identify a recurring pattern according to which estimated changes in the headline deficit
net of cyclical factors were not consistent with the policy objective of stabilising cyclical
swings of aggregate output. More in particular, Brandner and co-authors track fiscal
policy behaviour over time by decomposing the observed budget balance into four
unobserved components: a core balance, an automatic or built-in fiscal stabiliser
component, a component reflecting discretionary fiscal policy responses to the business
cycle, and, finally, a component reflecting all other transitory shocks to the fiscal
position. Their results for Austria highlight that the revenue side seems to be prone to
procyclical responses whereas the expenditure side shows opposite behaviour. Moreover,
during economic downturns, the overall impact of fiscal policy seems to be
countercyclical, whereas in periods of economic upturn the impact of automatic
stabilisers is nearly neutralised.
Afonso and Claeys’ focus is on the relation between the cyclical components of total
revenues and expenditures and the budget balance in France, Germany, Portugal and
Spain. A disaggregate analysis of fiscal policy in a structural VAR that mixes long- and
short-term constraints allows them to look into the transmission channels of fiscal policy
and to derive a model-based indicator of structural balance. Their main conclusions are
that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by
expenditure adjustments. As a consequence, deficits rise when economic conditions
worsen but cause a ‘ratcheting up’ in the size of government in economic booms. The
Pact has not eradicated these procyclical policies. Bad policies in ‘good times’ also
contribute to aggregate macroeconomic instability. The result of both teams clearly raises
concerns about the current situation and calls for both improvements in the available
diagnostics as well as particular vigilance. Starting in 2005, Europe entered in a
comparatively positive cyclical phase, in which Member States that have not yet reached
their medium-term budgetary objective (MTO) are expected to step up their consolidation
efforts and Member States that are already in MTO should implement counter-cyclical
policies.
The third part of these proceedings calls attention to the reliability of fiscal indicators; the
two respective chapters recall and illustrate the margins of uncertainty involved in the
available set of fiscal indicators. A critical view of the reliability of the underlying fiscal
statistics is offered in Chapter 6 by F. Balassone, D. Franco and S. Zotteri on the basis of
episodes of large-scale upward revision in government deficits. They discuss the causes of
such revisions and raise attention to the potential for opportunistic accounting, or ‘fiscal
gimmickry’ in their own words. A permanent and detailed cross-checking of available
data - starting with, but going deeper than, the simple comparisons of deficit and changes
in debt - should reduce the scope for exploiting existing loop holes in the reporting of
budgetary positions.
In Chapter 7, R. Barrell, I. Hurst and J. Mitchell provide estimates of the degree of
uncertainty attached to the output gap. Uncertainty about the cyclically-adjusted budget
deficit is further compounded by uncertainty on the link between the gap and the
government accounts. They advocate that the measurement of fiscal stance should make
explicit the bounds around the available data on the cyclically adjusted deficit. Yet, those
in charge of fiscal surveillance cannot waive the responsibility of taking action, even if
taking decisions in real time implies taking into account a certain, and in some cases a
high, degree of uncertainty.
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