Effects of tax-benefit policies on the income distribution and work incentives in Estonia

By Alari Paulus and Caroline Klein

The paper studies the impact of tax-benefit policies on the distribution of household incomes and work incentives in Estonia. It makes use of microsimulation modelling approach and applies the EU tax-benefit model EUROMOD to quantify the first-order effects of policy changes in 2016-2018 and of a range of alternative policy scenarios aimed at increasing the adequacy of social benefits. According to the simulations, 2016-2017 policies increased household incomes relative to inflation and were both poverty and inequality reducing. Alternative policy scenarios indicate that, among the considered options, increasing the generosity of the subsistence benefit and relaxing its means test by halving the withdrawal rate (currently at 100%), would have the highest first-order impact for a given fiscal cost. However, these measures would also weaken work incentives, which points to a conventional equity-efficiency trade-off. Other simulations demonstrate some scope for improving work incentives at low and middle-income levels together with modest reductions in poverty and inequality.

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Meeting fiscal challenges in Japan’s rapidly ageing society

By Randall S. Jones and Haruki Seitani

Japan’s gross government debt of 226% of GDP in 2018 is the highest ever recorded in the OECD area, and places the economy at risk. The government now aims to achieve a primary surplus by FY 2025. Additional fiscal consolidation, based on a detailed plan covering specific spending cuts and tax increases, is necessary to put the government debt ratio on a downward trend in the face of rapid population ageing. This is a very difficult task and a stronger fiscal framework would help keep policy on track to achieve fiscal targets. Controlling social spending requires making better use of healthcare resources, in p art by reducing overinvestment in hospitals and increasing the use of generic drugs. Another priority is ensuring the sustainability of local government spending, in part by reducing costs through the joint provision of local public services and infrastructure across jurisdictions and the development of compact cities in the context of depopulation in many parts of Japan. Increased revenue should come primarily from hikes in the consumption tax rate, which is among the lowest in the OECD. In addition, disincentives to employment in the tax and benefit system should be removed, as sustained economic growth is crucial to ensure fiscal sustainability.

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Fiscal challenges and inclusive growth in ageing societies

By Dorothée Rouzet, Aida Caldera Sánchez, Théodore Renault and Oliver Roehn

This paper was prepared in support of Japan’s G20 Presidency. It takes stock of ongoing and projected population ageing across G20 economies and its far-reaching implications for economic growth, productivity, inequality within and between generations and the sustainability of public finances. Rising old-age dependency ratios will put the financing of adequate pensions, health and long-term care under high pressure. The paper provides recommendations on policy responses to address ageing-related challenges and highlights good practices. A comprehensive approach is needed, tailored to each country’s institutional and policy settings and social preferences, and may span many areas of public policy: improving the design of public pensions, incentivising private savings, enhancing the efficiency of health care provision, expanding the coverage of social security systems, promoting employability and skills of older workers, and striving for a better labour market inclusion of women, youth and migrants.

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