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Structural Budget Deficits and Sustainability of Fiscal Positions in the European Union

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    Abstract

    According to the Pact for Stability and Growth (PSG), in the medium term the net deficit should be close to balance or in surplus. We question the use of the net deficit as the only medium-term budgetary objective and as the main indicator for the assessment of fiscal policy. Hence, for assessing the short-term fiscal stance, we propose to analyze cyclically adjusted budget balances, whereas an assessment of sustainability of fiscal positions in the medium-term should be based on structural primary gaps. The OECD, the EU and the IMF calculate structural budget balances by subtracting the balance of several cyclical revenue components and only one cyclical expenditure component from the overall net deficit, under the assumption of constant output elasticities. By means of a bootstrapping simulation we demonstrate that the assumptions of these traditional methods are too restrictive. They do not even allow to determine the sign of the cyclical balances for the EU-countries. To estimate structural budget balances, we suggest an alternative approach which is based on a statistical concept and identifies structural balances as a smooth trend. Medium term sustainability of fiscal policy is analysed within the concept of structural primary gaps. This indicator shows to what extent the current structural primary balance deviates from the primary surplus that stabilizes the debt to GDP ratio. Again, the meaning of structural is based on the same statistical concept of trend extraction. For the EU-countries structural primary gaps are calculated, referring to the net debt and gross debt concept. According to the gross debt concept and based on forecasts of the OECD Economic Outlook (December 1997), fiscal policy of all EU-countries can be considered as sustainable at least in 1999. Even if fiscal policy is already deemed sustainable in the medium-term, in some of the EU-countries structural balances will have to be further improved in order to bring fiscal positions close to balance or in surplus. Only then, compliance with the provisions of the PSG is assured.

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    Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 26.

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    Length: 62
    Date of creation: 28 May 1998
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    Handle: RePEc:onb:oenbwp:26

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    Cited by:
    1. Martin Zagler, 2000. "The Austrian Miracle - Revisited: Testing eight Explanations for High Growth and maybe a ninth," Working Papers geewp11, Vienna University of Economics Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.
    2. Maria Neicheva, 2006. "Non-Keynesian Effects of Government Expenditure on Output in Bulgaria: An HP Filter Approach," Post-Communist Economies, Taylor & Francis Journals, vol. 18(1), pages 1-12.
    3. Matti Virén, 2000. "How Sensitive is the Public Budget Balance to Cyclical Fluctuations in the EU?," Discussion Papers 230, Government Institute for Economic Research Finland (VATT).
    4. Jaakko Kiander & Matti Virén, 2000. "Do automatic stabilisers take care of asymmetric shocks in the euro area?," Discussion Papers 234, Government Institute for Economic Research Finland (VATT).
    5. Peter Brandner & Helmut Frisch & Eva Hauth, . "Is Austria's Balanced Budget Stable?," WIFO Working Papers 148, WIFO.
    6. Kinnunen, Helvi & Kuoppamäki, Pasi, 1998. "Sustainability of Public Finances in Finland and the Four Largest Euro-area Economies," Research Discussion Papers 25/1998, Bank of Finland.
    7. Braconier, Henrik & Holden, Steinar, 1999. "The Public Budget Balance - Fiscal Indicators and Cyclical Sensitivity in the Nordic Countries," Working Paper 67, National Institute of Economic Research.
    8. António Afonso, 2001. "Non-Keynesian Effects of Fiscal Policy in the EU-15," Working Papers Department of Economics 2001/07, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    9. Barrell, Ray & Pina, Alvaro M., 2004. "How important are automatic stabilisers in Europe? A stochastic simulation assessment," Economic Modelling, Elsevier, vol. 21(1), pages 1-35, January.
    10. John Weeks, 2013. "Euro Crises and Euro Scams: Trade not Debt and Deficits Tell the Tale," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(69), pages 7-36, December.
    11. Martin Larch & Jo�o Nogueira Martins, 2007. "Fiscal indicators - Proceedings of the the Directorate-General for Economic and Financial Affairs Workshop held on 22 September 2006 in Brussels," European Economy - Economic Papers 297, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    12. VirÉn, Matti, 2000. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 744, The Research Institute of the Finnish Economy.
    13. Helene Schuberth, 1998. "Room for manoeuvre of economic policy in EU countries are there costs of joining EMU?," Working Papers 35, Oesterreichische Nationalbank (Austrian Central Bank).
    14. Matti Virén, 1999. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 204, Government Institute for Economic Research Finland (VATT).
    15. Thomas D. Willett, . "A Political Economy Analysis of the Maastricht and Stability Pact Fiscal Criteria," Claremont Colleges Working Papers 1999-33, Claremont Colleges.
    16. Bruno Rossmann, 1999. "Zur Zusammensetzung und Dauerhaftigkeit der Budgetkonsolidierung der EU-Staaten im Übergang zur Währungsunion," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 25(1), pages 9-40.
    17. Maria Neycheva, 2005. "The Impact of the Fisc on Macroeconomic Fluctuations in Bulgarian Economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 42-59.

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