31 January 2009

IMF on the composition of stimulus packages

Contrary to the claims being made by the Federal Treasurer, the IMF is not advising against the inclusion of tax cuts in fiscal stimulus packages. The following is stated in the executive summary of an IMF staff position note titled Fiscal Policy for the Crisis:

Looking at the content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers.

Olivier Blanchard, Economic Counsellor and Director of the Research Department, and Carlo Cottarelli, Director of the Fiscal Affairs Department, gave their views on this issue in an article published in IMFSurvey Magazine. They recommend that tax cuts be targeted at consumers who are credit constrained. Blanchard states:

Consumers who are credit constrained are likely to spend any extra money derived from a lower tax bill.

Cottarelli also mentions the importance of diversity in the composition of stimulus packages:

Given the complexity of this crisis, policymakers have to recognize that there is an unusual degree of uncertainty about the impact of specific policies. Thus, they should not put all their fiscal eggs in just one basket, and the right package probably includes a mix of different policies.

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