Table 7.5
Effects on Budget as a % of GDP of a 1% of GDP Impulse for One Year
|
Consumption |
Investment |
Exports |
Average | |
|
France |
0.46 |
0.14 |
0.15 |
0.31 |
|
Germany |
0.58 |
0.27 |
0.31 |
0.45 |
|
Italy |
0.47 |
0.18 |
0.20 |
0.28 |
|
UK |
0.36 |
0.18 |
0.20 |
0.27 |
|
Spain |
0.59 |
0.24 |
0.28 |
0.42 |
|
Euro Area_____ |
__________0.51________ |
0.19________ |
0.22 |
0.34 |
Notes: UK in EMU. Interest rates fixed for the first year. No fiscal feedbacks for the first year. The ECB
uses a two-pillar strategy, the exchange rate and the long rate are forward looking. Budget effects from
shocks are rescaled to give the impacts of a 1% change in GDP.
Table 7.6 records the rescaled impact of the shocks on budget deficits, so that we can see
the tax richness of each shock when GDP changes by 1% as a result. We utilise these
estimates in the analysis of uncertainty over the budget deficit, and we attribute the
probabilities from Barrell and Hurst (2003) to each source of shocks in order to produce
an average effect. Our analysis suggests that the impact of the cycle on the budget should
be closer to 0.45 than the 0.50 used above and in other studies. But if we are clear on the
source of the shocks that have driven the output gap then we can be more accurate in our
assessment of the cyclically adjusted budget position.
Table 7.6 Effects on Budget as a % of GDP when GDP Changes by 1% as a Result
of Shocks
|
Consumption |
Investment |
Exports |
Average | |
|
France |
0.67 |
0.23 |
0.22 |
0.45 |
|
Germany |
0.66 |
0.35 |
0.35 |
0.51 |
|
Italy |
0.79 |
0.35 |
0.34 |
0.48 |
|
UK |
0.57 |
0.30 |
0.30 |
0.42 |
|
Spain |
0.74 |
0.33 |
0.32 |
0.52 |
|
Euro Area_____ |
_________0.73________ |
0.29________ |
0.29 |
0.46 |
Notes: UK in EMU. Interest rates fixed for the first year. No fiscal feedbacks for the first year. The ECB
uses a two-pillar strategy. The exchange rate and the long rate are forward looking.
If receipts have different sensitivities to the output gap, then the nature of the shock
facing the economy will determine whether the downturn is budget rich or not. Given the
frequency of different types of shocks in the 1990s to the five economies we look at, we
can say that the average adjustment for demand shocks should be 0.52 for Spain, 0.51 for
Germany, 0.48 for Italy, 0.45 for France and 0.42 for the small government UK. We can
see that if shocks are from exports or from investment then the impacts on the deficit are
noticeably smaller than the multipliers associated with consumption shocks, with an
average impact of 0.33 for investment shocks in the large Euro Area countries and 0.32
for export shocks in the same group. Consumption shocks have more impact on tax
revenues, and the average impact is 0.66 for France and Germany, and 0.75 for Italy and
Spain. Hence we need to look at the source of demand shocks in order to evaluate the
cyclical adjustment that would be appropriate in a given situation. This parameter
uncertainty increases the uncertainty bounds involved in evaluating deficits, but it may
not be an insurmountable problem to decide whether a downturn in demand is driven by
domestic or by foreign factors.
202