Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD
Official adjustments of the budget balance to the cycle merely assume that the only category of government spending that responds automatically to the cycle is unemployment compensation. But estimates show otherwise. Payments for pensions, health, subsistence, invalidity, childcare and subsidies of all sorts to firms respond automatically and significantly to the cycle as well. In addition, it is fairly common 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 deterministic but subject to supply shocks, then apart from anything else, those ratios are inefficient estimates of 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 budget balances and the ratios of budget balances to output. In addition, it discusses the relation between the two sorts of estimates. When the focus is on ratios of budget balances to output, the cyclical adjustments depend 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. Besides calling for different series for discretionary fiscal policy if ratios serve, these results also raise questions about the general policy advice to ‘let the automatic stabilizers work’.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Apr 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4988. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.