 pandemic. On the
scal side, extr aordinary and far-reaching ta x and
spending measures have been i mplemented to save
lives, support individuals a nd rms, and set the
stage for recovery. It is still too early to predict
an endgame for this cr isis. But once the virus is
beaten back and the global rec ession bottoms
out, public nances will have to be put back in
order, especially in countries where debt was
already high before t he pandemic arrived. is
will inevitably ra ise questions about what taxes
to increase and which spendin g to cut, decisions
that are p olitical ly unpopular.
Jean-Claude Juncker, the former president
of the European Commission, referring to the
political obstacles facing those underta king
structura l reforms, famously remarked, “We all
know what to do; we just don’t know how to get
re-elected after we’ve done it” (Economist 2007 ).
One could argue that this applies especially
to sca l consol idation. A mong cons olidation
measures, ta x hikes are typically a ssociated with
higher short-term growth costs than spending
cuts (Alesina, Favero, and Giavazzi 2015). But
does that mean governments a lways pay a price
at the ballot box for raising ta xes?
While there is broad ag reement on the economic
benets of scal adjustments to reduce ru naway
decits and debt, the political ra mications are
less clea r-cut.
On the one hand, tax increases may generate
gains for society a s a whole only in the longer
term while inicti ng short-term pain on certain
segments of society. ose aected may be
highly vocal a nd well organized. e rich and
middle-class voters may a lso have very dierent
notions about which tax hikes a re palatable (Alt,
Preston, and Sibieta 2010). is suggests th at
voters can penaliz e governments for undertaking
actions that go aga inst their policy preferences
and economic i nterests.
If properly designed, tax-based fiscal consolidation
does not have to be politically costly
Era Dabla-Norris and Aleksandra Zdzienicka
THE
DEVIL
IS IN THE
DETAILS
ART: ISTO CK / NEY RO2008

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