In the most recent Fiscal Monitor released on 15 April 2015 the IMF discusses how sound fiscal policy can promote growth and employment. Various factors can help economic recovery including the low oil price, growth-friendly monetary policy and a slower pace of fiscal adjustment.
Advanced economies are however experiencing low economic growth and still have high levels of debt. Emerging and developing economies have slower economic growth and higher costs from exchange rate fluctuations. Countries that export oil and commodities have lost revenue owing to the low prices.
The IMF emphasizes that smart taxation and strong fiscal frameworks can make a large contribution to growth. Countries should reform fiscal frameworks to ensure that public finance risks are managed and the public debt is sustainable.
The low oil price gives countries an opportunity to reform energy subsidies and energy taxes. A number of emerging and low income countries have been making moves to cut energy subsidies. More realistic energy prices would help their economies and benefit the environment and public health. Governments would also have more revenue to help with fiscal consolidation or to invest in vital areas such as health or education.
Energy Taxes
In advanced economies revenue from higher energy taxes could be used to reduce taxes on labor thereby promoting employment and growth. Higher energy taxes would also help to reduce some of the negative aspects of energy consumption, such as the pollution and the dangers of global warming.
As there is a prospect of a prolonged period of low oil prices the oil exporting countries should move towards lasting reforms. These could include broadening the base of taxation so there is a non-oil fiscal base; improving the management of natural resources and reducing government expenditure to a sustainable level.
The IMF suggests that there is a case for higher taxes on coal and on road fuels across developing and developed countries. This would help to control carbon emissions, lessen health effects of air pollution and reduce congestion and accidents on the roads. It has been estimated for example that energy taxes in the US are at around a quarter the level of their efficient levels so there is room for raising more revenue in this way.
On a global level correcting energy prices to realistic levels by removing subsidies would yield benefits in terms of the environment and carbon emissions, and gains in government revenues could be 2.5% to 3% on average. In the case of China which is very coal-intensive the gains in government revenue could be as much as 6%. Countries should however have social safety nets in place so that if the oil price increases these safety nets can be expanded to protect lower income groups.
Countries should also use fiscal policy to stabilize output. Economic growth could significantly ease the debt burden in the advanced economies. Analysis shows that a stable macroeconomic climate is supportive of growth and stability of output can add around 0.3% to growth each year.
