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: henrikb@konj.se

and Steinar Holden

Department of Economics University of Oslo Box 1095 Blindern

0317 Oslo Email: steinar.holden@econ.uio.no

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

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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.

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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.

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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

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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.

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• 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

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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.

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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).

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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.

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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

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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.

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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.

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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

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