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From those lying facts to the underlying deficit

Listed author(s):
  • Mihály Hoffmann


    (Magyar Nemzeti Bank (central bank of Hungary))

  • Gábor P. Kiss


    (Magyar Nemzeti Bank (central bank of Hungary))

Developments in the headline budget balance are distorted by temporary factors. The most significant of these factors are the business cycle and creative accounting. Adequate information and estimates are available, allowing us to filter out these factors using a so-called adjustment for self-reversal. Expenditures and revenues adjusted in this way, however, continue to fluctuate, as fiscal policy measures can, in part, also turn out to be temporary in retrospect. We filter out this effect by using a four-year moving average (covering a full election cycle), instead of taking individual pieces of information into account. Moving averages are calculated in a forward-looking manner, for the three subsequent years in addition to the current year. This allows temporary effects in the past to be captured and renders their identification easier over the forecast horizon. Based on our results, the deficit indicators obtained using the adjustment for self-reversal and the adjustment for policy reversal are similar; the latter method, however, yields a higher deficit for the period 2010–2012, due to the tax cuts (phasing out of temporary taxes) announced for 2013. Overall, however, both adjusted indicators deviate substantially from the headline indicator, highlighting the significance of the adjustment.

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Article provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its journal MNB Bulletin.

Volume (Year): 5 (2010)
Issue (Month): 4 (December)
Pages: 7-16

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Handle: RePEc:mnb:bullet:v:5:y:2010:i:4:p:7-16
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