Economics in a picture
Fiscal policy assessments based on structural balances should take into account the uncertainty regarding the measurement of the output gap
Structural budget balances are intertwined with output gaps and lie at the heart of most fiscal surveillance assessments. By removing the business cycle impact from the published headline budget balances, in addition to the effects of temporary measures, they emerge as an instrument that can be used to evaluate the underlying fiscal position of an economy.
Estimates for Portuguese structural balances, using alternative cyclical outputs that lie upon a unique information set, share some similar outcomes, but also reveal uncertainties and important discrepancies. The reported figure depicts maximum amplitudes computed with output gaps produced by the European Commission, the International Monetary Fund, and the Organisation for Economic Co-operation and Development, as well as by the suggestions of Braz, Campos and S. Sazedj (2019) and Duarte, Maria e Sazedj (2020). Discrepancies are particularly striking when the evaluation is focused on structural balance levels. The average amplitude across estimates reaches 1.5 percentage points (p.p.) over 1999-2018. Similarities are clearer when the analysis is focused on the changes in structural balances, with the average amplitude dropping to 0.3 p.p. In both cases, discrepancies are sufficient to produce model-dependent fiscal assessments.
For more details see Duarte, Maria e Sazedj (2021), “Cyclical outputs and structural budget balances”, available at Banco de Portugal Economic Studies, Vol. VII (2), pp. 1-20. References Braz, Campos e S. Sazedj (2019) and Duarte, Maria e Sazedj (2020) are the articles of Braz, C., M. M. Campos, and S. Sazedj (2019). “The new ESCB methodology for the calculation of cyclically adjusted budget balances: an application to the Portuguese case”. Banco de Portugal Economic Studies, Vol. V (2), pp. 19-42, and Duarte, C., J. R. Maria, e S. Sazedj (2020). “Trends and cycles under changing economic conditions.” Economic Modelling, 92(C), 126–146.
Prepared by Cláudia Duarte, José R. Maria and Sharmin Sazedj. The analysis, opinions and results expressed herein are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.
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