The comparison of this coefficient with the size of the overall budget sensitivity as
estimated by the OECD and used by the EC (+0.47) leads to the conclusion that the
overall impact of fiscal policy (summing up the automatic and discretionary components)
was slightly counter-cyclical in Austria in the past.59 Taking into account the fact that the
overall budget sensitivity for Austria as estimated by the OECD was lower in earlier
publications, this could indicate a slightly stronger counter-cyclicality of overall fiscal
policy for recent years.
Figure 4.1 also reveals that the core balance is slightly smoother than the cyclically
adjusted budget balance. The driving forces of the core balance were major structural
problems of the Austrian economy in the early 1980s; consolidation measures in the
second half of the 1980s; a major income tax reform which came into effect in 1990; the
implementation of long-term care benefits in 1993; the fiscal impact of EU membership
in the mid-nineties; the implementation of further consolidation packages between 1995
to 1997 in order to fulfil the Maastricht fiscal criteria in 1997; and another consolidation
package in 2000/2001 to reach a balanced budget.
The first result is confirmed when we use the alternative specification (4.5.1) and look for
the “overall” budget sensitivity to the output gap, i.e. estimating the automatic and the
policy response components in one go. A positive coefficient of 0.15 signals a slightly
counter-cyclical behaviour overall.60 Repeating the estimations with the primary budget
balance gives nearly identical coefficients (see Figures 4.3 and 4.4).
This finding contrasts with Gali and Perotti’s (2003) results. In their country estimates
they find a slightly counter-cyclical discretionary fiscal response for Austria for the pre-
Maastricht period, which became stronger in the after-Maastricht period (but the
coefficients are not statistically different from zero).
A “pro-cyclical fiscal policy response” of the general government is, however, not much
of a surprise; on the one hand it can be explained by the federal structure of government
in Austria, consisting of the federal government, the nine provinces and the local
governments (municipalities). The provincial and local governments’ fiscal policies have
traditionally been aimed at balanced budgets - thus undermining the impact of the
automatic stabilisers, in particular in downturns.61 Thus, even if the federal government
aims at counter-cyclical responses to cyclical developments, this ambition may be partly
counteracted by the provincial and local governments’ fiscal strategy.
Moreover, from the late 1970s to the end of the 1980s the federal government’s strategy
was influenced by a budget rule termed the “Seidel formula” (see Katterl and Kohler-
59
60
61
However, as stated by Alberola et al. (2003) (by means of a panel regression) such a result could
also signal problems with the estimation of the budget elasticity. They actually find a negative and
significant correlation between the output gap and the structural balance which they interpret as an
overestimation of the cyclical component. Consequently, in downturns structural balances tend to be
overestimated while they are underestimated in expansions.
In order to filter out the effect of the interest expenditures we estimate the equations also with the
cyclically adjusted and unadjusted primary balance as dependent variables.
The resources of the provincial and local governments stem mainly from an elaborate tax sharing
system and from federal transfers. The sub-levels mainly participate in cyclically sensitive tax
revenues. Own sources of revenues are of less importance for the provincial governments, but of
slightly more relevance for the local governments. Without any room for manoeuvre on the revenue
side, the provincial and local governments in principle have to adjust their expenditures to the
predetermined revenues (see Diebalek et al. (2005)).
109