The implications on policy assessments of having a more detailed public sector are analysed with an extension to specifically consider the public actor (ICES-XPS). In the core model the government is part of a regional household without a budget and limited to consuming only a fraction of regional disposable income (see Figure B, ICES core). ICES-XPS disaggregates the regional household into the two main actors in the economy: the private household and the government (see Figure below).
Figure: the income generation and uses in ICES-XPS
Therefore, the regional income is split into:
- Private household income, which consists of revenues from primary factors (capital, labour, natural resources);
- Government income,which is equal to the total tax revenues from both private household and productive sectors.
A series of international transactions among governments (foreign aid and grants) are collected by a fictitious international pool which redistributes them among recipient countries.
Transactions between the government and the private household consider flows inside the regional economy:
- Net Social transfers;
- Interest payment on public debt to residents.
In this category, we also include flows among governments and foreign private households such as:
- Interest payment on public debt to non-residents. Similarly to what happens to foreign aid and grants, there is an international pool that collects and reallocates these payments among countries according to its own rules.
Both the government and the private household consume a part of their income by choosing between a bundle of domestic and foreign commodities. The latter originate from different countries according to an elasticity of substitution (the so-called Armington assumption).
The government income not spent is saved, and the sum of public and private savings determines the regional disposable saving, which enters the Global Bank as in the core ICES.
Delpiazzo E., Parrado R., Standardi G. (2017), “Extending the Public Sector in the ICES Model with an Explicit Government Institution“, FEEM Nota di Lavoro 11.2017
Delpiazzo E. (2015), “Public finance and climate change adaptation: could adaptation policies foster public fiscal sustainability? The case of Italy”, CMCC Research Papers Issue RP0278.
Delpiazzo E., Parrado R., Bosello F. (2015), “Analyzing the coordinated impacts of climate policies for financing adaptation and development actions”, CMCC Research Papers Issue RP0276.
Delpiazzo E., Parrado R., Standardi G. (2015), “Phase-out of fossil fuel subsidies: implications for emissions, GDP and public budget”. CMCC Research Papers Issue RP0275
Delpiazzo E., Standardi G. (2014), “Introducing an explicit Government institution in ICES model”, CMCC Research Papers Issue RP0243.
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