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The Public Budget Balance - Fiscal Indicators and Cyclical Sensitivity in the Nordic Countries

Author

Listed:
  • Braconier, Henrik

    (The Research Institute of Industrial Economics)

  • Holden, Steinar

    (University of Oslo)

Abstract
This paper analyzes the relationship between the budget balance and the cyclical situation of the economy. There are two main purposes. In the first analysis, we develop a method for economic policy, and induced changes that arise due to changes in the economy. The discretionary component of the change in the budget balance measure changes in fiscal stance and can be used as a fiscal policy indicator. As a measure of changes in fiscal policy, the proposed indicator has two advantages over existing indicators used by international organizations. First, the adjustment of changes in the economy is attached to important tax bases, rather than to the GDP, leading to higher accuracy when tax bases are not perfectly component does not include the effect on the budget balance of structural changes in the economy (as measured by potential output), that are not directly related to fiscal policy. The induced change component can be used to evaluate the cyclical sensitivity of public finances with respect to changes in the economy, when fiscal policy is unchanged. We also suggest how a decomposition of the level of the primary budget balance into a structural and cyclical component can be conducted. The second main purpose of the study is to empirically investigate the cyclical sensitivity of public finances in the Nordic countries. The analysis focuses on the peroid 1980 to 1997. We use three different methods for evaluating the sensitivity of public finances. Overall, public finances in all the Nordic countries are sensitive to cyclical changes in the economy. The estimated sensitivity of the budget balance as a share of GDP with respect to GDP growth is 0.6-0.8 for Sweden, 0.5-0.75 for Denmark, 0.4-0.6 for Finland and Norway and 0.2-0.6 for Iceland, given constant fiscal policy. It is likely, however, that our estimates are biased downward as data problems lead us to underestimate the sensitivity while countercyclical fiscal policy may lead to even more sensitive public finances. In the empirical analysis we also study how different types of shocks affect public finances. The result show that a domestic savings shock has the strongest effect on public finances, while an aggregate demand shock affects public finances less and en export shock has the smallest effect on public finances. We conclude the paper by discussing the problems associated with analysing the effect of fiscal policy on the economy by use of simple indicators, as well as a few brief remarks on the normative question of how sensitive the budget should be to economic fluctuations.

Suggested Citation

  • Braconier, Henrik & Holden, Steinar, 1999. "The Public Budget Balance - Fiscal Indicators and Cyclical Sensitivity in the Nordic Countries," Working Papers 67, National Institute of Economic Research.
    • Handle: RePEc:hhs:nierwp:0067
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    References listed on IDEAS

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    Cited by:

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    2. Arjun Jayadev & Mike Konczal, 2010. "When Is Austerity Right?: In Boom, Not Bust," Challenge, Taylor & Francis Journals, vol. 53(6), pages 37-53.
    3. Sergio Ginebri & Bernardo Maggi & Manuel Turco, 2005. "The automatic reaction of the Italian government budget to fundamentals: an econometric analysis," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 67-81.
    4. repec:bla:scandj:v:104:y:2002:i:3:p:343-64 is not listed on IDEAS
    5. Carl E. Gjersem, 2002. "A presentation of Generational Accounting in Norway," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 28, pages 61-73.
    6. Ilmakunnas, Seija, 2000. "Yet Another Fiscal Indicator," Discussion Papers 214, VATT Institute for Economic Research.
    7. Andersen, Torben M., 2002. "International Integration, Risk and the Welfare State," IZA Discussion Papers 456, Institute of Labor Economics (IZA).
    8. Mr. Nigel A Chalk, 2002. "Structural Balances and All That: Which Indicators to Use in Assessing Fiscal Policy," IMF Working Papers 2002/101, International Monetary Fund.
    9. Martin Larch & Matteo Salto, 2005. "Fiscal rules, inertia and discretionary fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 37(10), pages 1135-1146.
    10. Aura Gabriela SOCOL & Dorin MĂNTESCU, 2011. "Re-modeling the Romanian Fiscal Policy under the Terms of the Economic Crisis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(554)), pages 111-120, January.
    11. Erixon, Lennart, 2005. "Travelling Along the Third Way. A Swedish Model of Stabilisation, Equity and Growth," Research Papers in Economics 2005:10, Stockholm University, Department of Economics.
    12. Signe Krogstrup, 2002. "Should We Pay Attention to Indicators of Fiscal Impact on Demand?," IHEID Working Papers 01-2002, Economics Section, The Graduate Institute of International Studies.
    13. Braconier, Henrik & Forsfält, Tomas, 2004. "A New Method for Constructing a Cyclically Adjusted Budget Balance: the Case of Sweden," Working Papers 90, National Institute of Economic Research.

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