The 4th Industrial Revolution affect economic policy?

 The 4th IR for future
For fiscal policy, the implications of the Fourth Industrial Revolution are likely to be complicated. If robotics and digitalization are disrupting jobs, there will be an impact on tax revenues. If more and more jobs can be replaced by computers and machines, the ability to tax labour income will be reduced in the long run. It is also likely that the social costs of taxes in terms of lost employment and lower GDP will increase. Taxes are likely to yield lower revenues and be more costly in terms of negative side effects for society.

The negative implications for tax revenues can potentially be reinforced by digitalization of retail sales and VAT. Almost one-third of Sweden’s Christmas shopping took place online this year. Young people below the age of 25 are already spending between a quarter and a third of their incomes on the internet. Sweden is a forerunner (the digital market in Sweden is bigger than in France in absolute terms, even if France is six times more populous), but others are gradually following suit.

From the medium-term perspective, there is also a risk that revenues from value-added tax will be affected. Goods are moving freely, and many online services are acquiring rights to use a digital product (consumption of sports, porn, gambling seems not to be hampered my the moral norms or tax jurisdictions of the digital age). The risk for tax migration in a globalized world is obvious in the long run. The standard economic theory of taxation states that the tax wedge on labour is the combination of income tax, social fees and value-added taxes.

If the Fourth Industrial Revolution has implications for labour as a production factor, it also has implications for VAT revenues.

Conclusion

The most important conclusion for monetary policy is that interest rates could remain very low for very long. Backward-looking central banks and macro-economists are apt to overestimate the inflation risks. If central banks, again and again, see actual CPI coming out lower than forecasted, soul-searching will ensue.

Against this backdrop it might be that the Federal Reserve will not follow through with quarterly rate hikes during 2016. Again, from a Swedish experience, there is a risk of too low inflation. The Riksbank, on the back drop of high growth, a strong labour market and increasing asset prices, landed in the natural conclusion that it was time to gradually raise interest rates. The stubbornly low inflation and deflationary risks that we have seen in Sweden thereafter is, at least partly, due to the fact that inflation propensity has been overestimated.

Even if the Fed had good reasons to raise rates in December, they now have good reason to exercise caution and wait for some actual inflation before they move forward. It is better to change the communication than to commit a serious policy mistake.

The Fourth Industrial Revolution is coming, and we are only just beginning to understand the implications for economic policy. Finance ministers and central bank governors alike are on a steep learning curve.

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