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Fiscal Windfalls: A Model-Based Analysis

Author

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  • Conefrey, Thomas

    (Central Bank of Ireland)

  • O'Reilly, Gerard

    (Central Bank of Ireland)

  • Walsh, Graeme

    (Central Bank of Ireland)

Abstract

Since 2015, the public finances have been boosted by exceptionally strong growth in corporation tax and sizeable unexpected savings on national debt interest payments. At the same time, the economy has experienced a phase of strong economic growth. In this Economic Letter, we examine some of the macroeconomic and fiscal implications of alternative uses of fiscal windfalls, conditional on the state of the economy. Saving revenue windfalls when the economy is operating at full capacity would strengthen the public finances while reducing the risk of fiscal policy amplifying overheating pressures. In the event of a future downturn, larger fiscal buffers could be used to avoid the need for austerity. Our results suggest that this could substantially reduce the loss of employment and output compared to the case where fiscal policy is tightened in the downturn.

Suggested Citation

  • Conefrey, Thomas & O'Reilly, Gerard & Walsh, Graeme, 2019. "Fiscal Windfalls: A Model-Based Analysis," Economic Letters 3/EL/19, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:3/el/19
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    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/vol-2019-no-3-fiscal-windfalls-a-model-based-analysis-(conefrey-o-reilly-and-walsh).pdf?sfvrsn=10
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    References listed on IDEAS

    as
    1. Thomas Conefrey & Gerard O'Reilly & Graeme Walsh, 2018. "Modelling External Shocks in a Small Open Economy: The Case of Ireland," National Institute Economic Review, National Institute of Economic and Social Research, vol. 244(1), pages 56-63, May.
    2. Linehan, Suzanne & Lydon, Reamonn & McIndoe-Calder, Tara & Reddan, Paul & Smyth, Diarmaid, 2017. "The Labour Market and Wage Growth after a Crisis," Quarterly Bulletin Articles, Central Bank of Ireland, pages 66-79, October.
    3. Larkin, John & Anderson, PJ & Furlong, Sean, 2019. "The Irish Government Bond Market and Quantitative Easing," Quarterly Bulletin Articles, Central Bank of Ireland, pages 78-100, April.
    4. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, vol. 39(3-4), pages 771-779, April.
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    1. Acheson, Jean & Lawless, Martina & Lawlor, Donough & Tarrant, Oisín & Weymes, Laura, 2021. "Responsiveness of corporation tax revenues to taxable income: A firm-level approach," Papers WP715, Economic and Social Research Institute (ESRI).

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