IDEAS home Printed from https://ideas.repec.org/p/cyb/wpaper/2025-1.html
   My bibliography  Save this paper

Estimation of the Fiscal Elasticities for Cyprus

Author

Listed:
  • Aris A. Avgousti

    (Central Bank of Cyprus)

Abstract

This paper presents updated estimates of short-run elasticities for the fiscal variables that depend upon the economic cycle for Cyprus. First, we construct a ‘policy-neutral’ time-series dataset, adjusting fiscal data for the estimated or assumed impact of discretionary policy measures. Then, for each fiscal variable, we estimate various specifcations using different macro bases and control variables (year dummies, structural breaks, or tax reforms), applying two econometric models (first differences and error correction model) to annual data for the period 1995-2023. In addition, we employ rolling-window regressions to detect possible trends in the fiscal-to-base elasticities. For each fiscal variable, we select the specifcations that satisfy the pre-specifed model-selection criteria and identify the most suitable specification. Based on the estimation results, we propose the use of updated fiscal elasticities for our forecasts. The proposed changes to the fiscal elasticities involve adjustments to the macro bases for three main revenue categories – personal income tax, social security contributions, and value added tax – but most importantly, they generally suggest the use of higher elasticities compared to those previously applied, particularly for revenue from direct taxes (personal and corporate income taxes). The impact of these changes on the June 2024 fiscal projections of the CBC is signifcant. All else equal (i.e. without any changes in judgment), public revenue would rise by 0.1 percent of GDP in 2024, 0.3 percent of GDP in 2025 and 0.7 percent of GDP in 2026. The largest impact would stem from the changes in the elasticities of personal and corporate income taxes, with average annual impacts of 0.12 percent of GDP and 0.10 percent of GDP, respectively. The updated estimates of fiscal elasticities could improve the accuracy of our fiscal projections and provide a clearer understanding of the factors driving government revenue and unemployment-related expenses.

Suggested Citation

  • Aris A. Avgousti, 2025. "Estimation of the Fiscal Elasticities for Cyprus," Working Papers 2025-1, Central Bank of Cyprus.
    • Handle: RePEc:cyb:wpaper:2025-1
    as

    Download full text from publisher

    File URL: https://www.centralbank.cy/images/media/pdf/2025-01.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert Price & Thai-Thanh Dang & Yvan Guillemette, 2014. "New Tax and Expenditure Elasticity Estimates for EU Budget Surveillance," OECD Economics Department Working Papers 1174, OECD Publishing.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Doris Prammer & Lukas Reiss, 2018. "How to increase fiscal stabilization at the euro area level?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/18, pages 111-131.
    2. Hollmayr, Josef & Kuckuck, Jan, 2018. "Fiscal multipliers of central, state and local government and of the social security funds in Germany: Evidence of a SVAR," Discussion Papers 28/2018, Deutsche Bundesbank.
    3. Morris, Richard & Reiss, Lukas, 2020. "A decomposition of structural revenue developments for euro area member states," Working Paper Series 2455, European Central Bank.
    4. Baum, Anja & Eyraud, Luc & Hodge, Andrew & Jarmuzek, Mariusz & Kim, Young & Mbaye, Samba & Ture, Elif, 2018. "How to calibrate fiscal rules : a primer," MPRA Paper 86423, University Library of Munich, Germany.
    5. Kasselaki, Maria Th. & Tagkalakis, Athanasios O., 2016. "Fiscal policy and private investment in Greece," International Economics, Elsevier, vol. 147(C), pages 53-106.
    6. Siemers Lars-H. & Gebhardt Heinz, 2020. "Die strukturelle Besserung der Länderfinanzen in der Niedrigzinsphase: die trügerische Leichtigkeit des Scheins," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 21(1), pages 54-78, April.
    7. Alfred Katterl & Walpurga Köhler-Töglhofer, 2018. "Stabilization and shock absorption instruments in the EU and the euro area – the status quo," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/18, pages 87-110.
    8. Francesco Berardini & Fabrizio Renzi, 2022. "Mind the Gap! The (unexpected) impact of COVID-19 pandemic on VAT revenue in Italy," Questioni di Economia e Finanza (Occasional Papers) 669, Bank of Italy, Economic Research and International Relations Area.
    9. Sebastian Gechert & Christoph Paetz & Paloma Villanueva, 2016. "Top-Down vs. Bottom-Up? Reconcilling the Effects of Tax and Transfer Shocks on Output," IMK Working Paper 169-2016, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Doris Prammer, 2021. "Unprecedented fiscal (re)actions to ease the impact of the COVID-19 pandemic in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/20-Q1/, pages 153-173.
    11. Hauptmeier, Sebastian & Kamps, Christophe, 2022. "Debt policies in the aftermath of COVID-19 — The SGP’s debt benchmark revisited," European Journal of Political Economy, Elsevier, vol. 75(C).
    12. Cristian MOCAN, 2015. "THE SUSTAINABILITY OF THE FISCAL-BUDGETARY POLICY IN THE CONTEXT OF TAXATION SYSTEM REDUCTION Abstract : The estimation of the budgetary impact determined by the Government’s proposition of modifyin," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 43(Special I), pages 1-3, august.
    13. Agata Szymańska, 2018. "Wpływ polityki fiskalnej na PKB w krajach Unii Europejskiej spoza strefy euro," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 49-74.
    14. Gilles Mourre & Aurélien Poissonnier, 2019. "What Drives the Responsiveness of the Budget Balance to the Business Cycle in EU Countries?," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 54(4), pages 237-249, July.
    15. repec:clr:wugarc:y:2016v:42i:03p:451 is not listed on IDEAS
    16. William R. Cline, 2015. "From Populist Destabilization to Reform and Possible Debt Relief in Greece," Policy Briefs PB15-12, Peterson Institute for International Economics.
    17. Marcell Göttert & Timo Wollmershäuser, 2021. "Survey-Based Structural Budget Balances," CESifo Working Paper Series 8911, CESifo.
    18. Heinz Gebhardt & Lars-H. R. Siemers, 2018. "Zur strukturellen Finanzlage der Länder: eine aktuelle Auswertung und Methodenkritik," Volkswirtschaftliche Diskussionsbeiträge 188-18, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    19. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2019. "Dynamic Scoring Of Tax Reforms In The European Union," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 38(1), pages 239-262, January.
    20. Dolls, Mathias & Wittneben, Christian, 2017. "Dynamic Scoring of Tax Reforms in the EU," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168261, Verein für Socialpolitik / German Economic Association.
    21. Pablo Burriel & Javier J. Pérez & Ivan Kataryniuk, 2023. "Computing the EU’s SURE Interest Savings with an Extended Debt Sustainability Analysis Tool," Hacienda Pública Española / Review of Public Economics, IEF, vol. 245(2), pages 157-178, June.

    More about this item

    Keywords

    Fiscal elasticities; Public revenue; Fiscal Projections; Public fnances;
    All these keywords.

    JEL classification:

    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cyb:wpaper:2025-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anna Markidou (email available below). General contact details of provider: https://edirc.repec.org/data/cbcgvcy.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.