The increased prominence of both the structural budget balance and the long-term
sustainability in the EU fiscal surveillance framework raises a number of straightforward
yet taxing questions related to the measurement of economic and fiscal performance. Is
the current toolkit sufficiently appropriate with respect to the provisions of the reformed
SGP? How accurate are the available estimates of the cyclical position and the structural
budget balance? What are the major caveats and how can they be overcome? Besides the
available standard indicators, what are the viable alternatives to the assessment of the
long-term sustainability of public finances?
These and a number of other issues were the focus of the workshop on Fiscal Indicators
in the EU Budgetary Surveillance organised by the Directorate General for Economic and
Affairs on 22 September 2006 in Brussels. This volume collects the papers presented at
the workshop together with the respective discussions. The three sessions of the
workshop mirror the main challenges outlined above notably (i) long-term sustainability,
(ii) the measurement of the underlying budgetary position and discretionary fiscal policy
and (iii) the reliability of fiscal indicators.
Reflecting the increasing relevance of long-term issues, the first part of this volume
covers two chapters which discuss alternative avenues to assess the long-term
sustainability of public finance. The work by F. Ballabriga and C. Martinez-Mongay
discusses various tests and rules based on the recent literature on fiscal-reaction
functions. They test for a positive response of the primary surplus to accumulated debt in
the data and check for robustness considering alternative specifications, estimation
techniques and structural breaks. One of their interesting policy conclusions is that
stricter conditions do not necessarily ensure sustainability; what matters is enforcement.
They conclude that the response to debt has fluctuated over the sample 1977-2005, but
sustainability has been prevalent in EU15: most governments have tended to apply a
fluctuating but generally positive primary surplus adjustment in response to debt
accumulation.
The chapter by J. Gokhale uses long-term economic and fiscal projections to determine if
and to what extent current and future expenditure trends, in particular taking into account
ageing population, give rise to fiscal imbalances. The results show relatively large gaps
which will have to be tackled in the coming years. He proposes the adoption of an
extended framework of budget accounting and reporting within the context of the SGP’s
long-term fiscal policy surveillance requirement. Gokhale argues that traditional debt and
deficit measures can be potentially misleading as measures of a nation’s fiscal stance and
suggests adopting fiscal and generational imbalance measures, as these indicators
incorporate comprehensive information about future fiscal prospects under current
policies. He also provides estimates which show large fiscal imbalances for most EU
countries until 2051. The author acknowledges that different underlying assumptions may
generate wide variations in estimates of fiscal and generational imbalances and in their
ratios to GDP or tax bases. Yet, rather than an argument against adopting such measures,
this implies a need to supplement those estimates with measures of the associated
uncertainty.
The second part of this volume is devoted to the measurement of the underlying
budgetary position and discretionary fiscal policy. The empirical results in Chapters 4
and 5 highlight a tendency of running pro-cyclical policies, especially in ‘good times’.
P. Brandner, L. Diebalek and W. Kohler-Toglhofer estimate an unobserved components
model while A. Afonso and P. Claeys apply structural VAR analysis. These two chapters
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