Is it time to resort to fiscal policies?

The IMF predicts that the global economic growth in 2009 will be 2.2%, which is down 0.8% from its last prediction on October 2008.

Developing economies: growth rate of 5.1%, which is a full point lower than the October prediction. This is due to falling commodity prices. While that has helped ease the inflation burden on rich countries, it is hurting commodity exporters. The IMF lowered its 2009 baseline oil price projection to $68 per barrel from $100, and noted that prices had also fallen for metals and food.

The IMF warned that conditions could get even worse as financial firms reduce their debt, investors brace for rising corporate defaults, and consumers cut back on spending.

IMF chief economist Olivier Blanchard said the IMF's downward growth revisions for most economies was based on a sharper-than-expected fall in demand in advanced countries and worsening credit conditions in emerging market economies. He believes that there is little room left in some counties to further cut interest rates, and that we should resort to employing expansionary fiscal policies (that is, lowering taxes and/or increasing government spending)

But taxes -- necessary as they are -- can distort private decisions, create misallocations of resources and generate dead weight losses. Tax systems can be more or less distortive for two reasons: either because they extract more or less resources from private agents (the tax level), or because they raise a given amount of revenue in more or less distortive ways (the tax structure).

For different countries to consider reforms to their tax systems, identifying the growth implications of different tax instruments is useful for policy design, regardless of whether or not they identify a change to the overall level of taxes. Another reason for focusing on tax structures rather than the overall tax burden is that the overall level of taxes reflects societal choices over the size of the public sector, while the tax structure is the first tool to implement these choices. Governments may consider changes to the structure of taxes in order to minimize the negative consequences for growth, while maintaining the desired level of public goods and services provided.

If a fiscal policy is, infact to be imposed, it will be challenging to figure out how to plan this policy, and what will the effects of its implementation be.