The name is absent

The Fiscal Indicator

We are now ready to discuss the indicator of discretionary fiscal stance. In general, the
measure is more volatile than the measures derived with conventional methods (see
Figure 5.5, bottom left panel). In many instances, our measure leads the smoothed
measures in the direction of change. The fiscal indicator is usually smaller than the
cyclically adjusted deficit. This reflects the definition of the structural balance, by which
we take out the automatic stabilisers and the induced stabilisation effects caused by fiscal
policies. In addition, fiscal policy also affects permanent output and therefore the
structural fiscal position fluctuates around balance.

The indicator is also much more volatile. This follows from the major contribution of
supply and fiscal shocks to the variation in output, spending and revenues (Figure 5.4).
As we discuss below, one of the causes of this strong volatility - apart from the dominant
supply side shocks - is the procyclical bias that characterises fiscal policymaking that
induces extra variation, especially so in government revenues.

We may then expect our fiscal measure to coincide with some episodes of fiscal laxness
or retrenchment. We consider the budget to undergo a strong expansion (contraction)
when the cyclically adjusted primary balance falls (increases) by at least 2 percentage
points of GDP in one year, or at least 1.5 percentage points on average in the last two
years. This is the measure proposed by Alesina and Ardagna (1998). In Table 5.5, we
gather those fiscal years in which a strong expansion or adjustment has occurred in our
dataset (see Afonso, 2006).

At first sight, the correspondence is rather close. Comparing the changes in Figure 5.5
(bottom left panel) to the years in Table 5.5, we detect all events that the Alesina-Ardagna
measure also suggests. For example, we find the budgetary cost of Reunification on
German public finances to have been large. The Maastricht rules have also led to
considerable fiscal retrenchment in France and Spain. There are a few events in
Portuguese fiscal policy over the eighties that we do not date exactly. But we do find a
switch between contraction and expansion starting in 1982-83. The Alesina-Ardagna
measure does not pick up all expansions and contractions that we find, however. Some of
these episodes correspond to well known changes in the fiscal stance (e.g. the ‘Mitterand’
budgets in France 1981). Another major expansion in France in 1992 follows upon a
string of expansionary budgets. Spain equally undergoes major expansions in the early
eighties and nineties (1981 and 1993 respectively). Fiscal policy is also lax in Portugal
(1990). Prolonged contractions occur over the eighties in France, Germany and Spain too.

Table 5.5 Large Fiscal Expansions and Contractions

Source: Adapted from Afonso (2006), following the measure used by Alesina and Ardagna (1998).

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