IDEAS home Printed from https://ideas.repec.org/p/euf/ecopap/0374.html
   My bibliography  Save this paper

The cyclically-adjusted budget balance in EU fiscal policy making : A love at first sight turned into a mature relationship

Author

Listed:
  • Martin Larch
  • Alessandro Turrini

Abstract

The cyclically-adjusted budget balance (CAB) plays a key role in the fiscal surveillance framework of the Economic and Monetary Union. It started off in a supporting role in the shadow of the headline deficit and, before long, turned into the linchpin of the rules and requirements of the Stability and Growth Pact. The steep ascent was driven by high hopes and expectations which, with the passing of time were only partly met. The everyday practice of the EU fiscal surveillance rapidly revealed a number of caveats of the instrument which, at times, hampered the effectiveness of fiscal surveillance. This paper provides a comprehensive review of the changing fortunes of the CAB in the EU fiscal surveillance framework. It portrays its main shortcomings and the way they can be dealt with in practice. As an overall conclusion the paper argues that, although the CAB is not devoid of problems and imperfections, it is superior to the headline deficit in most respects.

Suggested Citation

  • Martin Larch & Alessandro Turrini, 2009. "The cyclically-adjusted budget balance in EU fiscal policy making : A love at first sight turned into a mature relationship," European Economy - Economic Papers 2008 - 2015 374, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0374
    as

    Download full text from publisher

    File URL: https://ec.europa.eu/economy_finance/publications/pages/publication14644_en.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. European Commission, 2010. "Taxation trends in the European Union: 2010 edition," Taxation trends 2010, Directorate General Taxation and Customs Union, European Commission.
    2. Doris Prammer & Lukas Reiss, 2014. "Fiscal Projections by the Oesterreichische Nationalbank: Methods and Motives," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 31-48.
    3. Pilar Poncela & Eva Senra & Daniel Sotelsek & Guido Zack, 2014. "Some New Results on the Estimation of Structural Budget Balance for Spain," Hacienda Pública Española / Review of Public Economics, IEF, vol. 210(3), pages 11-31, September.
    4. Stephan Schulmeister, 2013. "Growth Dynamics Exposed to Conflict Between Easy Monetary Conditions and Fiscal Restriction. Medium-term Forecast for the World Economy Until 2017," Austrian Economic Quarterly, WIFO, vol. 18(1), pages 25-40, April.
    5. Döhrn, Roland & Gebhardt, Heinz, 2013. "Die fiskalischen Kosten der Finanz- und Wirtschaftskrise," IBES Diskussionsbeiträge 198, University of Duisburg-Essen, Institute of Business and Economic Studie (IBES).
    6. Torben M. Andersen, 2013. "The Swedish Fiscal Policy Framework and Intermediate Fiscal Policy Targets," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 149(II), pages 231-248, June.
    7. Luca Agnello & Jacopo Cimadomo, 2012. "Discretionary Fiscal Policies over the Cycle: New Evidence Based on the ESCB Disaggregated Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 43-85, June.
    8. Virkola, Tuomo, 2014. "Real-Time Measures of the Output Gap and Fiscal Policy Stance," ETLA Reports 37, The Research Institute of the Finnish Economy.
    9. Klaus Vondra, 2013. "Austria Withstands Recession: Return to Positive Growth in Early 2013," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 6-11.
    10. Bauer, Thomas K. & Gebhardt, Heinz & Matz, Florian & Schmidt, Christoph M. & Schmidt, Torsten & Siemers, Lars-H., 2010. "Ermittlung der Konjunkturkomponenten für die Länderhaushalte zur Umsetzung der in der Föderalismuskommission II vereinbarten Verschuldungsbegrenzung: Endbericht - Juni 2010," RWI Projektberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, number 69915.
    11. Fabrizio Coricelli & Riccardo Fiorito, 2013. "Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure," Documents de travail du Centre d'Economie de la Sorbonne 13033, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    12. Vladimir Tomsik, 2012. "Some insights into monetary and fiscal policy interactions in the Czech Republic," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal policy, public debt and monetary policy in emerging market economies, volume 67, pages 161-171, Bank for International Settlements.
    13. European Commission, 2012. "Taxation trends in the European Union: 2012 edition," Taxation trends 2012, Directorate General Taxation and Customs Union, European Commission.
    14. Villena, Mauricio G. & Gamboni, Cristóbal & Tomaselli, Andrés, 2018. "Fiscal sustainability and the cyclically adjusted balance policy: methodology and analysis for Chile," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    15. Artem Vdovychenko, 2018. "Estimating the Fiscal Impulse in Ukraine," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 245, pages 45-63.
    16. Jef Vuchelen & Jesse De Wit, 2008. "An Evaluation of the OECD Cyclically-Adjusted Primary Government Balance Forecasts," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 51(4), pages 459-479.
    17. Andersen, Torben M., 2013. "Fiscal policy targeting under imperfect information," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 114-130.
    18. Ludovit Ódor & Gábor P. Kiss, 2014. "Back to basics – good indicators for good fiscal institutions!," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 13(4), pages 125-151.
    19. Markus Marterbauer, 2010. "Budgetkonsolidierung in Zeiten verminderter Erwartungen," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 36(3), pages 299-323.
    20. IMK Düsseldorf & OFCE Paris & WIFO Wien, 2013. "Die Krise schwelt weiter," IMK Report 80-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    21. Stephan Schulmeister, 2014. "Der Fiskalpakt – Hauptkomponente einer Systemkrise," WIFO Working Papers 480, WIFO.

    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. Paunovic, Igor, 2005. "Public debt sustainability in the northern countries of Latin America," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    2. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    3. Vratislav Izák, 2008. "Udržitelnost veřejných financí a dynamická efektivnost [Public finance sustainability and dynamic efficiency]," Politická ekonomie, Prague University of Economics and Business, vol. 2008(2), pages 162-181.
    4. Gossé, Jean-Baptiste & Guillaumin, Cyriac, 2013. "L’apport de la représentation VAR de Christopher A. Sims à la science économique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 89(4), pages 309-319, Décembre.
    5. Nicolas Huchet & Bénédicte Serbini, 2013. "Public finance, banking sector and sovereign bond risk premiums in the Eurozone," Post-Print hal-03124168, HAL.
    6. Marco BUTI & Daniele FRANCO & Hedwig ONGENA, 1997. "Budgeetary Policies during Recessions : Retrospective Application of the Stability and Growth Pact” to the Post-War Period," Discussion Papers (REL - Recherches Economiques de Louvain) 1997041, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    7. World Bank, 2005. "Dominica : OECS Fiscal Issues, Policies to Achieve Fiscal Sustainability and Improve Efficiency and Equity of Public Expenditures," World Bank Other Operational Studies 8681, The World Bank.
    8. Volker Meier & Martin Werding, 2010. "Ageing and the welfare state: securing sustainability," Oxford Review of Economic Policy, Oxford University Press, vol. 26(4), pages 655-673, Winter.
    9. Ronald D. Kneebone & Kenneth J. McKenzie, 1999. "The Characteristics of Fiscal Policy in Canada," Canadian Public Policy, University of Toronto Press, vol. 25(4), pages 483-501, December.
    10. Stan Du Plessis & Ben Smit & Federico Sturzenegger, 2007. "The Cyclicality Of Monetary And Fiscal Policy In South Africa Since 1994," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 391-411, September.
    11. Matti Virén, 1998. "Do the OECD Countries Follow the Same Fiscal Policy Rule?," Discussion Papers 186, Government Institute for Economic Research Finland (VATT).
    12. van Aarle, Bas & Garretsen, Harry, 2003. "Keynesian, non-Keynesian or no effects of fiscal policy changes? The EMU case," Journal of Macroeconomics, Elsevier, vol. 25(2), pages 213-240, June.
    13. Lankester-Campos, Valerie & Loaiza-Marín, Kerry & Monge-Badilla, Carlos, 2020. "Assessing public debt sustainability for Costa Rica using the fiscal reaction function," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
    14. Jacopo Ponticelli & Joachim Voth, 2011. "Austerity and anarchy: Budget cuts and social unrest in Europe, 1919-2008," Economics Working Papers 1342, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2012.
    15. Koskela, Erkki & Viren, Matti, 2003. "Government Size and Output Volatility: New International Evidence," Discussion Papers 857, The Research Institute of the Finnish Economy.
    16. VirÉn, Matti, 2000. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 744, The Research Institute of the Finnish Economy.
    17. Pragidis, Ioannis & Gogas, Periklis & Plakandaras, Vasilios & Papadimitriou, Theophilos, 2013. "Asymmetric Fiscal Policy Shocks," DUTH Research Papers in Economics 8-2013, Democritus University of Thrace, Department of Economics.
    18. Gábor P. Kiss, 2007. "One-off and off-budget items: An alternative approach," MNB Conference Volume, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 1(1), pages 18-27, December.
    19. Enrique G. Mendoza & P. Marcelo Oviedo, 2009. "Public Debt, Fiscal Solvency and Macroeconomic Uncertainty in Latin America The Cases of Brazil, Colombia, Costa Rica and Mexico," Economía Mexicana NUEVA ÉPOCA, , vol. 0(2), pages 133-173, July-Dece.
    20. Sanhita SUCHARITA, 2014. "Debt Sustainability Of India," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 6(6), pages 208-224, December.

    More about this item

    Keywords

    budget balance; cyclical adjustment; EU fiscal surveillance framework; Larch; Turrini;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt

    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:euf:ecopap:0374. 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: . General contact details of provider: https://edirc.repec.org/data/dg2ecbe.html .

    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: ECFIN INFO (email available below). General contact details of provider: https://edirc.repec.org/data/dg2ecbe.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.