Tax Base-Broadening a Light at the End of the Tunnel in the Fiscal Consolidation Dynamics

It is an open secret that the Global Financial Crisis (GFC) of 2007-2008 and the COVID-19 pandemic have contributed to the augmentation of indebtedness worldwide. The World Bank, in its study, Finding the tipping point: when sovereign debt turns bad, has suggested the potential role of tax base expansion as a remedial measure of surging indebtedness (Mehmet et al., 2010). We have employed a DSGE model to observe the impact of tax base expansion on the output (GDP), and Debt/GDP ratio. The empirical outlook of the study is based on the framework of independent monetary policy and the presence of significant public debt in an economy. The tax base expansion has been attained from the Non-Ricardian household segment; the reason behind such selection is the unique position, inability to optimize their utility and lack of access to formal financial components of an economy, of this segment in any economy. Our findings are aligned with the existing literature. We found that fiscal consolidation has no immediate impact on both output and the Debt/GDP ratio. The gradual reduction and increase emerge in the Debt/GDP ratio, and output respectively, which last at the steady state in the long run. These outcomes endorse the tax base expansion as a viable option to tackle surging indebtedness and achieving meaningful fiscal consolidation.