Tax Gap Between Onshore And Offshore To Widen

by Ulrika Lomas, Tax-News.com, Brussels

24 August 2009

IMF Chief Economist, Olivier Blanchard has observed that the 'tax gap' between low tax jurisdictions and advanced - typically high tax - countries will dramatically widen as a result of the crisis. In a document, published last week, Blanchard warned that in order for developed countries to recover from the impact of the global downturn, significantly higher taxation would be inevitable. Whilst offshore has responded quickly to the developing landscape, what with the G20's crusade on so-called 'tax havens', their taskmasters - high tax countries, according to Blanchard, are likely "to take a long time to find their new shape".

Blanchard’s publication, ‘Sustaining a Global Recovery’, observes that developed countries’ fiscal responses have typically been to increase government spending, lower taxes, and accept much larger fiscal deficits. Given the collapse of private demand, and the inability to reduce interest rates below zero, Blanchard considers the governments chose the right response in the short-term, but cautions that a rocky path lies ahead.

Noting the substantial average ratio of debt to GDP for G20 countries before the crisis, and projections that it is due to exceed 100% in the next few years, Blanchard warns that governments will soon be forced to retract fiscal stimulus, in favour of stringent austerity packages. “As large deficits continue, debt sustainability comes increasingly into question,” he writes. “[With higher debt] comes the risk of higher long-term interest rates, both because of anticipated crowding out of private borrowers by government borrowers and because of higher risk of default."

Blanchard notes that in order to sustain a global recovery, advanced countries' governments will be required to perform delicate rebalancing acts, with cooperation between governments remaining as crucial as at the start of the crisis. He underscores that the future holds several challenges for developed economies. According to Blanchard, as a priority, the G20 will need to: bolster international trade; delicately, yet substantially, increase tax; and cut costs.

Blanchard writes:

"The world is not in a run-of-the mill recession. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come."

"Some parts of the economic system have broken. Some firms went bankrupt that would not have in a normal recession. In advanced countries, the financial systems are partly dysfunctional, and will take a long time to find their new shape," he added.

This new shaping process, alongside lingering fiscal concerns surrounding advanced countries' ageing population, are to present unprecedented costs to government coffers, Blanchard believes -- a cost that will fall on the shoulders of companies and individuals that remain onshore.

The publication also highlights that taxpayers in the G20 will not only have to shoulder austerity measures to reduce state debt over coming years, but according to IMF projections, without substantial reforms, the cost of government funded healthcare and pensions will grow to ten times larger than that of the fiscal impact of the crisis.

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