Bank Of Greece Sa · ATHEX:TELL
Bank Of Greece Sa — Technical Presentation (September 2022)
28 slides from Bank Of Greece Sa's technical presentation, Sep 29, 2022
Slide 1: Fiscal multipliers with an informal sector
Fiscal multipliers with an informal sector Harris Dellas*, Dimitris Malliaropulos**, Dimitris Papageorgiou# and Evangelia Vourvachaki# * University of Bern and CEPR, **Bank of Greece and University of Piraeus, # Bank of Greece Sixth Annual Workshop: ESCB Research Cluster 2 29-30 September 2022, Bank
Slide 2: Fiscal consolidation and economic informality in Greece
Fiscal consolidation and economic informality in Greece On the eve of its sovereign debt crisis in 2010, Greece initiated a large fiscal consolidation program Deep and persistent recession → Greek GDP declined by around 26% over 2009-2015 Despite the large, broad increase in tax rates, tax rev
Slide 3: Objectives of the paper
Objectives of the paper Estimate the contribution of economic informality to the Greek recession Quantitative assessment of the fiscal policies pursued during the debt crisis Draw general lessons about how the informal sector impacts on the absolute and relative size of tax and government spen
Slide 4: Relevant literature
Relevant literature The paper is related and contributes to two strands in the literature • Performance of the Greek economy during the sovereign crisis (Gourinchas et al. 2016, Chodorow-Reich et al. 2021) • Implications of the informal sector for the magnitude of fiscal multipliers and macroecono
Slide 5: Preview of main findings
Preview of main findings Fiscal policy was the main force behind the collapse in economic activity in Greece • The consolidation package accounts for at least 2/3 of the observed decline in Greek GDP The fiscal package triggered a rise in informal activities as share of output of about 7pp • The
Slide 6: The model: Key features
The model: Key features Small open economy that belongs to a currency area • The domestic interest rate equals to an exogenously given risk-free policy rate Production (firms that operate at different stages) • 1st stage: firms produce a homogeneous intermediate good using labour and capital (fo
Slide 7: The model: Key features (cont.)
The model: Key features (cont.) Tax evasion • Firm level: firms do not report the revenue from the sale of the informal good they produce • Households: do not declare the labour income earned from working in the informal sector • Firms/households that get detected – which happens with an exogenous
Slide 8: The model: Key equations
The model: Key equations Production (homogeneous intermediate goods firms) 𝑎 1−𝑎 𝑝 𝑝 𝑝 𝑝 𝑔 𝑎𝐺 𝑌𝑓,𝑡 = 𝐴𝑡 𝐾𝑓,𝑡 𝐻𝑓,𝑡 𝐾𝑡 , formal good 𝑢 𝑢 𝜁 𝑌𝑓,𝑡 = 𝐴𝑢𝑡 𝐻𝑓,𝑡 − 𝐹, informal good Production of informal good uses only labour Profits 𝑝 𝑢 𝑃 𝑓 𝑓,𝑡 𝑝 𝑃𝑓,𝑡 𝑢 𝑝…
Slide 9: The model: Key equations (cont.)
The model: Key equations (cont.) Household budget constraint 𝑢 𝐼 𝑝 𝑐 𝑝 𝑃𝑡 𝑢 𝑃 𝑡 𝑖 𝑆𝑡 𝐹𝑖,𝑡+1 1 + 𝜏𝑡 𝐶𝑖,𝑡 + 𝐶 𝐶𝑖,𝑡 + 𝐶 𝐼𝑡 + = 𝑃𝑡 𝑃𝑡 𝑃𝑡𝐶 𝑝 𝑝 𝑔 𝑔 𝑢 𝑝 = 1 − 𝜏𝑡𝑙 𝑤𝑡 𝐻𝑖,𝑡 + 𝑤𝑡 𝐻𝑖,𝑡 + 1 − 𝜋𝜙 𝑊 𝑤𝑡𝑢 𝐻𝑖,𝑡 + 1 − 𝜏𝑡𝑘 𝑟𝑡𝑘 𝑢𝑖,𝑡 𝐾𝑖,𝑡 +…
Slide 10: The model: Key equations (cont.)
The model: Key equations (cont.) Resource constraints • Informal goods are used only for household consumption 𝑌𝑡𝑢 = 𝐶𝑡𝑢 , informal output • Formal goods are exported or used domestically for consumption and investment purposes, by both the private and public sector 𝑝 𝑌𝑡 = 𝑢𝑡𝑑 𝐶𝑡𝑑…
Slide 11: Calibration of the model
Calibration of the model The model is calibrated at an annual frequency • The exogenous fiscal policy instruments are set equal to their values in 2009 • The TFP in the informal sector is calibrated so that the informal output is 15% of GDP 𝑝 – Production of informal goods is less productive…
Slide 12: Fiscal multipliers
Fiscal multipliers Steady-state analysis • Effects of changes in the tax-spending instruments in an economy with and without an informal sector Economic Analysis and Research Department Special Studies Section 12
Slide 13: Fiscal multipliers: tax rate on labour income
Fiscal multipliers: tax rate on labour income Economy without an informal sector With an informal sector: Description Variable Labour tax rev./ • Hitting any given tax revenue level requires 𝑙 𝑇 𝑇𝑅 /𝑦 0.17 0.18 0.19 0.20 0.21 higher tax rates output Tax rate 𝜏𝑙 0.321 0.34 0.358 0.377…
Slide 14: Fiscal multipliers: government consumption
Fiscal multipliers: government consumption Economy without an informal sector Gov. spending multipliers do not depend on the Description Variable existence and the size of the informal sector Gov. consumption/ 𝐺 𝑐 /𝑦 𝑇 0.09 0.10 0.11 0.12 0.13 total output % Change Output 𝑑 𝑦෪𝐹 , 𝑑…
Slide 15: Fiscal consolidation in Greece
Fiscal consolidation in Greece Quantitative evaluation of the fiscal package in Greece during 2010-2015 How we work • We start the economy in its steady state and then plug in the model the actual values of the fiscal (tax-spending) instruments for the period 2010-2015 • Examine the effects of t
Slide 16: The fiscal consolidation package and economic activity
The fiscal consolidation package and economic activity Formal output decreases by 26% in 2015 Total output decreases by 17% Depending on the share of informal activities included in the official GDP figures the model can account for • 2/3 of the reduction in Greek GDP (when official GDP includ
Slide 17: Contribution of individual fiscal instruments
Contribution of individual fiscal instruments The labour income tax hike has the biggest effect, accounting for about 1/4 of the decrease in total and formal output It is followed by the decrease in the public sector wage bill and the increase in the capital income tax Overall, tax increases a
Slide 18: The effects on tax revenue
The effects on tax revenue The average extra revenue raised (as percentage of pre-consolidation output) is only around 1pp Economic Analysis and Research Department Special Studies Section 18
Slide 19: Share of informal output to total output
Share of informal output to total output Substantial growth in informal activities from an average of 15% of pre-consolidation total output to 22% by 2015 The tax component of the package contributes the bulk of this increase (from 15% to 20%) Economic Analysis and Research Department Special St
Slide 20: Counterfactuals
Counterfactuals We examine how the economy would have fared under the exact same policy package if it had managed to restrict growth in the informal sector 1. We feed the actual paths of the fiscal instruments in the model while at the same time varying tax compliance in order to keep either its l
Slide 21: Fixing the size of the informal sector: effects on tax revenue
Fixing the size of the informal sector: effects on tax revenue Significant impact of stricter compliance on tax revenues that increase by a factor of three to five Economic Analysis and Research Department Special Studies Section 21
Slide 22: Fixing the size of the informal sector: effects on output
Fixing the size of the informal sector : effects on output Limiting growth in informal activities would have saved about 1% of total output Much larger gains for formal output depending on the ways of fixing the informal sector (gains between 5% and 10%) Economic Analysis and Research Department
Slide 23: Fixing the size of the informal sector for a tax revenue target
Fixing the size of the informal sector for a tax revenue target Impose a tax revenue requirement → keep the size of the The implied average labor tax rate is 0.34, informal sector fixed and compute the labor tax rate needed to about 15% less than the average labor tax support the revenue target
Slide 24: Conclusions
Conclusions Fiscal consolidation was the main culprit for the severity of the recession in Greece The large growth of the informal sector in Greece in response to the tax hikes significantly magnified the adverse effects of fiscal consolidation The recession would have been much milder, had th
Slide 25: Thank you!
+30 2103203826 Thank you! dpapageorgiou@bankofgreece.gr harris.dellas@vwi.unibe.ch dmalliaropulos@bankofgreece.gr evourvachaki@bankofgreece.gr Head Office, 21 El. Venizelos, GR 102 50 Athens 25
Slide 26: Back up slides
Back up slides Economic Analysis and Research Department Special Studies Section 26
Slide 27: Measuring the informal sector in Greece
Measuring the informal sector in Greece Definition of the informal or underground economy • Consists of activities that lead to economic transactions on the marketplace that escape government monitoring/taxation (household production is excluded) Three types of estimates • Embedded in the SNA (a
Slide 28: Measuring the informal sector in Greece (cont.)
Measuring the informal sector in Greece (cont.) Table 1: Share of informal sector in official GDP 2010 2011 2012 2013 2014 2015 2001-09 avg VAT Gap based 0.20 0.24 0.28 0.29 0.26 0.26 0.15 estimate Hassan and 0.24 0.27 0.28 0.25 - - 0.19 Schneider, 2016 Source: Author's calculations and Hassan and S
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