The Tax Reform 2015-16 – Macroeconomic Effects up to 2019

The 2015-16 tax reform foresees tax cuts of € 3.9 billion in 2016, increasing to € 5.2 billion p.a. from 2017 onwards. Provided that the planned measures to fund the tax relief (2016 € 3.6 billion, 2017 € 4.4 billion, from 2018 € 4.5 billion p.a.) are implemented in a timely and complete manner (scenario 1: "government" scenario), real disposable income of private households would increase by 1 percent (compared with a baseline scenario without tax reform; numbers are deviations from baseline in percent, cumulated up to 2019). As a consequence, private consumption will increase by 0.75 percent, real GDP will increase by ¼ percent and consumer prices by ½ percent. Under these assumptions the tax reform will not have lasting negative effects on the government balance. The chosen policy-mix would shift demand from public to private consumption and reduce the government-to-GDP ratio by 0.5 percentage points. Two alternative scenarios assume a delayed (scenario 2) or incomplete (scenario 3) implementation of cuts in public administration costs and subsidies, and measures to combat tax fraud. In these scenarios, disposable household income increases more and public consumption declines less than in scenario 1. This implies a slightly stronger increase in GDP (in comparison with scenario 1 up to +0.2 percentage points until 2019), but also a higher government deficit and public debt-to-GDP ratio (up to +1 percentage point in 2019).