Tax Reform of 2015-16 – Macroeconomic Effects up to 2019

The 2015-16 tax reform envisages tax cuts of about € 3.9 billion in 2016 increasing to € 5.2 billion p.a. from 2017 onwards. Provided that the planned measures to fund the tax relief (2016 € 3.6 billion, 2017 € 4.4 billion, from 2018 € 4.5 billion p.a.) are implemented in due time and in full scope (scenario 1: "government" scenario), private households will see their real disposable incomes increase by 1 percent (compared to a baseline scenario without a tax reform; numbers are deviations from baseline in percent, cumulated up to 2019), and private consumption will be about 0.75 percent higher. Real GDP will increase by an additional ¼ percent and consumer prices will rise by ½ percent. Conditional on these terms it is quite reasonable to implement the tax reform without any lasting negative effects on fiscal balances. In the medium run the chosen policy-mix of measures would cause a shift in demand, from public to private consumption and reduce the government to GDP ratio by 0.5 percentage points. In addition to the government scenario, two alternative scenarios were simulated which assumed a delayed (scenario 2) or incomplete (scenario 3) implementation of measures to reduce the size of the public administration, to combat tax fraud and to cut government subsidies. As a consequence, disposable household income increases are stronger and public consumption decreases are smaller than in scenario 1. In the short to medium run this leads to a slightly stronger increase in GDP (in comparison to scenario 1 up to +0.2 percentage points till 2019) but also to a higher government deficit and public debt to GDP ratio (up to +1 percentage point in 2019).