Recent Developments

1. Recent Developments Andrew Mason January 21, 2006

2. Recent Developments • Private consumption allocation • Intra-household transfers • Asset-based reallocations

3. Private consumption allocation • Education: regression method • Health: regression method • Other: ad hoc equivalence scale • Discussion: Experience of teams and suggestions for improvements.

4. Intra-household transfers • Governing principles • Intra-household transfers are directly from individuals with “surplus” disposable income to individuals with deficits. • After all consumption needs are met, residual surplus is transferred to the household head and saved. • Owner-occupied housing and consumer durables are owned by the head; hence, consumption of these services by non-heads is matched by a transfer from the head.

5. Definition of Surplus Disposable income less current consumption Disposable income = labor income + net public cash transfers + net inter-household transfers; Current consumption = consumption less value of consumption of durables and owner-occupied housing. Surplus if positive; deficit if negative.

6. Transfer “Policy” • Each surplus household member pays the same household-specific “tax rate” which may not exceed 1. • If the total household deficit exceeds the total household surplus, the difference is financed through a transfer from the household head (out of asset income or dis-saving if asset income is insufficient).

7. Sector-specific Transfers • For each sector, the transfer inflow is proportional to current consumption in that sector • Results are intra-household transfers for • Education • Health • Owner-occupied housing and durables • Other consumption • Saving

8. Explanation of Saving • Inflows: Flows from household members to household heads that are saved. Difference between household saving and flow should equal saving out of the head’s personal income. • Outflows:

9. Details Description of method and stata program available on the website: Documents/Private Transfers

13. Asset-based Reallocations • Terminology • Asset-based reallocations • Capital-based reallocations • Credit-based reallocations • Treatment of land and other non-financial assets • Previously included with credit • Propose that they be included with capital

14. Public Asset-based Reallocations • Public capital-based reallocations: investment in schools, highways, ports, communication systems, etc. • Public credit-based reallocations: accumulation of public credit (debt)

15. Public Capital-based Reallocations: General Principles • Public investment yields no profit or capital income (not sold in the market; the value assumed to be equal to the cost.) • The only form of reallocation is saving/dis-saving. • Public capital belongs to the beneficiaries (not taxpayers) • Taxpayers invest in new public capital and then transfer the capital to program beneficiaries • Old public capital is transferred from one generation of beneficiaries to the next

16. A Simple Example: A School • Taxpayers build a $10 million school • Transfer the school to students, the beneficiaries

17. A Simple Example: A School

18. A Simple Example: A School • Each year school is transferred from old students to new students • Suppose • Students are all those age 2, 3, and 4 • Per capita benefits are independent of age • No mortality: N(a+1,t+1)=N(a,t)

19. Public Capital Transfers (Old Capital) Beneficiaries are ages 2, 3, and 4. Benefits are proportional to population. No mortality. A negative sign for investment if an outflow; positive if an inflow. Wealth account will be adjusted to reflect investment.

20. Public Capital-based Reallocations Summary • Public investment is essentially a store of value. • An asset is created through investment and then consumed in future periods through dis-investment. • Age reallocations are produced because those who pay for the public asset are not those who consume the asset.

21. Public Credit-based Reallocations • General Principles • The government borrows from domestic and perhaps foreign investors on behalf of taxpayers. • Taxpayers do not keep the funds, which are “taxed” away (an implicit tax) and used to fund programs. • This generates public debt seen from the perspective of taxpayers and public credit as seen from the perspective of investors • As with private credit systems, public debt and public credit are equal in total but not for each age group.

22. Public Credit-based Reallocations • General Principles (continued) • In subsequent periods, the accumulated debt is transferred to a new generation of taxpayers. • Current taxpayers pay interest on the debt generating an outflow from taxpayers and an inflow to investors; and/or • Current taxpayers retire the debt generating an outflow from taxpayers and an inflow to investors.

23. A Simple Example • Government runs a deficit of 100 in year t at an interest rate of 5% • How are the transactions recorded in the NT Accounts? • Credit-based reallocations • Transfers • Wealth account

24. Deficit spending leads to a flow from investors to taxpayers Investors Taxpayers

25. Debt servicing leads to a flow from taxpayers to investors Investors Taxpayers

26. Implicit Tax Generates Transfer from Taxpayers to Consumers Consumers Taxpayers

27. Public Debt Passes from One Generation to the Next Taxpayers (t+1) Taxpayers (t)

28. TO DO LIST • Age profile for the accumulation of public credit: spreadsheet uses assets but it should be investment. • Finalize terminology • Update variable list on website • Revise spreadsheets for capital and credit • Include sectors for capital-based reallocations • Add reconciliation page • Add data base upload sheet • Test

29. The End