In general terms, the elasticity or sensitivity of income to the cycle can be defined as the proportional change of the same to changes in a representative indicator of income or associated macroeconomic base; Traditionally nominal GDP or the output gap.
Why is your estimate important?
For the independent Fiscal Responsibility Authority (AIReF), which is in charge of the continuous evaluation of the fiscal cycle and the assessment of compliance with fiscal rules, the estimation of the elasticity of tax revenues to the cycle allows:
• Obtain basic projections consistent with the evolution of the macroeconomic scenario, supporting the analysis, both in the short and medium term.
• Evaluate the budgetary position in structural terms, by filtering the impact of the cycle on public accounts and quantifying the influence of discretionary policy actions.
How has it evolved in recent years?
The sensitivity of the budgetary elements most related to the evolution of the cycle (net revenues) has decreased significantly in the last 15 years. This effect is particularly visible in the post-crisis period, as can be seen in figure 1, which represents the evolution of net income along with the output gap. Although from the beginning of the century the response of net revenues to cyclical evolution was greater than 1, in the post-2013 recovery phase, the cycle closes at a higher (more pending) pace than the recovery of revenues. The fall in elasticity has translated into a burden for the correction of budgetary imbalances. The loss of sensitivity means that, for each output gap closing point, the improvement in net income is reduced by approximately 5,000M €.
Why have they fallen?
An explanation of the main figures of income In terms of income, it is worth mentioning a threefold explanation for the loss of sensitivity to economic growth:
(I) absence of inflation;
(Ii) growth composition more oriented to the external sector;
And (iii) impact of tax collection mechanics.
First, the absence of inflation has been an obstacle in recent times for the collection of both personal income tax (IRPF) and social contributions. In the case of the IRPF, in the case of a progressive tax, the nominal growth of the wage bases by means of inflation supposes an increase of the collection, since the tax installments are not indicted. This effect can be seen in Graph 2 (below), which shows the decomposition of IRPF growth. The evolution of nominal wages (sum of the impact of inflation and real wages) was the main driver in the pre-crisis period, but practically disappeared in the last period 2014-2016, in which, before the absence of inflation, the Collection has been based on job creation.
Second, the orientation of the Spanish economy towards the external sector implies lower structural revenue through Value Added Tax (VAT), whose collection is positively correlated with the current account deficit, linked to a higher level of domestic expenditure . This pattern can be seen in figure 3, which represents the dynamics in the contribution of the external sector (expressed as ratio between exports and imports) along with the collection of the Tax.
Third, the collection mechanism of Corporate Income Tax (IS) has opened a gap between the evolution of the macroeconomic bases of the tax and its accounting bases, thus reducing the recovery expected by the business cycle. Figure 4 reflects the decoupling through the increase in the gross operating surplus ratio (macroeconomic basis) and the tax base of the tax.
The conclusions of figure 3 is that - and I warn you - the VAT of tourism is going to rise into nothing. The Rajoy who said that this sector "gives wealth" is seeing that it only contributes on average 10% ...
First quarter of 2017.
And that practice the advance of corporation tax ...
How will they think to give it back?
FOTEM THE CAMP THAT AIXÒ WILL EXPLODE !!!
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