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The Macroeconomic Impact of the IMF Recommended VAT Policy for the Fiji Economy: Evidence from a CGE Model

In: Computable General Equilibrium Approaches In Urban And Regional Policy Studies

Author

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  • PARESH KUMAR NARAYAN

    (Department of Accounting, Finance and Economics, Griffith University, Queensland, Australia)

Abstract
Value Added Tax (VAT) is a general consumption tax levied on goods and services. In September 2002, in the face of mediocre economic performance, deteriorating government finances and stagnant investment levels — all due to the political coups of 2000 — an increase in VAT was recommended to Fijian policy makers by the IMF as a remedy to Fiji's problems. The Fiji government, without an in depth study of the economy wide repercussions of a VAT policy, welcomed it by announcing a 25% increase in VAT in its 2003 budget. Beginning 1 January 2003, all goods and services were levied a VAT rate of 12.5%. In this paper, we use a computable general equilibrium model to examine the economy wide effects of this VAT policy. We find that while the VAT improves government revenue and brings about a small 0.6% increase in real GDP, it fails to address investment levels. VAT actually leads to a decline in investments and a reduction in real consumption and national welfare. We highlight that large amounts of tax revenue are owed to government. This is three times more than what the government will collect from the 25% increase in VAT. In this light, an alternative to VAT is to upgrade the government's tax collecting mechanism. From this, we deduce that the IMF policy is misdirected.

Suggested Citation

  • Paresh Kumar Narayan, 2006. "The Macroeconomic Impact of the IMF Recommended VAT Policy for the Fiji Economy: Evidence from a CGE Model," World Scientific Book Chapters, in: Masayuki Doi (ed.), Computable General Equilibrium Approaches In Urban And Regional Policy Studies, chapter 3, pages 27-40, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812707116_0003
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    Cited by:

    1. Petutschnig, Matthias, 2017. "Future orientation and taxes: Evidence from big data," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 29(C), pages 14-31.
    2. James Alm & Asmaa El-Ganainy, 2013. "Value-added taxation and consumption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(1), pages 105-128, February.
    3. Hrushikesh Mallick, 2021. "Do governance quality and ICT infrastructure influence the tax revenue mobilisation? An empirical analysis for India," Economic Change and Restructuring, Springer, vol. 54(2), pages 371-415, May.
    4. George-Adrian STANCIU, 2020. "National and International Fiscal Regulations on Value Added Tax (I)," CECCAR Business Review, Body of Expert and Licensed Accountants of Romania (CECCAR), vol. 1(10), pages 61-72, October.
    5. Michael Safo OFORI & Abel FUMEY & Edward NKETIAH-AMPONSAH, 2020. "Forecasting Value Added Tax Revenue in Ghana," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 4(2), pages 63-99.
    6. George-Adrian STANCIU, 2020. "National and International Fiscal Regulations on Value Added Tax (II)," CECCAR Business Review, Body of Expert and Licensed Accountants of Romania (CECCAR), vol. 1(11), pages 64-72, November.
    7. Narayan, Paresh Kumar & Narayan, Seema, 2005. "Estimating income and price elasticities of imports for Fiji in a cointegration framework," Economic Modelling, Elsevier, vol. 22(3), pages 423-438, May.

    More about this item

    Keywords

    Computable General Equilibrium (CGE) Model; Social Accounting Matrix (SAM); Urban and Regional Policies (or Urban and Regional Policy Evaluation); Each Industry's Market Clearance; Structural and Long-Term Policy Impacts;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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