Some short-run implications of fightback: a general equilibrium analysis

G. A. Meagher, Brian R. Parmenter
We report ORANI projections of the short-run effects on the macroeconomy and the industrial structure of the main elements of the Fightback proposals, namely the proposed abolition of the wholesale sales tax, petroleum excise and the payroll tax, proposed cuts in income taxes and government outlays, and the proposed introduction of the goods and services tax. In making the projections, we assume (with Fightback) that nominal wage rates are unaffected. We also assume that private domestic
more » ... te demand moves in line with changes in disposable income. These fiscal changes fall into two main groups — changes in indirect taxes which affect relative prices directly, and changes to income tax rates and government outlays which have their direct impacts on the level and commodity composition of domestic demand. Analysis of the second group is relatively straightforward. Cuts in income taxes increase private-sector demand, crowding out exports but generating a net increase in output and employment. Cuts in government outlays reduce public and private demand, allowing exports to expand but generating a net contraction of output and employment. Because public demand is concentrated on labour-intensive commodities, the contractionary employment effect of cuts in outlays is greater, per dollar of change, than is the expansionary effect of the income tax cuts.Differences in the macroeconomic effects of the indirect-tax components of the package depend on: differences between the taxes in the effects of imposing a dollar's worth of tax on any given industry; differences in the industrial incidences of the taxes; and differences in the sizes of the tax changes.The payroll tax affects the cost of employing labour directly. It therefore has a greater effect in any given industry on employment per dollar of tax change than does the wholesale sales tax, the petroleum excise or the goods and services tax. The GST does not discriminate between imports and domestic commodities and affects exports in only a minor indirect way. Hence [...]
doi:10.4225/03/5934f735ec823 fatcat:74hqesjvqjefzhvjexgxqpcsmm