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Quo vadis, deficit? How high the tax level will be when the economic cycle reverses?

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Author Info

  • Gábor P. Kiss

    ()
    (Magyar Nemzeti Bank (central bank of Hungary))

  • Zoltán Reppa

    ()
    (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

The economic recession dampened tax revenues, causing deterioration – partly temporary, partly permanent – in the general government balance. The fiscal position can be assessed realistically if we can determine the level of revenue and deficit in the medium run. In order to do this, we prepare estimates of the trends of the macroeconomic variables determining tax bases and of the elasticity between tax revenues and tax bases. Trends in macroeconomic variables can be determined in three ways. Results from the macroeconometric model are more reliable and consistent. The simple time series method (ECB) is acceptable if it relies on prior estimation – e.g. one derived from the model – of the trends of macroeconomic variables. The Multivariate Hodrick-Prescott filter method (MVHP) only requires exogenously given potential GDP, and is thus suitable for simulation and for determining the uncertainty surrounding the estimate. Our model-based results show that the deficit for 2010 would be 2.8% lower if – over the medium term – there were convergence with the potential GDP forecast by the model. From 2011 this negative cyclical component will diminish by an annual 0.4-0.5%. If potential GDP is 1% lower, from 2011 tax revenues would approach a lower medium-term tax level 0.28-0.29% faster based on the MVHP method. If potential GDP is 1% higher, convergence to a higher tax level would be 0.30-0.31% slower.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_mnbszemle/mnben_mnb_bulletin_october_2010/pkiss-reppa_EN.pdf
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Bibliographic Info

Article provided by Magyar Nemzeti Bank (the central bank of Hungary) in its journal MNB Bulletin.

Volume (Year): 5 (2010)
Issue (Month): 3 (October)
Pages: 47-56

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Handle: RePEc:mnb:bullet:v:5:y:2010:i:3:p:47-56

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Web page: http://www.mnb.hu/
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Related research

Keywords: cyclically adjusted budget deficit; business cycles; constrained multi variate HP filter;

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References

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  1. Tomasz Jedrzejowicz & Gabor Kiss & Jana Jirsakova, 2009. "How to measure tax burden in an internationally comparable way?," National Bank of Poland Working Papers 56, National Bank of Poland, Economic Institute.
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Cited by:
  1. Anita Angelovska Bezovska & Jane Bogoev & Ana Mitreska & Maja Kadievska Vojnovik, 2011. "Investigating the Cyclical Behavior of Fiscal Policy in the Republic of Macedonia during the Period of Transition," Croatian Economic Survey, The Institute of Economics, Zagreb, vol. 13(1), pages 57-104, April.

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