Working Paper: CEPR ID: DP16846
Authors: Christian Keuschnigg; Julian Johs; Jacob Stevens
Abstract: One of the main functions of public debt is to smooth taxes and spending over time. In the Covid crisis, the Maastricht deficit restrictions were temporarily suspended to allow for large temporary deficits. As recovery sets in, countries are confronted with the task of consolidating the Covid debt. This paper explores a fiscal consolidation strategy combined with growth enhancing tax and expenditure reform. We quantitatively illustrate that this reform based strategy, by reaping substantial efficiency gains and inducing strong growth, eliminates the Covid debt, protects per capita social entitlements and yet avoids increasing tax rates. With slow consolidation, marginal tax rates are reduced right from the beginning.
Keywords: COVID debt; fiscal consolidation; tax and expenditure reform; growth
JEL Codes: E62; H24; H25; H55; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax reforms (H29) | GDP growth (O49) |
| VAT reforms (H25) | GDP growth (O49) |
| corporate tax reforms (ACE) (H25) | effective marginal tax rates on investment (H32) |
| effective marginal tax rates on investment (H32) | economic resilience (R23) |
| raising the retirement age (J26) | labor supply (J20) |
| raising the retirement age (J26) | tax revenues (H29) |
| reducing ill-targeted tax deductions (H20) | fiscal outcomes (H68) |
| reducing public spending (H69) | fiscal outcomes (H68) |
| growth-enhancing reforms (O25) | consolidate COVID debt (H63) |