Tag: IMF

The press release issued by the IMF on 21 March 2023.

• The Ukrainian authorities and IMF staff have reached a staff-level agreement on a set of macroeconomic and financial policies that would be supported by a new 48-month Extended Fund Facility (EFF) Arrangement.
• The EFF, with requested access of SDR 11.6 billion (about US$15.6 billion), or 577 percent of quota, aims to support the Ukrainian authorities anchor policies that sustain fiscal, external, price and financial stability, and support the ongoing gradual economic recovery, while promoting long-term growth in the context of post-war reconstruction and Ukraine’s path to EU accession.
• The staff-level agreement reflects the IMF’s continued commitment to support Ukraine and is expected to help mobilize large-scale concessional financing from Ukraine’s international donors and partners.

Washington, DC: At the request of the Ukrainian authorities, an International Monetary Fund (IMF) team led by Mr. Gavin Gray held discussions in Warsaw with Ukrainian officials, during March 8-15, 2023, on a 4-year economic program that, subject to approval by the Executive Board, would be supported by the IMF under the Extended Fund Facility (EFF).

Mr. Gavin Gray issued the following statement today:

“I am pleased to announce that the IMF team has reached staff-level agreement with the Ukrainian authorities on a 4-year IMF-supported program, with access requested of SDR 11.6 billion (about US$15.6 billion), or 577 percent of Ukraine’s quota. This agreement is subject to approval by the IMF Executive Board, with Board consideration expected in the coming weeks.

“The staff-level agreement reflects the IMF’s continued commitment to support Ukraine and is expected to help mobilize large-scale concessional financing from Ukraine’s international donors and partners over the duration of the program.

“In addition to the horrific humanitarian toll, Russia’s invasion of Ukraine continues to have a devastating impact on the economy: activity contracted by 30 percent in 2022, a large share of the capital stock has been destroyed, and poverty levels have climbed. Acute macroeconomic challenges persist due to the scale of the shock and the expansion of the fiscal deficit. The authorities have nevertheless managed to maintain macroeconomic and financial stability, thanks to substantial external support and skillful policymaking. The authorities’ commitment to good economic management was also evidenced by the strong performance under the Program Monitoring with Board Involvement (PMB) (Press Release 23/46).

“A gradual economic recovery is expected over the coming quarters, as activity recovers from the severe damage to critical infrastructure, although headwinds persist, including the risk of further escalation in the conflict. Developing a single baseline outlook scenario under exceptionally high uncertainty is exceedingly challenging, as a range of outcomes are plausible. On that basis, staff currently sees real GDP growth for 2023 ranging from -3 to +1 percent.

“The overarching goals of the authorities’ program are to sustain economic and financial stability in circumstances of exceptionally high uncertainty, restore debt sustainability, and support Ukraine’s recovery on the path toward EU accession in the post-war period. The program has been designed in line with the new Fund’s policy on lending under exceptionally high uncertainty, and strong financing assurances are expected from donors, including the G7 and EU. In view of the exceptionally high uncertainty, the requested IMF-supported program envisions a two-phased approach:

• The first phase, currently envisioned during the first 12-18 months of the program, will build on the PMB, to strengthen fiscal, external, price and financial stability by (i) bolstering revenue mobilization, (ii) eliminating monetary financing and aiming at net positive financing from domestic debt markets, and (iii) contributing to long-term financial stability, including by preparing a deeper assessment of the banking sector health and continuing to promote central bank independence. New measures that might erode tax revenues will be avoided. The authorities are also committed to continuing reforms to strengthen governance and anti-corruption frameworks, including through legislative changes.

• The second phase would shift focus to more expansive reforms to entrench macroeconomic stability, support recovery and early reconstruction, and enhance resilience and higher long-term growth, including in the context of Ukraine’s EU accession goals. During the second phase, Ukraine would be expected to revert to pre-war policy frameworks, including a flexible exchange rate and inflation targeting regime. In addition, fiscal policies would focus on critical structural reforms to anchor medium-term revenues through the implementation of a national revenue strategy, together with strengthening public finance management and introducing public investment management reforms to support post-war reconstruction. Enhancing competition in the vital energy sector, while reducing quasi-fiscal liabilities would complement the post-war reform efforts.

“The mission met with NBU Governor Pyshnyy and Finance Minister Marchenko, and other senior public officials, and would like to thank the authorities for the open and constructive discussions and the close collaboration that have brought us to today’s staff-level agreement.”

The press release issued by the IMF on 9 December 2022.

Speaking Points for the conference on Bulgaria in the Eurozone—Advantages and Opportunities

The press release issued by the IMF on 28 November 2022.

Keynote Speech Vitor Gaspar

Prepared in collaboration with Ruud de Mooij

Thank you very much for inviting me to speak in the EU Tax Symposium: Road to 2050.

I find the topic of ‘the tax mix for 2050’ timely and important. To me, it shows how the EC is ahead of the game in preparing for the challenges of the future. This is very welcome and very necessary in today’s turbulent times. Many policy makers are occupied with the transition out of the pandemic or dealing with the challenges of inflation. During such turbulent times, the contrast between wisdom and folly looms large and can have long lasting consequences.

The focus on tax and 2050 allows me to reminisce on my experience at the Commission’s Bureau of European Policy Advisers and the last report I wrote for the President of the European Commission on Taxation in the Digital Economy.

Back in history

To predict the future, we first need to understand the past. Let me take 4 minutes to highlight some of the remarkable changes in taxation that have occurred over the last 1½ century or so.

In the old days, say before 1870, states used simple tax handles to fund their operations, such as customs duties, transaction taxes and several funny taxes that were recently described in a fascinating book by Joel Slemrod and Michael Keen (e.g. taxes on chimneys, windows, hats, wigs, candles, mirrors, dogs, salt and bricks). Many of these taxes were of course highly distortionary as they are directly penalizing the functioning of markets and trade.

You may even have noticed that I stole the reference—to wisdom and folly—from the Keen and Slemrod book.

The modern income tax was a major innovation of the late 19 ^th and early 20^th century. It was first developed in Britain. Corporate income taxes came a little later and served as an effective withholding mechanism for the income tax. Anticipations of the international corporate tax system go back to the 1920s.

These innovations have led to a much more prominent role of the state. Tax-to-GDP ratios rose from a little over 7% in 1870 to well above 27% today. It coincided with the appearance of the modern social welfare state. Brad DeLong showed that this long 20th century is associated with the best 140 years of economic growth in History.

In the 1970s and 1980s, top income tax rates on personal income had risen to levels of 70 or 80%, while corporate tax rates were often 40 to 50%. These high rates turned out to be too distortionary and became unstainable. Since then, tax rates have declined.

After WWII, France invented the Value Added Tax. This gained traction in the EU in the 1970s to replace various distortionary and cascading turnover taxes. Since then, we have seen a global “spread of VAT”, with a leading role of the IMF. In Europe, VAT is now responsible for more than one quarter of revenue.

During the last 20 years we have also witnessed something else: its corrective role. This is based on Pigou’s principle to set prices right and, for example, make polluters pay. Carbon taxes and other environmental levies were first pioneered in Scandinavia in the 1990s and have since spread to 45 countries around the world.

Please note that all listed tax innovations originated in Europe. What they have in common is that they came in response to mounting distortions that made the earlier system untenable. They also explored information and administrative capacity as they became usable, over time. These themes I will explore in the remainder of my talk.

Drivers of change

The EC has identified 4 mega trends that will likely shape the tax mix of the future. Let me reflect briefly on each of them and how I think they will drive changes in taxation. I think the best perspective to take is that of Joel Slemrod in his book of 2014 who emphasizes the importance of an integrated approach encompassing tax policy, administration and legal aspects.

#1 Digitalization: or in the context of taxation, perhaps call it the information revolution. Digital revenue administration has already visibly reduced tax compliance gaps around the world. During the pandemic, we saw how quickly transformations happened. And much more is likely to come in the next 30 years. What I find intriguing is that this information revolution is putting classic tax theory on its head. This theory is based on information constraints—the theory of 2^nd best. We now need to rethink the old ways of taxation—distortions are no longer what they were in the past.

#2 Population dynamics: An ageing society with a declining population faces the inevitable challenge how the shrinking working population can support the expanding group of retirees. The heavy reliance on labour taxes seems to be unsustainable. As more elderly people retire and dissave, the tax burden will have to shift to consumption taxes, which are a more robust revenue source in an ageing society.

#3 Globalization has been ongoing for decades. New digital technologies and intangible assets make production factors ever more mobile, and it is therefore harder to sustain taxes where the production factors are. The destination principle is more robust to globalization because it depends on where less mobile consumers are. We already see a tendency toward destination-based taxes, for example in Pillar 1 of the global tax deal and the gradual shift toward VAT.

#4 Global public goods: Not only do climate externalities call for carbon tax to reflect the social cost of GhG emissions; corrective taxes can possibly be used for other environmental problems (waste, biodiversity), and other global public goods such as health (pandemics) or externalities in the financial sector (crypto assets).

So, the 4 mega trends will likely shape the direction of change in the tax system of 2050. However, change needs to be managed by people in governments and institutions. We therefore need to understand also how the political economy of tax reform evolves to make informed predictions of the future.

Scenarios for tax mix

Let me offer a brief perspective on what might happen with the tax system over the next 3 decades by sketching two scenarios. It emphasizes that we cannot take for granted that the theoretically ideal tax response can be implemented. The scenarios are based on two key uncertainties for the future:

(i) Trust in government: For instance, for government to be trustworthy in the digital age, it must prove its strong accountability and transparency through the primacy of the rule of law and permanent scrutiny by citizens. That is exactly what Lorenzetti’s painting here and on the first slide reflect. Can governments live up to that expectation? Or will they lack credibility, act opportunistically, and create uncertainty?

(ii) International cooperation: Will countries manage to effectively cooperate to address common challenges? Or will there be fragmentation, as we currently see in some areas?

By combining the two key uncertainties, we can in principle sketch 4 scenarios. Given time, I’m highlighting only two (2) of them, to show how the tax mix could differ in these diverging worlds.

• Scenario 1 is a world of mistrust in government and fragmentation.

• In this world, citizens demand strict data privacy and digitalization can’t revolutionize tax enforcement. Rather, digitalization exacerbates market power of large multinationals and raises the power of elites. This limits the ability for progressive taxation.
• Also in this world, unreliable governments do not deliver on their promises and tax certainty is low; governments rely on instruments such as repeat amnesties and ad-hoc windfall taxes instead of a stable rules-based system.
• At the same time, fragmentation prevents effective international and European cooperation: countries are reluctant to introduce carbon taxes and there remains fierce tax competition that erodes corporate and personal tax bases.

• Scenario 2 is a world of trust and international cooperation

• In this world, governments can (i) exploit the gains from digitalization; (ii) effectively respond to domestic trends such as ageing; and (iii) cope with international challenges such as tax competition, tax avoidance/evasion and carbon pricing.

I prefer the second scenario. But that scenario requires hard work in building and sustaining credible institutions, including in the EU. A strong Europe will be essential for two reasons.

EU in the world

First, in 2050 we need a strong Union to address the common European challenges reflected in the mega trends that cannot be resolved by individual countries. A stronger role of the EU based on macroeconomic stability and Europe-wide public goods will be essential to remain credible. This role might go beyond the coordination of national tax policies and also raises the important question about the vision for the EU budget in 2050:

• What will be the financing model to the EU budget in 2050? Will there be European taxes?
• How would that fit in the overall tax system (European; national, sub-national)?

Remember that in the US, the central government in 1780 had no taxing powers and relied entirely on national contributions from the 13 States of the confederation. And each state had veto power.

Second, Europe’s role in the global economic order is vital. As history shows, Europe has always been at the frontier of tax system innovation and served as the pioneer of the social welfare state. Is may again play this leadership role in the developments to 2050.

The single market of 1992 and the single currency of 2001 are its most emblematic achievements. The best environment for Europe is capitalism embedded in a rules-based global order. For Europe to be effective in the global arena, its countries must work together. Let me conclude with a quote from Jean Monnet from November 9, 1954. On that day, he said to his colleagues. “ Our countries have become too small for the world of today, for the scale of modern technology and of America and Russia today, or China and India tomorrow ”.

The press release issued by the IMF on 21 October 2022.

The International Monetary Fund’s (IMF) Mission Chief for Ukraine Gavin Gray issued the following statement today:

“During October 17–20, an IMF staff team met with the Ukrainian authorities in Vienna, Austria. The mission discussed its findings with Finance Minister, Serhii Marchenko, and Governor of the National Bank of Ukraine, Andriy Pyshnyy.

“The Russian invasion of Ukraine that started over seven months ago has caused tremendous human suffering and had a severe economic impact. Real gross domestic product (GDP) has contracted significantly, inflation has risen sharply, trade has been substantially disrupted, and the fiscal deficit has risen to unprecedented levels.

“Against this challenging backdrop, the discussions focused on recent macro-financial developments and outlook, the budget for 2023 and associated external financing needs, financial sector issues and the mix of policies to support macroeconomic stability. The Ukrainian authorities deserve considerable credit for having maintained an important degree of macro-financial stability in these extremely difficult circumstances. The authorities are encouraged to refrain from measures that erode tax revenues, as they strive to align expenditure with available financing.

“Building on these productive discussions, staff and the authorities will advance work in the coming weeks to follow up on the authorities’ request for Program Monitoring with Board Involvement (PMB). The PMB will lay out the authorities’ policy intentions to support macroeconomic and financial stability and present an assessment of external financing needs for 2023. As such, the PMB will also provide a strong anchor for macroeconomic policies, further catalyze donor support, and help pave the way toward a fully-fledged Fund program. ”

The press release issued by the IMF on 11 October 2022.

The IMF issued a gloomy forecast for global growth, downgrading its forecast for 2023 in its World Economic Outlook report issued Tuesday in Washington, D.C.

IMF Chief Economist Pierre-Olivier Gourinchas, Petya Koeva Brooks and Daniel Leigh answered questions on how the current turbulence will shape things in the months to come.

The IMF chief economist opened with a broad look at the growth forecast for the next year, which is likely to be much lower than expected, due to several main factors.

“The global economy continues to face steep challenges. Shaped by three powerful forces, the Russian invasion of Ukraine, the cost of living crisis caused by persistent and broadening inflation pressures, and the slowdown in China,” Gourinchas said at a news conference launching the report at the IMF’s Annual Meetings.

Gourinchas also highlighted the continuing impact the war in Ukraine is having on the global energy crisis.

“The war in Ukraine is still raging and further escalation can exacerbate the energy crisis. Our October World Economic Outlook Report presents a risk assessment around or baseline projections. With 25% probability, global growth next year could slow down to below 2%, a historically low level. We’ve only had that five times since 1970. ”

When asked about the continued risk new COVID-19 variants would have, Gourinchas said progress was being made, although he suggested China’s continued lockdown regulations are an exception.

“An important exception is China, where a different health policy path has been charted. And as a result, the country is still facing continued, localized, but important sometimes lockdowns. And that’s something that is weighing down on Chinese economic activity in our in our baseline forecasts because of the continuation of zero-covid policy, ” said the IMF’s Chief Economist.

IMF Economist Petya Koeva Brooks provided new insight on the impact that rising inflation and the energy crisis is having the Italian economy.

“We are expecting Italy to enter a technical recession in the coming quarters. And a big impact has come from the energy crisis and the elevated inflation and the adverse impact on real incomes. So when it comes to the risks to this outlook, they are getting very much on the downside. And again, they are related to even further impact coming from energy markets,” she said.

The panel was asked to turn their attention to the Horn of Africa, where there is a severe humanitarian crisis. In addition to high debt levels and a strengthening US dollar, IMF Economist Daniel Leigh highlighted low vaccination rates in the region as one of the factors in the continuing financial stress caused by the pandemic.

“It is a region very severely affected by the war in Ukraine. The food, fuel and fertilizer price spike is having a negative effect on agriculture and a broad part of the economy. On top of that, this is one of the parts of the world where the COVID shock is still really severe in terms of the very low vaccination rates, 26% only in sub-Saharan Africa, compared to 66% in the rest of the world. Only 2% have a booster compared to a third to a half in the rest of the world. So on top of that, the global slowdown means less demand for the products of the region. And then on top of that, the higher interest rates, low growth means that two thirds of the countries in the regions are facing stress or debt distress. So this is why the attention here is very much on providing relief, also in terms of supporting the common framework to avoid the debt crisis from spreading,” Said Daniel Leigh.