The overall situation seems less dramatic in Portugal, as revenue changes have been
supported by equivalent spending decisions.96 For Spain, the moderate decline in tax
revenues in 2001 and 2002 was not entirely matched with spending cuts, leading to a
slight deterioration of the structural indicator. The expansionary measures taken in 2004
have led to a breach of a balanced structural budget for the first time since 1995.
Unsurprisingly, the expansion of fiscal policies in all countries reflects itself in rising debt
ratios in recent years (see Appendix 5.B).
How useful is our indicator for assessing budgetary reform? We have argued above that
aggregate spending or revenue measures contribute to long-term growth. Its contribution
may perhaps be small relative to productivity rises in the private sector, and part of the
effect could be swamped due to procyclical policies that induce macroeconomic
fluctuations (and its consequent negative effects on growth). We do not believe this is the
final word on the contribution of fiscal policy. A more detailed analysis of different
spending/tax items could shed light on their specific growth enhancing effects.
Some Sensitivity Analysis
The results might be influenced by some particular parameter value that we have drawn
from the OECD (Girouard and André, 2005) in order to distinguish business cycle and
fiscal demand shocks. There are various reasons for considering these aggregate
elasticities with some caution.
First, elasticities are assumed to be time-invariant. These are not representative of the tax
and spending structures that have prevailed in historical samples, however. In some
countries, the expansion of the welfare state has led to gradually larger tax bases and
dramatic changes in tax systems (Portugal and Spain). But even in France and Germany,
time-variation cannot be neglected. Budget elasticities tend to move over the business
cycle as well (Bouthevillain et al., 2001). Changes in elasticities also throw up a more
subtle difficulty in the interpretation of the fiscal shocks that we have already discussed in
section 5.4. On the revenue side, discrete policy changes involve decisions on the ratio of
average to marginal tax rates and the breadth of tax bases rather than on total amounts.97
Only if changes in total revenue amounts coincide with these decisions, do we identify
correctly shocks on the revenue side of the budget. Second, given the difficulties in
identifying all channels through which changes in interest rates and inflation may
impinge on various revenues and spending categories, the OECD simply abstains from
adjusting interest payments for cyclical variation and assumes the net effect of inflation to
be zero.98 This only reinforces the argument in favour of our economic approach in which
we specify a role for long-term and business cycle fluctuations. However, our use of the
OECD numbers can be argued to be inconsistent as these have been derived under these
methods. Finally, auxiliary assumptions on the various parts of the calculation of budget
elasticities may cumulate into quite some uncertainty in the final estimates of elasticity.
96
97
98
One should notice that several one-off measures mask the true deterioration in the Portuguese or the
Spanish budget in recent years. Under the revised Pact, the deficit net of one-off and temporary
measures is considered. Our procedure does not necessarily consider the effects of such measures to
be nil.
Similar arguments can be put forward for various expenditure items.
Eschenbach and Schuknecht (2004) argue that government revenues and expenditures are also
affected by asset prices changes in ways not accounted for by standard cyclical-adjustment methods.
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