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Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD

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  • Jacques Melitz

    (Crest)

Abstract

Official adjustments of the budget balance to the cycle merely assume that the only category of governmentspending that responds automatically to the cycle is unemployment compensation. But estimatesshow otherwise. Payments for pensions, health, subsistence, invalidity, childcare and subsidiesof all sorts to firms respond automatically and significantly to the cycle as well. In addition, it is fairlycommon to borrow official figures for cyclically adjusted budget balances, divide by potential output,and then use the resulting ratios to study discretionary fiscal policy. But if potential output is not deterministicbut subject to supply shocks, then apart from anything else, those ratios are inefficient estimatesof the cyclically-independent ratios of budget balances divided by potential output. (A fortiori,they are inefficient estimates of the cyclically adjusted ratios of budget balances to observed output.)Accordingly, the paper provides separate estimates of the impact of the cycle on the levels of budgetbalances and the ratios of budget balances to output. In addition, it discusses the relation between thetwo sorts of estimates. When the focus is on ratios of budget balances to output, the cyclical adjustmentsdepend more on inertia in government spending on goods and services than they do on taxes(which are largely proportional to output). But they depend even still more on transfer payments. Besidescalling for different series for discretionary fiscal policy if ratios serve, these results also raisequestions about the general policy advice to “let the automatic stabilizers work.”

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Bibliographic Info

Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2005-10.

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Length: 30
Date of creation: 2005
Date of revision:
Handle: RePEc:crs:wpaper:2005-10

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Cited by:
  1. Ana Lamo & Javier J. Pérez & Ludger Schuknecht, 2013. "The cyclicality of consumption, wages and employment of the public sector in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(12), pages 1551-1569, April.
  2. Edoardo Gaffeo & Giuliana Passamani & Roberto Tamborini, 2005. "Fiscal and monetary policy, unfortunate events, and the SGP arithmetics - Evidence from a growth-gaps model," Department of Economics Working Papers 0519, Department of Economics, University of Trento, Italia.
  3. Strawczynski, Michel & Zeira, Joseph, 2009. "Cyclicality of Fiscal Policy: Permanent and Transitory Shocks," CEPR Discussion Papers 7271, C.E.P.R. Discussion Papers.
  4. Sébastien Pommier, 2008. "The Use of Fiscal Policy in EMU: First Appraisal and Future Prospects," EKONOMIAZ, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 69(03), pages 28-45.
  5. Antonio Fatas & Ilian Mihov, 2009. "The Euro and Fiscal Policy," NBER Working Papers 14722, National Bureau of Economic Research, Inc.

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