The “True” Deficit

  • 17. 3. 2014

In this paper we propose a new methodology to improve the estimation of structural budget balances in Slovakia.

Major innovations compared to currently used methods are in using more robust output gap estimates, inclusion of pensions in the analysis, imposing consistency between various gap measures, elimination of effects of different deflators and using time-varying elasticities. Significant attention is attached also to one-off and temporary measures, where we define 10 principles for identification. The estimation is complemented with bottom-up approaches which focus more directly on discretionary fiscal action. Latest changes to the European fiscal framework have strengthened significantly the role of structural budget balances. With the adoption of the Fiscal Compact there is a numerical threshold each year for the deviation of the structural balance from the medium-term objective (or the adjustment path toward it). Moreover, automatic correction mechanisms are activated if the deviation is above the threshold. The basic motivation of this paper was that independent fiscal institutions are going to play an important role in triggering these correction mechanisms.

Keywords: fiscal policy, budget balance, structural fiscal balance, one-off measures
JEL classification: E32, E60, E62, H30, H60, H62