The cyclically adjusted budget balance in EU fiscal policymaking: Love at first sight turned into a mature relationship

Intereconomics

Volumn 45, Issue 1, 2010, Pages 48-60

  Larch, Martin ^b   Turrini, Alessandro ^a  

^a EUROPEAN COMMISSION   (Belgium)

^b NONE

Author keywords

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EID: 76749109971     PISSN: 00205346     EISSN: 1613964X     Source Type: Journal    
DOI: 10.1007/s10272-010-0324-9     Document Type: Article

References (54)

1. O. Blanchard: Suggestions for a New Set of Fiscal Indicators, in: OECD Economics Department Working Paper, No. 79, 1990.
2. E. M. Gramlich: Fiscal Indicators, in: OECD Economics Department Working Papers, No. 80, 1990.
3. Early examples are A. Okun: Potential GNP: Its Measurement and Significance, in: Proceedings of the Business and Economic Statistics Section, American Statistical Association, Washington DC 1962.
4. and E. Kuh: Measurement of Potential Output, in: The American Economic Review, Vol. 56, No. 4, 1966, pp. 758-776.
5. A detailed portrayal of the initial faith bestowed in the indicator is provided in A. S. Blinder, R. Solow: Analytical Foundations of Fiscal Policy, in: A. S. Blinder, G.F. Break, D. Netzer, R.M. Solow, P.O. Steiner (eds.): The Economics of Public Finance, Washington DC 1974, The Brookings Institution, pp. 3-115.
6. E.C. Brown: Fiscal Policy in the Thirties: A Reappraisal, in: American Economic Review, Vol. 46, No. 5, 1956, pp. 857-879.
7. O. Blanchard: Suggestions for a New Set of Fiscal Indicators, in: OECD Economics Department Working Paper, No. 79, 1990.
8. See A. Dalsgaard, A. De Serres: Estimating Prudent Budgetary Margins for 11 EU Countries: A Simulated SVAR Model Approach, in: OECD Economics Department Working Papers, No. 216, 1999.
9. and G. Camba-Mendes, D. Rodriguez-Palenzuela: Assessment Criteria for Output Gap Estimates, in: ECB Working Paper, No. 54, 2001.
10. Generally, the cyclical component CC is derived using an aggregate estimate of the output gap. The ECB follows an alternative approach involving different output gaps for individual tax and expenditure bases. For a detailed presentation of the ECB method see C. Bouthe- villan, P. Cour-Thimann, G. Van Den Dool, P. Hernandez de Cos, G. Langenus, M. Mohr, S. Momigliano and M. Tujula: Cyclically Adjusted Budget Balances: An Alternative Approach, ECB Working Paper, No. 77, 2001.
11. Useful references for the estimation of tax elasticities are: C. Bouthevillan, et. al., op. cit.
12. P. Van den Noord: The Size and Role of Automatic Stabilizers in the 1990s and Beyond, OECD Economics Department Working Paper, No. 230, 2002.
13. N. Girouard, C. André: Measuring Cyclically-Adjusted Budget Balances for the OECD Countries, OECD Economics Department Working Paper, No. 434, 2005.
14. G. Wolswijk: Short- and Long-Run Tax Elasticities. The case of the Netherlands, ECB Working Paper, No. 763, 2007.
15. The only official reference to the CAB was in the 1998 and 2001 Code of Conduct on the content and format of stability and convergence programmes defining the CAB as a useful working instrument.
16. ECOFIN Council Report 6877/03 of 7 March 2003, endorsed by the European Council of March 21 and 22 March 2003.
17. A. Blinder, R. Solow, op. cit.
18. The IMF in its World Economic Outlook and the OECD in its Economic Outlook regularly comment on fiscal positions in structural terms as measured by the CAB, associating changes in the structural deficit with discretionary policy interventions.
19. L. Jonung, M. Larch: Improving Fiscal Policy in the EU. The Case for Independent Forecasts, in: Economic Policy, Vol. 21, No. 47, 2006, pp. 491-531.
20. A detailed analytical discussion of this issue is provided by M. Larch, M. Salto: Fiscal Rules, Inertia and Discretionary Fiscal Policy, in: Applied Economics, Vol. 37, No. 10, 2005, pp. 1135-46.
21. For the technical details of the minimum benchmark, see European Commission: Public Finances in EMU - 2004, in: European Economy, No. 3, Brussels 2006.
22. Art. 2a of Council Regulation (EC), No. 1466/97, 7 July 1997, on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies.
23. 17 In 1998-2001, euro area GDP grew on average by around 3% per year. In autumn 2000, shortly before the bursting of the ICT bubble, available forecasts - including the one by the services of the EU Commission - expected this rate to carry on into the medium term.
24. The economic projections included in the 2003 vintage of the Member States' stability and convergence programme implied a medium-term growth rate of around 3% for the euro area.
25. A. Orphanides: Monetary Policy Rules Based on Real-Time Data, in: American Economic Review, Vol. 91, No. 4, 2001, pp. 964-85.
26. A. Orphanides, S. Van Norden: The unreliability of output gap estimates in real time, in: Review of Economics and Statistics, Vol. 84, No. 4, 2002, pp. 569-83.
27. L. Forni, S. Momigliano: Cyclical Sensitivity Of Fiscal Policies Based On Real-Time Data, in: Applied Economics Quarterly, Vol. 50, No. 3, 2005, pp. 299-326.
28. R. Golinelli, S. Momigliano: The Cyclical Response of Fiscal Policies in the Euro Area. Why Do Results of Empirical Research Differ So Strongly?, in: M. Larch (ed.): Achieving and Safeguarding Sound Fiscal Positions, European Economy, Economic Paper, No. 377, 2008.
29. The estimate of potential output in year t estimated in the current year T generally involves a centred function of actual GDP y or of parts of actual GDP: For estimates of potential output in year T or beyond, this involves the use of forecasts: Taking the difference between the "final" estimate of potential output, the one obtained after the arrival of new data, and the forecast yields which shows that the revision of potential output estimates reflects the forecast errors for real GDP.
30. A first clear message concerning the risks related to the spending of revenue windfalls was included in the Commission services 2006 autumn forecast.
31. A detailed analysis of the link between the constraints imposed by the SGP and the recourse to one-off and temporary factors is provided by V. Koen, P. Van Den Noord: Fiscal Gimmickry in Europe: One- off Measures and Creative Accounting., in: P. Wierts, S. Deerose, E. Flores, A. Turrini, (eds.): Fiscal Policy Surveillance in Europe, Basingstoke 2006, Palgrave McMillan, pp. 45-76.
32. J. Von Hagen, G. Wolff: What Do Deficits Tell Us About Debt? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU, in: Journal of Banking & Finance, Vol. 30, No. 12, 2006, pp. 3259-3279.
33. M. Buti, J. Nogueira Martins, A. Turrini: From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules, in: CESifo Economic Studies, Vol. 53, No. 1, 2007, pp. 115-152.
34. European Commission: Public Finances in EMU - 2004, in: European Economy, No. 3, 2004.
35. By way of example, it was argued that tax amnesties, combined with the intention to strengthen tax controls, would produce a permanent improvement in the budget. To prove the contrary from an ex ante point of view was not always easy.
36. ECOFON Council report on "Strengthening the coordination of budgetary policies", 7 March 2003, 6877/03.
37. A detailed overview of the 2005 reform is presented in European Commission: Public Finances in EMU - 2004, in: European Economy, No. 3, 2005.
38. See Council regulation (EC) No. 1056/2005 of 27 June 2005 amending Regulation (EC) No. 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure.
39. The result is derived in a separate appendix available upon request from the authors.
40. Evidence for a systematic tendency in some Member States to over- estimate potential growth, confirming the risk of moral hazard, is provided in R. Strauch, M. Hallerberg, J. Von Hagen: Budgetary Forecasts in Europe: The Track Record of Stability and Convergence Programmes, in: ECB Working Paper, No. 307, 2004.
41. and in L. Jonung, M. Larch, op. cit.
42. The accuracy of Commission services growth forecasts is documented in F. Keereman: The Track Record of the Commission Forecast, in: European Economy, Economic Paper, No. 137, 1999.
43. and in L. Jonung, M. Larch, op. cit.
44. Commission services' economic assessment of the 2006/07 vintage of stability and convergence programmes includes short paragraphs comparing output gap estimates with the indications emerging from complementary indicators. The assessments can be found at: http://ec.europa.eu/economy_finance/netstartsearch/pdfsearch/pdf.cfm?mode=_m2
45. European Commission: Public Finances in EMU - 2008, in: European Economy, No. 3, 2008.
46. The extended production function approach does not yet have official status in the EU fiscal surveillance framework. It is currently being discussed with the Member States in the competent Council committees.
47. See for instance R. Morris, L. Schuknecht: Structural Balances and Revenue Windfalls. The Role Of Asset Prices Revisited, ECB Working Paper, No. 737, 2007.
48. and G. Wolswijk: Short- and Long- Run Tax Elasticities. The Case of the Netherlands, ECB Working Paper, No. 763, 2007.
49. For a detailed description of the ECB method see C. Bouthevillan, et al., op. cit.
50. The technical details can be found in Part II of European Commission: Public Finances in EMU - 2008, in: European Economy, No. 3, 2008.
51. A first step in this direction was presented in European Commission, op. cit.
52. Council report on "Improving the Implementation of the Stability and Growth Pact" was included in the Council conclusions of 23 March 2005, 7619/1/05 REV 1.
53. The code of conduct on "Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes", endorsed by the ECOFIN Council on 11 October 2005.
54. European Commission: Public Finances in EMU - 2004, in: European Economy, No. 3, 2006.