Fiscal policy in the OECD: Measurement and Cyclical Adjustments
by
Henrik Braconier National Institute of Economic Research
Box 3116 SE-103 62 Stockholm
Sweden Email: [email protected]
and Steinar Holden
Department of Economics University of Oslo Box 1095 Blindern
0317 Oslo Email: [email protected]
Homepage: http://folk.uio.no/~sholden/
First version: 29 September 2001 This version 15 May 2004 NB: Preliminary version
Errors may occur Abstract In this paper we suggest a new fiscal indicator, based on a decomposition of the change in the budget balance into discretionary changes (the effect of changes in fiscal policy) and induced changes (the effect of changes in the economy). In our indicator, adjustments are linked directly to the main tax bases, in contrast to other indicators where adjustments usually are linked to the GDP or to the rate of unemployment. This difference involves higher accuracy when tax bases evolve differently than do GDP and unemployment. We calculate our indicator for a number of OECD countries, and compare with existing indicators. Furthermore, we measure the cyclicality of fiscal policy based on our indicator, and explore to what extent fiscal policy can be explained by economic and institutional/political variables. We would like to thank Alberto Alesina, Alan Auerbach, Olivier Blanchard, Peter Brandner, Ådne Cappelen, Paul van den Noord, and Fredrik Wulfsberg for useful comments and discussion. The paper draws heavily upon a project financed by the Nordic Council of Ministers and the National Institute of Economic Research (Sweden), cf Braconier and Holden (1999). We are grateful for the comments and suggestions we received from a number of scholars, as well as the financing from the Nordic Council of Ministers and the National Institute of Economic Research, in relation to that project. Steinar Holden is grateful for the hospitality of National Bureau of Economic Research, where part of the paper is written. Malin Hübner is thanked for excellent research assistance. JEL Codes: E6, H6 Keywords: fiscal policy, fiscal indicators, budget indicators
1
1. Introduction
The cyclical behaviour of fiscal policy over the business cycle has been a contentious issue
among generations of economists. The traditional Keynesian view has been that fiscal policy
should be countercyclical, so that the budget is used actively to stabilise the economy. In
contrast, the "German" view (as presented by Giavazzi and Pagan, 1990) held that fiscal
retrenchment is a premise for an expansion - by absorbing a smaller share of GDP, the public
sector makes room for the private sector to expand. From a different perspective, the tax-
smoothing models following Barro (1979) suggest that fiscal policy should be kept neutral
over the business cycle. More recent theories have introduced various arguments of more
political nature. Talvi and Vegh (2000) argue that governments that face large, anticipated
fluctuations in the tax base will find it optimal to run procyclical fiscal policy, to avoid large
budget surpluses creating a pressure to increase public spending. Tornell and Lane (1999)
show that a situation where multiple political power blocs compete for a share in fiscal
revenues may lead to an outcome where spending can grow more than proportionally relative
to an increase in income. Persson and Tabellini (2000) discuss how the electoral system may
affect the fiscal policy, in particular the size of government spending, but also how fiscal
policy varies over the cycle.
A key problem in the empirical literature on fiscal policy, as well as in the evaluation
and policy-formulation of fiscal policy, concerns the measurement of the actual policy. In
particular, the budget balance is affected by the cyclical situation of the economy, so it is
important to distinguish between the changes in the budget balance that arise due to changes
in the economy (induced changes), and those arising from changes in policy (discretionary
changes). To overcome this problem, international organisations like the OECD, the IMF and
the EU Commission, as well as national governments, regularly publish cyclically adjusted
budget balances which are used in the assessment of fiscal policy issues. Academic
researchers either use these indicators, or they develop other indicators for the problem at
hand.
In this paper we propose a new fiscal indicator that distinguish between induced and
discretionary changes in fiscal policy, and we apply this indicator in a study of the cyclicality
of the fiscal policy.1 Our motivation for suggesting yet another fiscal indicator lies in our view
1 The indicator is based on the indicator proposed in Braconier and Holden (1999). Ilmakunnas (1999) and Brandner, Frisch and Haut (2001) have applied closely related measures, based on our work in Braconier and Holden (1999).
2
that existing indicators have important weaknesses. Most other indicators are constructed to
be used for several purposes, and as emphasised by Blanchard (1993), this involves the cost
that the indicator may be less suited for each of the purposes.2
The most important weakness of other indicators is that they are generally based on
cyclical adjustment attached to movements in the GDP or in the rate of unemployment.
However, the budget balance is mainly affected by movements in large tax bases, and is not
directly linked to the GDP or the rate of unemployment. Thus, these indicators are misleading
when tax bases evolve differently than do GDP or unemployment. In the indicator suggested
below, adjustments are linked directly to the main tax bases. This difference is especially
important when the economy is hit by large shocks, because in this case there may be an
important difference in the timing between the effect on GDP and the effect on various tax
bases.
Compared to the OECD structural budget balance, which is the most widely used
fiscal indicator, another key difference is related to the aim of the indicator. The OECD
structural budget balance is based on a cyclical adjustment of the budget balance, implying a
decomposition into cyclical and non-cyclical changes. In contrast, we distinguish between
effects of changes in the economy (without any distinction between cyclical and non-cyclical)
and changes in policy. Thus, the OECD indicator does not distinguish between policy and the
effects of non-cyclical changes in the economy. This feature has the merit that it provides an
indicator for the cyclically adjusted budget balance, but it also involves several problems.
First, as pointed out by Blanchard (1993), the distinction between cyclical and non-
cyclical changes is highly controversial and uncertain, as is well illustrated by the occasional
large revisions of the OECD indicator several years later, when there is a shift in the estimate
of potential output (eg Japan in the 1990s). More importantly for our purposes, it also
involves inaccuracy in the measure of the change in fiscal policy. One example of this is that
a positive structural change in the economy will reduce the cyclical adjustment, and thus be
measured as a tightening of fiscal policy. A second example is related to the fact that net
interest payments are treated as non-cyclical by the OECD. Thus, the OECD indicator will
interpret a reduction in net interest payments as a tightening of fiscal policy, even if it is
arising from a decrease in nominal interest rates associated with lower inflation (like in Italy
in the late 1990s), so that the change is purely nominal, with no direct real effects.
2 Thus, when we in the following talk about weaknesses of other indicators, we think about weaknesses related to the specific purpose of our study; it is not an overall evaluation of the indicators on the basis of all the different applications.
3
While we argue that our indicator provides a more accurate measure of fiscal policy
changes than most other existing indicators, we make no claim for perfect accuracy. Ideally,
one might want a measure for the effects on the budget balance of new rules and decisions.
However, we base our indicator on internationally available and comparable data, where this
is not possible. Instead, we define unchanged fiscal policy as a specific evolution of tax
revenues and public expenditure: unchanged fiscal policy is associated with tax revenues
increasing in proportion with the tax bases, public expenditure increasing in proportion with
trend GDP, and expenditure on unemployment benefits changing in proportion with the rate
of unemployment. Thus, we measure a tightening of fiscal policy if tax revenues increase
relatively more than the tax bases, if public expenditure increases relatively less than trend
GDP, or if unemployment benefits increase relatively less than the rate of unemployment.
The definition of unchanged policy implied by our indicator must be viewed in
relation to the use of the indicator. In analyses over longer horizons, a key issue of interest is
how the budget balance evolves under constant rules, often with emphasis on demographical
changes (eg generational accounting, or Auerbach, 1999). In such analyses, our definition of
constant fiscal policy would be meaningless. Our indicator is meant to measure changes in
fiscal policy in the short run, where the quantitative importance of structural changes is
smaller. Furthermore, in many cases our definition of unchanged policy may be viewed as a
transparent and reasonable approximation. For example, under a progressive income tax
system, income growth under constant rules will higher average taxes. However, one could
also argue that unchanged policy should be defined as adjusting the tax system to compensate
for any non-proportionality. As a second example: if one is interested in the short run effect
on the economy of an increase in public expenditure above the trend rate of GDP, it may not
matter whether the increase is a consequence of new decisions, or an implication of existing
programs.
We apply our indicator in a study of the cyclicality of fiscal policy. However, we also
believe that the indicator may prove useful in other applications. Recent years, there has been
a renewed interest among economists regarding the effect of fiscal adjustments. Some
scholars have studied the effect of fiscal adjustments on the economy (eg Bowitz et al, 1993,
Giavazzi and Pagano, 1990, Alesina and Ardagna, 1998, and Blanchard and Perotti, 1999).
Others have focussed on whether the fiscal adjustments themselves are temporary or long-
lasting (eg Alesina and Perotti, 1995). Clearly, for both these purposes the reliability of the
results depends on the accuracy of the indicator that is used. It is our intention to make the
calculated indicators available for others at the web.
4
Our indicator may also be of use in policy formulation and evaluation. In practical
situation it is often difficult to see the overall discretionary change in policy, because the
budget balance is affected by many different changes, both in the economy and in policy.
Thus, for a government that is concerned about the evolution of the budget balance, the
indicator provides information about the direction in which fiscal policy is heading. For
example, in a strong upswing of the economy, there is a risk that fiscal policy becomes too
lax, because an expansionary change in the fiscal policy is "hidden" by the increase in tax
revenues. We also decompose the discretionary change into separate components related to
revenues and expenditures, which sheds further light on changes in the fiscal policy.
The paper is organised as follows. In section 2, we present our fiscal indicator, based
on a decomposition of the change in the budget balance in the induced and the discretionary
change. In section 3, we show the results when the indicator is calculated for a number of
OECD countries, for the period 1980-1999. In section 4 we present a cross-country study of
the determinants of fiscal policy on the basis of our indicator. Some concluding remarks are
provided in section 5. Appendix A contains data definitions and appendix B the diagrams
describing the indicator.
2. A new fiscal indicator
In this section we suggest a new fiscal indicator, based on a decomposition of the change in
the budget balance into discretionary and induced changes.
• Discretionary changes are the effect of changes in the fiscal policy.
• Induced changes arise as a consequence of changes in the economy; these are the
changes that would take place even if fiscal policy were constant.
This decomposition requires a definition of unchanged fiscal policy regarding each of the
three main components of the budget balance, i.e. the revenues, the expenditures and the net
interest payments.
Concerning revenues, we assume that unchanged fiscal policy implies that tax
revenues are proportional to their respective tax bases. This assumption can be interpreted in
two different ways, as an approximation to the actual, non-proportional tax system, or as a
definition of unchanged tax policy. Regarding the former interpretation, it is clear that the
accuracy of the approximation will depend on the specific tax base in question. Some taxes
5
are essentially linear, whereas others, like income taxes, have important progressive elements.
However, it should be noted that even if a tax system is progressive as viewed from the
individual taxpayer, this does not necessarily imply non-proportionality in the relationship
between the size of the tax base and tax revenues (Rødseth, 1984, Giorno et al, 1995). For
example, income taxes revenues may increase due to an increase in the number of income
earners or due to higher income for the existing income earners. In the latter alternative, tax
revenues increase more than proportionally with the tax base if the tax system is progressive.
On the other hand, if tax revenues increase due to new income earners, tax revenues may
increase less than proportionally with the tax base if the new income earners have below
average income. This example also illustrates that any estimated tax elasticity is likely to be
situation specific, as the importance of various causes of rising tax revenues presumably
changes over time.
An alternative interpretation of the proportionality assumption is that this is reasonable
and transparent definition of unchanged policy. For example, under a progressive tax system,
keeping the tax rates constant implies that the average tax rate increases if income grows
(sometimes referred to as "bracket creep"). In this case it could be argued that unchanged
policy more appropriately should be interpreted as adjusting tax rates for the income growth,
so that the average tax rate was constant. More generally, one could argue that unchanged
policy should be defined as adjusting for the effects of changes in the economy of any non-
proportionality in the tax system.
To specify the definitions above more formally, the induced change in the tax
revenues from tax base i in year t can be defined and calculated as
(1) ∆TIi,t ≡ Ti,t-1 (Zi,t /Zi,t-1 -1).
where Ti,t is tax revenues and Zi,t is the tax base.3
In the calculations, we distinguish between five different tax types.4 Thus, unchanged
policy is defined as
• Direct taxes on households (TD) are proportional to pre-tax household income (Hinc).
• Direct taxes on the business sector (TB) are proportional to business income (Binc).
• Social security contributions (TS) are proportional to the wage bill (WL).
3 We use the difference operator ∆ to emphasise that this is a change, although we do not define a corresponding levels variable TI
i,t.
6
• Indirect taxes (TI) are proportional to private consumption (C).
• Other revenues (TO) are proportional to GDP (Y).
For the first four groups, tax revenues are thus attached to a variable that is fairly close to the
actual tax base. The fifth group, other revenues, is quantitatively less important,
Table 1 about here
The induced change in total tax revenues is thus
(2) ∆TIt ≡ TH,t-1 (Hinct/Hinct-1 –1)+ TB,t-1 (Binct/Binct-1 –1)+ T S,t-1(WLt/WLt-1 –1)
+ TI,t-1(Ct/Ct-1 –1) + TO,t-1(Yt/Yt-1-1)
where all variables are measured in nominal terms. The induced change in tax revenue is thus
the weighted growth in the tax bases, where the weight is given by the size of the tax base.
The induced change measures the effect on tax revenues arising from growth in the tax bases.
The discretionary change in revenues is defined as a residual, by
(3) ∆TDt ≡ ∆Tt - ∆TI
t,
or as a ratio to GDP
(4) ∆tDt ≡ ∆TD
t/Yt
From (3) and (4) we see that there is a discretionary increase in taxes if tax revenues increase
above the growth in the tax bases.
For expenditures, excluding capital and interest spending, unchanged policy is defined as
• Public expenditures (excluding unemployment benefits) are proportional to trend GDP.
• Unemployment benefits, as a share of trend GDP, are proportional to the rate of
unemployment.
This definition implies that unchanged policy is associated with government expenditure
being a constant share of GDP, which seems a reasonable benchmark.
4 The first four are essentially the same as those used by the OECD, in their calculation of the structural budget
7
Table 2 about here
For public expenditures excluding unemployment benefits, the induced change in public
expenditure, excluding unemployment benefits, can be defined and calculated as
(5) ∆GIO,t ≡ GO,t-1 ( YT
t /YTt-1 – 1)
where GOt is public expenditures excluding unemployment benefits, and YTt is trend GDP
(calculated as trend real GDP times the actual GDP deflator).
For expenditures on unemployment benefits, the induced change in expenditure on
unemployment benefits can be defined and calculated as
(6) ∆GIU,t ≡ GU,t-1 [(Ut /Ut-1)( YT
t /YTt-1) – 1]
where Ut is the rate of unemployment, and GU,t is expenditure on unemployment benefits.
(5) and (6) associate unchanged policy with benefits relative to the rate of unemployment
being constant as share of trend GDP. Total induced change in government expenditure is
(7) ∆GIt ≡ ∆GI
O,t + ∆GIU,t
Total discretionary change in government expenditure is defined as a residual, by
(8) ∆GDt ≡ ∆Gt – ∆GI
t
or, as ratio to GDP,
(9) ∆gDt ≡ ∆Gt/Yt
The discretionary change in the budget balance is defined as the difference between the
discretionary change in revenues and expenditures, ie
(10) ∆bDt ≡ ∆tD
t - ∆gDt
balance.
8
This definition implies that the entire change in net interest payments is interpreted as
induced by changes in the economy. Clearly, the changes in the size of public debt are the
result of past fiscal policy, and the interest rate may also be affected by past and current fiscal
policy. However, as most changes in the economy to some extent are affected by past fiscal
policy, including effects of past policy makes it difficult to discern between induced and
discretionary changes. Thus, the change in net interest payments is viewed as an induced
change because it is largely unrelated to current fiscal policy.5
Let us briefly make a few comments on its interpretation. First, note that the
discretionary change in fiscal policy is measured at the time that actual expenditures and
revenues change, and not when the decisions are taken. For example, if parliament one year
decides to undertake a reform involving much higher public expenditures in later years, this
will be measured as discretionary changes when the expenditures increase, and not when the
decision is taken.
Secondly, the indicator makes no explicit allowance for transfer programs. Thus, if
expenditure on pensions increases relative to GDP, our indicator will interpret this as a change
in policy, even if the cause is a larger number of retirees, and not higher pensions for each
retiree, so that a change in the economy would be a more appropriate interpretation. However,
our choice is restricted by data availability, as we want to use data from international
databases. To shed light on the quantitative importance of this, it is useful with a specific
example. Based on projections by the Congressional Budget Office, Auerbach (1999) reports
that Social Security, Medicare and Medicaid, the three largest federal entitlement programs in
the US, are projected to increase by 1.7 percent measured as share of GDP over the decade
1999-2009. This increase is clearly of great importance for the analysis over long run
changes, yet the annual average increase is only 0.17 so the omission is of much less
importance for a short run indicator.
3. Constructing and comparing fiscal indicators
In this section we present the decomposition of changes in the primary balance into
discretionary and induced changes in order to construct our discretionary change indicator
(DCI) of fiscal policy. All data is taken from the OECD Economic Outlook 73 (2003).6 We
5 To the extent that there is public debt with a floating interest rate, current fiscal policy may affect interest rate payments by affecting the short-term interest rate. Our indicator does not capture this. 6 The only exception is figures on the structural budget balance for 1980 to 1982, which have been taken from the OECD Economic Outlook 59 (1996).
9
have assumed that the trend growth rate is equal to the average growth rate for the preceding
10 years.7 The decompositions for a number of OECD economies are shown in the diagrams
in the Appendix. In figure 1, we display the evolution of the weighted tax bases relative to the
GDP for the countries in our sample. For most countries this ratio is fairly stable over time.
However, for some countries there have been large fluctuations, which suggest that fiscal
indicators based on adjusted to GDP will prove inaccurate.
Figure 1 about here
3.1 The OECD structural budget balance, (structural change index, SCI) The OECD structural budget balance, SCI, is calculated in three steps (cf van den Noord,
2000). First, one calculates the potential output of the economy Y*, based on a production
function approach and estimates of the equilibrium rate of unemployment. The structural
components of the budget balance, Ti* and G*, are then calculated from actual tax revenues
and government expenditures, adjusted proportionally according to the ratio of potential
output to actual output and the assumed built-in elasticities.
(11) βα
=
=
YY
GGi
YY
TT
i
i****
;
where αi and β are the respective elasticities.8 Finally, the cyclical components of the budget
balance are calculated by subtracting the estimated structural components of tax revenues and
government expenditure from their actual levels.
(12) ∗
+−=∑
Y
XGTb i
i**
*
(13) *** bbb −=
where b**, b* and b are cyclical component of budget balance, the structural component of
budget balance (ratio to potential output), and the actual budget balance (ratio to actual
7 This choice is motivated from the desire to have a benchmark with little fluctuation from year to year, and with little subsequent revision due to revised data, but nevertheless with some flexibility as to changes in trend growth. 8 Four different categories of taxes are distinguished, with different elasticities (see Table A.1) the corporate tax, the personal income tax, the social security tax and the indirect tax, while concerning government expenditure, the cyclical variation reflects unemployment-related spending only.
10
output), respectively, and X non-tax revenues minus interest on public debt minus net capital
outlays.
As mentioned in the introduction, the main differences between our indicator and the
SCI is that (i) the SCI attaches the cyclical adjustment to the output gap, while our indicator
attaches the adjustment directly to the tax bases, and (ii) the SCI distinguish between cyclical
and non-cyclical components, while our indicator distinguish between induced and
discretionary (policy) changes; thus the SCI does not distinguish between policy and non-
cyclical changes. The SCI has the merit that is provides a levels indicator for the cyclically
adjusted budget balance, which our indicator does not. However, when the SCI is used as a
measure of changes in fiscal policy, as is sometimes done, this involves inaccuracies that may
be substantial. The SCI includes net interest payments, which, as pointed out by Blanchard
(1993) misleadingly implies that a change in the interest rate is measured as a change in fiscal
policy.
A further difference is that the DCI is based on tax revenues being proportional to
their respective tax bases (ie unit elasticity), while the SCI is based on estimated elasticities.
This difference involves three issues. First, as argued above, assuming unit elasticity involves
higher transparency, and may not be a bad approximation. Secondly, non-proportionality may
be an artefact of attaching the adjustment to GDP and not to the tax bases. For indirect taxes,
this is indeed the case, because here the SCI is also based on indirect taxes being proportional
to private consumption (while the relationship between private consumption and GDP is
estimated, cf van den Noord, 2000). Thirdly, the estimates are likely to be subject to large
sampling errors, and may also be outdated if there are changes in the tax system. For example,
the correlation between consumption and output must depend on the sources of cyclical
fluctuations. If a shock to consumption (eg. due to credit liberalization) leads to a booming
economy, consumption is likely to vary more over the cycle than if the source is variation in
exports. As the source of fluctuation may change over time, there is also reason to believe that
the estimated elasticities will be unstable over time.
3.2 Comparing Fiscal Indicators Fiscal indicators for individual years are presented in Appendix B. In panel a) for each
country, we present the different parts of our fiscal indicator (DCI). In panel b), our indicator
is compared to the OECDs SCI indicator. In panel c), we show changes in three
11
macroeconomic variables, the rate of unemployment, real GDP, and real weighted tax bases,
that are important to understand and evaluate the differences between the indicators.
The most important reason for the different results is the large differences in the
growth of tax bases and GDP growth that has taken place in some cases. However, there are
also some episodes where large changes in net interest payments in relation to GDP as well as
differences between growth in potential GDP and trend GDP have significant impact on the
fiscal indicators.
The first episode relates to Canada between 1993 and 1995. During these years, the
DCI indicates that fiscal policy was tight or very tight, amounting to a fiscal contraction of 6
percent of GDP in total.9 In comparison, the SCI shows a neutral or tight fiscal policy for the
same period amounting to 2 percent of GDP. From 1993 to 1995, real GDP on average grew
with 2.9 percent, while the tax bases on average grew with just 1.5 percent. The SCI adjusted
for the large growth in GDP, while the DCI took into consideration that tax bases grew more
slowly, thus attributing a larger share of the improvement of the budget balance to a
discretionary tightening of fiscal policy.
Secondly, we consider Sweden during the period 1993 to 1995, where the DCI shows
a much tighter fiscal policy (neutral, neutral, very tight) than the SCI (very loose, loose, very
tight). Once again, real GDP grows much faster than the tax bases during 1994 and 1995 (3.9
percent vs. 2.2 percent), which is one important source of differences between the indicators.
In the Swedish case, it may be instructive to point out why there is such a large discrepancy
between growth in tax bases and GDP. During the crisis in the early 1990s, the krona
depreciated strongly, which lead to an export boom where exports increased 36.7 percent in
real terms between 1992 and 1995. This increase, in turn, meant that exports as a share of
GDP surged from 31.2 percent to 40.5 percent and was therefore a central factor behind GDP
growth. This export-led growth did, however, have a much smaller effect on tax bases, as
income before tax and consumption continued to grow relatively slowly. A similar
explanation applies to Finland 1993 and 1994, where DCI and SCI differs in the same
manner and for the same reasons as in the Swedish case.
In the DCI, trend GDP growth is the benchmark for growth in public expenditure,
whereas growth in potential GDP is the benchmark for the SCI. For most countries this
9 Following Alesina and Perotti (1995), we define fiscal stance as neutral, tight and very tight when the fiscal indicator is below 0.005, between 0.005 and 0.015, and above 0.015 respectively. The same definitions (with the opposite sign) apply to loose fiscal policies. This implies that the classification of the fiscal policy is based on the change in the budget balance. Alternatively, the fiscal policy might be classified on the basis of the level of the budget balance. See Braconier and Holden (1999) for a discussion of the merits of these two alternatives.
12
difference does not affect the results, as growth in trend GDP and potential GDP are quite
similar. In the case of Japan our estimate of the trend growth rate is consistently higher than
the OECD estimate of the growth in potential output from 1990 and onwards, as the potential
output is more flexible and thus responds more rapidly to the lower growth in output. This
means that fiscal policy, through expenditures, according to the SCI is consistently more
expansionary than the DCI indicator suggests.
In this case, the difference in construction of the two indicators is related to different
aims. The main aim of the OECD indicator is to adjust for cyclical effects so as to uncover the
underlying structural fiscal position. If growth of potential output is reduced, the appropriate
fiscal policy response in general is to reduce growth in public expenditure. The failure to do
so in Japan is measured as expansionary policy according to the SCI. In contrast, the DCI is
constructed to measure changes in fiscal policy, and thus relates public expenditure to past
output growth (trend growth), and not to an estimate of contemporaneous potential output. As
public expenditure has grown more or less at the trend growth rate, and taxes have grown
along with the tax bases, the DCI indicates that fiscal policy has been fairly neutral. This may
or may not have been the appropriate policy, but the DCI does not aim at a comparison with
the appropriate policy.
It should however be noted that part of the difference between trend growth and
growth in potential GDP is a statistical artifact as the OECD has made downward revisions of
growth in potential GDP from 1989 and onwards between 1997 and 2000 (as shown by EO61
vs EO73). Consequently, the OECD’s interpretation of fiscal stance during the 1990s,
evaluated in 1997, was that it was tighter than their estimate in 2003. Especially, the forecast
of potential GDP in 1998, as estimated in 1997, is very close to the trend growth rate.
Consequently, even if actual trend growth had slowed down, the OECD method would also
only acknowledge this slowdown ex post.
The mirror image of the Japanese experience is the development in the US, where potential
GDP growth during the 1990s has been revised upwards. Consequently, fiscal policy since
1990 has been tighter according to SCI than to DCI. In most cases however, the difference is
quite small.
13
4. Explaining fiscal policy
4.1 The cyclical behaviour of fiscal policy In this section we explore the cyclical behaviour of fiscal policy. We estimate country-by-
country regressions of the form
(14) , ,Dt J t tJ gap J B T Gα β ε∆ = + + =
where ∆JDt is the discretionary change in the budget balance ∆BD, taxes ∆TD, or government
expenditure ∆GD, in year t, and gap is the growth rate of GDP. The results for all the studied
countries are presented in Table 4 (we also include a regression on the growth in GDP).
Table 4 about here
Table 4 provides a crude measure of the degree of discretionary countercyclical fiscal policy
undertaken by the various countries. Regressing the discretionary change in the budget
balance on the output gap and growth in GDP indicates whether fiscal policy mainly has been
pro- or countercyclical, where the latter means a tightening of fiscal policy when the output
gap is low and growth is high. The results are broadly similar using growth in GDP and the
output gap as explanatory variables. As the latter measure is better correlated with the
usefulness of stabilization policies, we focus on this in the analysis. For the whole period
1971-2002, around half the countries pursued countercyclical policies and the other half
pursued procyclical policies. On average, the procyclical policies where more pronounced,
which is illustrated by the fact that only Australia, Japan and the US pursued a significantly
countercyclical policy. It is also evident from panel 4a that the countries that pursued
procyclical policies are continental European economies or, more precisely, the old core
members of the Euro area. One might expect that some of the fiscal contractions may be due
to the fact that these economies tightened their fiscal stance as a result of the Maastricht
criteria and the Stability and Growth Pact (see e.g. Gali and Perotti, 2003). However, panel 4b
do not support this hypothesis, as the procyclical nature of fiscal policy in these countries
remain more or less unchanged during the period 1991-2002. Thus, the apparent difference in
fiscal responses to economic conditions between continental Europe on one hand and the non-
European OECD-countries on the other appears to be due to other factors than EMU. It also
14
follows from table 4b that, if anything, procyclical fiscal policies have become more prevalent
since 1991 than before in our sample of OECD countries.
4.2 What explains fiscal policy? As was clearly shown in section 4.1, business cycles are not a strong or consistent factor
behind changes in fiscal policies in the OECD area. The results suggest that OECD-countries
have pursued both pro- and countercyclical fiscal policies and that these policies have
sometimes changed over time. This raises the question whether other factors may help to
explain changes in fiscal policies. Specifically we analyze whether economic, political and
institutional variables explain fiscal policies.
In this section we construct a panel of discretionary fiscal policies for the OECD
countries in order to explain fiscal policy. Apart from business cycles, we include changes in
the government’s debt position, the assumption being that fast-growing debt in the three
proceeding years makes fiscal contractions more likely. Furthermore, we add two types of
political variables; a dummy for election years and the government’s political affiliation. The
latter variable contains information on the share of portfolios in the government held by left,
Christian democrat (CD) or right-wing parties. The political variables are also interacted with
economic variables to see whether e.g. left-wing governments pursue more counter-cyclical
policies. The data on economic variables are from the OECD and the political variables are
from the Welstatemini database (2001).
Which results should one expect from such an analysis? Firstly, the theory of political
business cycles would suggest that policies should tend to become more expansionary during
election years. Possibly, one could imagine that left-wing governments would engage in more
expenditure increases while right-wing or CD governments would opt for lower taxes.
Regarding fiscal stance, left-wing governments are probably more likely to pursue
Keynesian counter-cyclical fiscal policies. Whether the overall fiscal stance differs between
left, right or CD governments is unclear. Right-wing and CD governments are likely to pursue
lower taxes and expenditures, while left wing ones would point in the opposite direction. As
the basis of our panel analysis, we respecify (14) as:
(15) 1 , ,Dit Ji J it J it J it itJ gap elect debt J B T Gα δ β γ λ ε−∆ = + + + + ∆ + =
15
where i denotes country and Jiδ is a country-specific fixed effect. The included independent
variables are the lagged output gap (gap), a dummy for election years (elect) and the change
in gross debt-to-GDP between t-3 and t. Column 1 of table 5 gives the results for the baseline
specification.
The baseline specification confirms the country-specific regressions, yielding a
negative and significant coefficient for the lagged output gap. Consequently, fiscal policies
have on average been procyclical in the studied period. The estimated effect is small however,
as a negative output gap equal to 1 percent of GDP implies a fiscal tightening equal to 0.025
percent of GDP. We find strong evidence of an election bias, where fiscal policy becomes
more expansionary in election years. The quantitative effect is significant, implying a fiscal
expansion equal to 0.7 percent of GDP. Finally, fiscal policy becomes more contractionary
when debt-to-GDP ratios rise in the three proceeding years.
In column 2 we report results where we include the number of government portfolios
held by the left, right and CD parties in the regression. On average, we do not find any
significant differences in overall fiscal stance between the political parties, but the pro-
cyclicality of fiscal policy disappears. This suggests that the government’s political shading is
related to cyclicality. To address this question further, we let the three variables (gap, elect,
∆debt) interact with the number of left-wing portfolios (column 3) and CD portfolios (column
4) in government.10 The results show that governments with strong left-wing influence tends
to pursue more counter-cyclical policies than the average government, while CD participation
in governments tends to led to more pro-cyclical fiscal policies.
Table 5 here
Turning to the components of fiscal policy, i.e. revenues and expenditures, we find a
somewhat different picture. For revenues, the election year effect (column 1) has the same
coefficient as we found in table 5, meaning that the fiscal expansions during election years
almost completely takes place through lower taxes. Furthermore, rising debt implies tax hikes.
When we focus on the political shading of governments (columns 3 and 4) we once again find
that left-leaning governments pursue more countercyclical (or less procyclical) policies.
On the expenditure side (columns 5-8), the effect of output gaps and election years are
weaker in general. Growing debt does however lead to expenditure cutbacks. The results for
10 Right-wing portfolios produced results in between left and CD portfolios.
16
expenditures indicate that left-wing governments more countercyclical policies are partly
implemented through expenditure policies (column 7). The converse is true for CD influenced
governments, which also tends to be less inclined to cut expenditures when debt grows
(column 8).
4.3 Institutional and economic aspects of the cyclicality of fiscal policies We proceed to try to explain the cross-country differences in the cyclicality of fiscal policy,
with the cross-sectional specification
(16) 1 2 , ,Ji i i iX Z J Bβ α λ λ ν= + + + = T G
where Jiβ are the set of estimated parameters from equation (14), Xi is the set of economic
explanatory variables, and Zi is the set of political explanatory variables.
Concerning economic variables, Talvi and Vegh (2000) argue that the cyclical
behaviour of fiscal policy depends on the volatility of tax bases. The argument is as follows.
Ideally, a country should try to smooth tax rates. However, full tax smoothing would imply
large budget surpluses in good times, which would induce a strong political pressure for
wasteful spending. To mitigate this problem, a country with highly volatile tax bases may
choose to reduce taxes in good times, thus reducing the budget surplus. To capture this effect,
we include the variability of growth in GDP, var(∆yit) and the variability of growth in
weighted tax bases, var(∆tbit) in the regressors Xi.
From an entirely different perspective, one could argue that countries experiencing
large cyclical fluctuations have greater benefits from pursuing a countercyclical fiscal policy
aimed at stabilising the economy. On this argument, one could include the variability in the
output gap as a regressor, var(gapit).
Concerning political variables, we include a key variable of Persson and Tabellini
(2000): MAJ, a dummy variable equal to unity if the country's electoral system utilizes a
majority or plurality rule for legislative actions, and zero other wise (in our dataset, MAJ is
equal to unity for Austrialia, Canada, New Zealand, the UK and the US, and equal to 0.94 for
France).11 Persson and Tabellini argue that proportional election systems, usually combined
11 The other key variable of Persson and Tabellini, PRES, a dummy variable equal to unity if the country has a president who is not accountable to the elected assembly, and who has some power over the fiscal policy; turns out to be a dummy for the US in our sample, and it has no predictive power.
17
with large voting districts, tend to favour large welfare spending, while majoritarian regimes
involve harder competition and thus stronger opportunistic electoral cycles. The predictions
concerning cyclicality are less clear-cut, but Persson and Tabellini (2000) find evidence
suggesting that the cyclical response of aggregate spending and budget deficits is smaller
under majoritarian regimes, which partly could be explained by larger welfare programs in
proportional systems inducing a larger automatic response of government outlays to cyclical
fluctuations.
We also include a measure of power dispersion, POLCON (political constraints),
suggested by Henisz (1999). POLCON is defined over the unit interval, and measures the
number of veto points in the political system, as well as the distribution of preferences across
and within different branches of government. A value close to unity indicates dispersed
power, which is increasing in the number of veto points and increasing in the division of
control across political parties. Henisz (1999) finds that this index is positively associated
with growth performance, which he interprets as arising from power dispersion enhancing the
security of property rights, thus improving the incentives to invest. Lane (1999) suggests that
political inertia as measured by POLCON may also contribute to more procyclical fiscal
policy, and he finds some empirical support for this idea.
The main results are displayed in Table 7. The positive and significant coefficient of
MAJ in column 2 indicates that majoritarian regimes have more procyclical budget balances
than proportional systems, ie. that majoritarian regimes pursue a more countercyclical fiscal
policy. The difference is mainly due to a different cyclicality of spending (columns 6-8),
rather than taxes (columns 4-5). However, column 3 shows that the effect of MAJ on the total
budget balance disappears when a dummy for EMU-membership is included. EMU-
membership has a strong correlation with procyclical tax policy (column 5), but no correlation
with the cyclicality of spending (column 8). Dispersion of political power, as measured by
POLCON, is associated with less procyclical budget balance, ie more procyclical fiscal
policy, consistent with the findings of Lane (1999), but the effect is never significant.
Table 7 and 8 here
There is a tendency that countries with large variability in the output gap have pursued a more
countercyclical fiscal policy, consistent with the notion that these countries have found a
greater need to use fiscal policy to stabilise the economy. On the other hand, variability in
growth in GDP or tax bases seem to have negligible impact on the cyclicality of fiscal policy.
18
19
In Table 8, similar regressions are presented for the two subperiods 1980-1991 and
1991-2001. The effect of the political variables POLCON and MAJ are fairly stable across the
two subperiods; surprisingly, the effect of EMU membership is stronger in the 1980s, while
the effect of the variability in the output gap differs between the subperiods, as there is a
strong positive effect on taxes and the budget balance in the 1990s, but not in the 1980s.
5. Concluding remarks
In this paper we have suggested a new fiscal indicator, which decomposes the change in the
budget balanced into induced and discretionary changes, where the former are caused by
changes in the economy while the latter can be interpreted as discretionary changes in fiscal
policy. While there already exist several other indicators that can be used for this purpose, we
argue that our indicator is likely to be more accurate than the existing ones. The main reason
for the higher accuracy is that our indicator attaches the cyclical adjustment directly to the tax
bases, while other indicators are based on adjustment relative to GDP or unemployment. In
years where GDP grows at a higher rate that the tax bases, adjustment based on GDP growth
will attribute a too large share of the change in the tax revenues to cyclical changes, by failing
to take into consideration that tax revenues depend on the tax bases, and not directly on GDP.
Thus, in such years an indicator based on GDP growth will be misleading, by indicating that
fiscal policy is less tight than it actually is.
We use our indicator to measure the cyclicality of fiscal policy for 18 OECD
countries. We find that countries on average are pursuing a pro-cyclical fiscal policy, by
increasing public expenditures in booms. Election years are associated with fiscal expansion
through lower taxes. A rising gross public debt relative to GDP leads to a fiscal tightening,
statistically significant but numerically small. Concerning the cyclicality of the fiscal policy,
the main distinction is between continental European countries and other countries, where
most continental European countries have pursued a much more procyclical fiscal policy than
other countries. Leftish governments tends to pursue more countercyclical policies than other
governments.
We believe that our indicator is useful also for other purposes. In policy formulation
and evaluation, the overall picture may be blurred due to the large number of changes
affecting the budget balance. Then our indicator is helpful by providing a transparent
summary measure of the direction in which fiscal policy is heading. The indicator can also be
used in economic research on other fiscal policy problems, as research on the effect of
changes in fiscal policy on the economy, and research on fiscal policy decision-making.
Table 1: Revenues as shares of GDP in 2002 COUNTRY DIRECT TAXES
HOUSEHOLDS DIRECT TAXES
BUSINESS SOCIAL SECURITY CONTRIBUTIONS
INDIRECT TAXES
OTHER REVENUES
PRIMARY REVENUES
Australia 0,12 0,04 0,00 0,14 0,04 0,34 Austria 0,12 0,02 0,17 0,15 0,04 0,50 Belgium 0,14 0,03 0,17 0,13 0.02 0.49 Canada 0,12 0,04 0,05 0,13 0.04 0.38 Denmark 0,27 0,02 0,03 0,18 0.04 0.53 Finland 0,15 0,05 0,12 0,13 0,05 0,50 France 0,09 0,02 0,18 0,15 0.05 0.50 Germany 0,10 0,01 0,18 0,12 0.03 0.44 Italy 0,11 0,03 0,13 0,15 0.03 0.44 Japan 0,05 0,03 0,11 0,08 0.01 0.29 Korea 0,04 0,03 0,04 0,14 0.02 0.29 Netherlands 0,08 0,04 0,15 0,13 0.04 0.43 New Zealand 0,15 0,05 0,02 0,13 0.01 0.36 Norway 0,12 0,09 0,10 0,14 0.08 0.53 Spain 0,07 0,03 0,13 0,11 0.02 0.37 Sweden 0,17 0,03 0,16 0,17 0.05 0.57 UK 0,13 0,03 0,07 0,14 0.01 0.38 US 0,11 0,02 0,07 0,08 0.03 0.31 Table 2: Expenditures on unemployment and total expenditures as shares of GDP 2002 COUNTRY EXPENDITURES ON UNEMPLOYMENT
BENEFITS TOTAL EXPENDITURES ON
UNEMPLOYMENT OTHER PRIMARY EXPENDITURES
Australia 0,01 0,01 0,32 Austria 0,01 0.02 0.45 Belgium* 0.02 0.04 0.40 Canada* 0.01 0.01 0.33 Denmark** 0.01 0.05 0.49 Finland 0.02 0.03 0.45 France* 0.01 0.03 0.46 Germany 0.02 0.03 0.42 Italy* 0.01 0.01 0.39 Japan 0.00 0.01 0.29 Korea 0.00 0.00 0.17 Netherlands* 0.02 0.04 0.40 New Zealand 0.01 0.02 0.32 Norway 0.01 0.01 0.44 Spain 0.02 0.02 0.32 Sweden 0.01 0.02 0.53 UK* 0.00 0.00 0.36 US 0.01 0.01 0.31 * 2001, ** 2000
20
Table 4 a: Fiscal policy and business cycles (1971-2002) Note: Figures in bold are significantly different from zero at the 10% level. Regression coefficient with respect to output gap
(standard errors in parentheses) Regression coefficient with respect to growth in
GDP (standard errors in parentheses) Country ∆BD ∆BD
Australia 0.33 (0.13) 0.33 (0.09) Austria 0.03 (0.16) -0.02 (0.11) Belgium -1.00 (0.16) -0.63 (0.28) Canada 0.07 (0.10) 0.14 (1.39) Denmark 0.07 (0.30) -0.21 (0.25) Finland -0.01 (0.11) 0.10 (0.10) France -0.16 (0.09) 0.05 (0.12) Germany -0.57 (0.17) -0.31 (0.18) Italy -0.42 (0.23) -0.38 (0.31) Japan 0.29 (0.16) -0.00 (0.13) Korea - 0.04 (0.10) Netherlands -0.45 (0.12) -0.42 (0.16) New Zealand -0.18 (0.13) 0.08 (0.13) Norway 0.14 (0.13) 0.23 (0.56) Spain - -0.16 (0.13) Sweden -0.38 (0.23) 0.06 (0.27) UK -0.05 (0.09) -0.13 (0.13) US 0.17 (0.07) 0.17 (0.07) Table 4b: Fiscal policy and business cycles (1991-2002) Regression coefficient with respect to output gap
(standard errors in parentheses) Regression coefficient with respect to growth in
GDP (standard errors in parentheses) Country ∆BD ∆BD
Australia 0.21 (0.13) 0.50 (0.12) Austria -0.20 (0.32) -0.27 (0.34) Belgium -0.69 (0.17) -0.27 (0.29) Canada -0.01 (0.23) 0.21 (0.18) Denmark 0.07 (0.33) -0.37 (0.29) Finland -0.12 (0.17) 0.36 (0.15) France -0.41 (0.12) -0.07 (0.21) Germany -0.36 (0.31) 0.04 (0.18) Italy -0.71 (0.40) -0.61 (0.39) Japan 0.30 (0.12) 0.23 (0.13) Korea - 0.04 (0.10) Netherlands -0.28 (0.43) -0.17 (0.41) New Zealand -0.20 (0.14) 0.08 (0.16) Norway 0.39 (0.36) 0.27 (1.41) Spain - 0.01 (0.18) Sweden -0.48 (0.30) 0.28 (0.31) UK 0.58 (0.24) 0.59 (0.24) US 0.18 (0.21) 0.24 (0.23) Note: Figures in bold are significantly different from zero at the 10% level.
21
Table 5: Determinants of fiscal policy Change in B
i ii iii (gov=left)
iv (gov=CD)
Constant 0.000 (0.007)
0.001 (0.005)
-0.001 (0.004)
-0.004 (0.004)
Gap -0.025*** (0.018)
-0.025 (0.017)
-0.098*** (0.029)
-0.007 (0.018)
Elect -0.007*** (0.003)
-0.008*** (0.002)
-0.008*** (0.003)
-0.009*** (0.003)
∆debt 0.013*** (0.004)
0.010** (0.004)
0.008 (0.006)
0.015** (0.007)
Left -0.000 (0.000)
Right -0.000 (0.000)
CD 0.000 (0.000)
Gap*gov 0.001*** (0.000)
-0.005*** (0.001)
Elect*gov -0.000 (0.000)
0.000 (0.000)
∆debt*gov 0.000 (0.000)
-0.000 (0.000)
Nobs 249 239 239 239 Within 0.11 0.09 0.10 0.15 Between 0.25 0.46 0.38 0.40 Overall 0.09 0.12 0.12 0.17
Note: *** significant at the 1% level, ** significant at the 5% level, * significant at the 10% level. Table 6: Determinants of fiscal policy
Change in T Change in G
i ii iii (gov=left)
iv (gov=CD)
v vi vii (gov=left)
viii (gov=CD)
Constant 0.002 (0.002)
0.006* (0.004)
0.004 (0.003)
0.003 (0.003) 0.007***
(0.002) 0.005
(0.003) 0.005* (0.003)
0.007*** (0.002)
Gap -0.010 (0.012)
-0.017 (0.013)
-0.052** (0.022)
-0.012 (0.014) 0.008
(0.012) 0.009
(0.011) 0.054*** (0.018)
-0.018* (0.011)
Elect -0.007*** (0.002)
-0.007*** (0.002)
-0.005** (0.002)
-0.008*** (0.002) 0.001
(0.002) 0.001
(0.002) 0.003* (0.002)
0.002 (0.002)
∆debt 0.036*** (0.003)
0.003 (0.003)
0.000 (0.005)
0.002 (0.005) -0.010***
(0.003) -0.007***
(0.003) -0.008** (0.004)
-0.013*** (0.004)
Left -0.000 (0.000) -0.000
(0.000)
Right -0.000 (0.000) 0.000
(0.000)
CD -0.000 (0.000) -0.000
(0.000)
Gap*gov 0.001* (0.000)
-0.001 (0.001) -0.001**
(0.000) 0.004*** (0.001)
Elect*gov -0.000 (0.000)
0.000 (0.000) -0.000
(0.000) -0.000 (0.000)
∆debt*gov 0.000 (0.000)
-0.000 (0.000) 0.000
(0.000) 0.001** (0.000)
Nobs 249 239 239 239 249 239 239 239 Within 0.08 0.08 0.12 0.10 0.11 0.06 0.11 0.13 Between 0.06 0.39 0.20 0.18 0.16 0.31 0.22 0.47 Overall 0.08 0.10 0.12 0.24 0.06 0.06 0.11 0.16
Note: *** significant at the 1% level, ** significant at the 5% level, * significant at the 10% level.
22
Table 7: Determinants of fiscal policy
i
∆BD ii
∆BD iii ∆BD
iv ∆TD
v ∆TD
vi ∆GD
vii ∆GD
viii ∆GD
Constant 0.934 (0.51)
0.977 (0.65)
1.285 (1.10)
0.555 (0.43)
0.846 (0.94)
-0.274 (-0.35)
-0.372 (-0.49)
-0.384 (-0.49)
var(∆y) -332 (-0.18)
845 (1.02)
var(∆tb) 56.3 (0.07)
-359 (-1.05)
var(gap) 133 (1.45)
129 (1.62)
56.6 (0.87)
85.6 (1.25)
26.6 (0.33)
-61.0 (-1.48)
-54.9 (-1.37)
-52.0 (-1.18)
POLCON -1.35 (-0.61)
-1.42 (-0.76)
-1.35 (-0.94)
-0.764 (-0.48)
-0.670 (-0.65)
0.511 (0.53)
0.620 (0.66)
0.619 (0.63)
MAJ 0.365 (1.50)
0.358** (2.29)
0.110 (0.77)
0.189 (1.41)
-0.046 (-0.42)
-0.183** (-2.25)
-0.168** (-2.15)
-0.158 (-1.65)
PRES -0.040 (-0.10)
EMU -0.442** (-3.26)
-0.419** (-4.00)
0.018 (0.19)
Nobs 18 18 18 18 18 18 18 18 R2 0.373 0.371 0.654 0.212 0.647 0.399 0.324 0.326
Note: Dependent variable is the estimated jiβ for the period 1980-2002. T-values in parenthesis, *** significant at the 1% level, ** significant at the 5% level, * significant at the 10% level. Table 8: Determinants of fiscal policy
i ∆BD
ii ∆BD
iii ∆TD
iv ∆GD
v ∆BD
vi ∆BD
vii ∆TD
viii ∆GD
Constant 1.029 (0.45)
1.753 (0.97)
1.083 (1.03)
-2.070 (-1.64)
2.029 (1.23)
1.962 (1.19)
-0.191 (-0.12)
-1.621 (-1.44)
var(gap) 17.2 (0.07)
-110 (-0.57)
24.6 (0.22)
156 (1.16)
467** (2.93)
419** (2.54)
341** (2.06)
-87.4 (-0.78)
POLCON -1.41 (-0.50)
-1.78 (-0.81)
-0.985 (-0.77)
2.35 (1.53)
-2.89 (-1.41)
-2.63 (-1.28)
0.243 (0.12)
2.26 (1.58)
MAJ 0.369 (1.41)
0.174 (0.80)
-0.039 (-0.31)
-0.106 (-0.70)
0.588** (3.63)
0.485** (2.58)
0.158 (0.84)
-0.318** (-2.48)
EMU -0.524** (-2.95)
-0.432** (-4.19)
0.190 (1.54)
-0.168 (-1.06)
-0.292* (-1.83)
-0.111 (-1.02)
Nobs 18 18 18 18 18 18 18
R2 0.175 0.522 0.655 0.288 0.602 0.636 0.518 0.374
Note: Dependent variable is the estimated jiβ for the period 1980-1991 in columns 1-4 and 1991-2002 in columns 5-8. T-values in parenthesis, *** significant at the 1% level, ** significant at the 5% level, * significant at the 10% level.
23
Figure 1a: Weighted Tax-bases in relation to GDP.
0,5
0,55
0,6
0,65
0,7
0,75
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
AustraliaAustriaBelgiumCanadaDenmarkFinland
Figure 1b: Weighted Tax-bases in relation to GDP.
0,5
0,55
0,6
0,65
0,7
0,75
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
FranceGermanyItalyJapanKoreaNetherlands
24
Figure 1c: Weighted Tax-bases in relation to GDP.
0,5
0,55
0,6
0,65
0,7
0,75
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
New ZealandNorwaySpainSwedenUKUS
25
Appendix (to save space, most countries not mentioned in text are excluded) Figure 2a: Decomposition of Primary Balance, Canada, 1981-2001
-0 ,0 5
-0 ,0 4
-0 ,0 3
-0 ,0 2
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 2
0 ,0 3
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1
D is c re tio n a ry c h a n g e in re v e n u e s /G D P
D is c re tio n a ry c h a n g e ine x p e n d itu re s /G D PC h a n g e in b u d g e t b a la n c e /G D P
In d u c e d c h a n g e in b u d g e t b a la n c e /G D P
Figure 2b: Indicators of Fiscal Stance, Canada, 1981-2002
-0 ,0 3
-0 ,0 2
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 2
0 ,0 3
0 ,0 4
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
D C I S C I
Figure 2c: Underlying Economic Trends, Canada, 1981-2002
-0 ,0 4
-0 ,0 3
-0 ,0 2
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 2
0 ,0 3
0 ,0 4
0 ,0 5
0 ,0 6
0 ,0 7
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
W e ig h te d ta x b a s e
G D P
U n e m p lo ym e n t ra te
26
Figure 2a: Decomposition of Primary Balance, Sweden, 1981-2002
-0 ,0 6
-0 ,0 5
-0 ,0 4
-0 ,0 3
-0 ,0 2
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 2
0 ,0 3
0 ,0 4
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
D is c re tio n a ry c h a n g e in re v e n u e s /G D P
D is c re tio n a ry c h a n g e ine x p e n d itu re s /G D PC h a n g e in b u d g e t b a la n c e /G D P
In d u c e d c h a n g e in b u d g e t b a la n c e /G D P
Figure 2b: Indicators of Fiscal Stance, Sweden, 1981-2002
-0 ,0 5
-0 ,0 4
-0 ,0 3
-0 ,0 2
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 2
0 ,0 3
0 ,0 4
0 ,0 5
0 ,0 6
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
D C I S C I
Figure 2c: Underlying Economic Trends, Sweden, 1981-2002
-0 ,0 3
-0 ,0 2
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 2
0 ,0 3
0 ,0 4
0 ,0 5
0 ,0 6
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
W e ig h te d ta x b a s e
G D P
U n e m p lo ym e n t ra te
27
Figure 2a: Decomposition of Primary Balance, Japan, 1981-2001
-0 ,0 3
-0 ,0 3
-0 ,0 2
-0 ,0 2
-0 ,0 1
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 1
0 ,0 2
0 ,0 2
0 ,0 3
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1
D is c re tio n a ry c h a n g e in re ve n u e s /G D P
D is c re tio n a ry c h a n g e ine x p e n d itu re s /G D PC h a n g e in b u d g e t b a la n c e /G D P
In d u c e d c h a n g e in b u d g e t b a la n c e /G D P
Figure 2b: Indicators of Fiscal Stance, Japan, 1981-2002
-0 ,0 4
-0 ,0 3
-0 ,0 3
-0 ,0 2
-0 ,0 2
-0 ,0 1
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 1
0 ,0 2
0 ,0 2
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
D C I S C I
Figure 2c: Underlying Economic Trends, Japan, 1981-2002
-0 ,0 2
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 2
0 ,0 3
0 ,0 4
0 ,0 5
0 ,0 6
0 ,0 7
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
W e ig h te d ta x b a s e
G D P
U n e m p lo ym e n t ra te
28
Figure 2a: Decomposition of Primary Balance, US, 1981-2001
-0 ,0 4
-0 ,0 3
-0 ,0 3
-0 ,0 2
-0 ,0 2
-0 ,0 1
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 1
0 ,0 2
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
D is c re tio n a ry c h a n g e in re v e n u e s /G D P
D is c re tio n a ry c h a n g e ine x p e n d itu re s /G D PC h a n g e in b u d g e t b a la n c e /G D P
In d u c e d c h a n g e in b u d g e t b a la n c e /G D P
Figure 2b: Indicators of Fiscal Stance, US, 1981-2002
-0 ,0 4
-0 ,0 3
-0 ,0 3
-0 ,0 2
-0 ,0 2
-0 ,0 1
-0 ,0 1
0 ,0 0
0 ,0 1
0 ,0 1
0 ,0 2
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
D C I S C I
Figure 2c: Underlying Economic Trends, US, 1981-2002
-0 ,0 4
-0 ,0 2
0 ,0 0
0 ,0 2
0 ,0 4
0 ,0 6
0 ,0 8
1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2
W e ig h te d ta x b a s e
G D P
U n e m p lo ym e n t ra te
29
References: Alesina, A. and S. Ardagna (1998). Fiscal adjustments. Why they can be expansionary. Economic Policy, 489-545. Alesina, A. and R. Perotti (1995). Fiscal expansions and adjustments in OECD countries. Economic Policy, 207-248. Barro, R. J. (1979) On the determination of public debt. Journal of Political Economy 87, 940-971. Blanchard, O. (1993). Suggestions for a new set of fiscal indicators. In The Political Economy of Government Debt. H.A.A. Verbon and F.A.A.M. van Winden (eds). Elsevier Science Publishers B.V. Blanchard, O. and R. Perotti (1999). An empirical characterisation of the dynamic effects of changes in government spending and taxes on output. NBER Working Paper 7269. Bowitz, E., A. Rødseth and E. Storm (1993). Fiscal expansion, the budget deficit and the economy: Norway 1988-91. Statistics Norway, Discussion Paper 91. Braconier, H. and S. Holden (1999). The public budget balance, fiscal indicators and cyclical sensitivity in the Nordic countries. Report to the Nordic Council of Ministers. TemaNord 1999:575. Brandner, P, H. Frisch, and E. Hauth (2001). Is Austria’s balanced budget stable? Austrian Institute of Economic Research, WIFO working paper 148. Buiter, W. (1985). A guide to public sector debts and deficits. Economic Policy 1, 13-60. Campbell, J. Y, and N.G. Mankiw (1989). Consumption, income, and interest rates: Reinterpreting the times series evidene. NBER Macroeconomics Annual 4, 185-216. Giavazzi, F. and M. Pagano (1990). Can sever fiscal adjustment be expansionary? NBER Macroeconomic annual. Giorno, C., P. Richardson, D. Roseveare and P. van den Noord (1995). Potential output, output gaps and structural budget balances. OECD Economic Studies 24, 167-209. Henisz, W.J. (2000). The institutional environment for economic growth. Economics and Politics 12, 1- 31. Ilmakunnas, S. (1999). Yet another fiscal indicator. VATT Discussion Paper 214, Helsinki. Lane, Philip R. (1999). The cyclical behaviour of fiscal policy: Evidence from the OECD. Mimeo, Trinity College Dublin. van den Noord, Paul (2000). The size and role of automatic stabilizers in the 1990s and beyond. OECD Economics Department Working Papers No 230, Paris. OECD (1983). Income tax collection lags. OECD Studies in Taxation. OECD, Paris.
30
31
Persson, T. and G. Tabellini (2000). Political institutions and policy outcomes: What are the stylised facts? Mimeo, IIES, University of Stockholm. Rødseth, A. (1984). Progressive taxes and automatic stabilization in an open economy. Journal of Macroeconomics 6, no 3, 265-282. Shapiro, M.D. and J. Slemrod (1995). Consumer response to the timing of income: Evidence from a change in tax withholding. American Economic Review 85, 274-283. Talvi, E. and C. A. Vegh (2000). Tax base variability and procyclical fiscal policy. NBER working paper 7499. Tornell, A. and P.R. Lane (1999). The voracity effect. American Economic Review 89, 22-46.