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4.

Budget Balances Decomposed: Tracking Fiscal Policy in Austria

Peter Brandner, Leopold Diebalek, and Walpurga Kohler-Toglhofer*

4.1 Introduction and Motivation

The Maastricht Treaty and the Stability and Growth Pact (SGP) stipulate that budget
balances in EU countries should be balanced over the business cycle, since this would
allow automatic stabilisers to work properly in cushioning cyclical fluctuations and to
create some room for discretionary policy. Hence, in order to act in accordance with the
intention of the SGP, governments should avoid pro-cyclical policies in recessions and
strive for budgetary consolidation during economic booms; in other words, governments
should behave counter-cyclically and react symmetrically to output fluctuations. This
“ideal” notwithstanding, there is some evidence that fiscal policy behaved more pro-
cyclically than counter-cyclically in the past decades. Thus the question arises to which
extent a fiscal policy regime change is or would have been necessary in order for
governments to comply with the spirit of the European fiscal rules.

In order to analyse this issue for a country - as we do for Austria in this chapter - one has
to assess whether discretionary fiscal policy has actually offset or reinforced the operation
of automatic fiscal stabilisers, whether there have been significant transitory variations in
the fiscal position unrelated to business cycle fluctuations, and what the behaviour of the
underlying (“core”) fiscal position over time has been. The variability of the latter reflects
discretionary measures not related to the cycle, such as permanent consolidation
measures, measures aiming at distributional and allocative/structural goals or effects of
macroeconomic shocks, demographic changes, etc.

The economic cycle affects a government’s fiscal position - this is all but new.
Correcting budget balances for the effects of the business cycle in general gives a better
measure of the policy-related part of the budget and reduces the simultaneity bias that
may arise as budgets and economic growth interact. The conventional approach relies on
adjusting the budget balance for the impact of the automatic stabilisers, i.e. decomposing
the budget balance into two components: the cyclically adjusted balance and the
automatic stabiliser component (or cyclical component). Adjusting the budget balance for
the impact of the automatic stabilisers is only appropriate, for example, for predicting the
room for discretionary stabilisation policy measures in an economic slowdown, given a
threshold for the general government deficit (since in this case the cyclical component
should indeed be limited to effects of the automatic stabilisers). If, however, the aim is to
analyse the policy behaviour related to macroeconomic developments, the adjustment

The views expressed herein are those of the authors and should not be attributed to the Federal
Ministry of Finance, Austria and the Oesterreichische Nationalbank. We are grateful to Jonas Fischer
for helpful comments.

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