The budget balance reflects discretionary decisions and policy measures, as well as structural trends and other non-cyclical effects outside governments’ control. The fiscal stance is the theoretical concept that summarizes the impact of the discretionary component on the budget balance.

In practice, the fiscal stance is often measured with recourse to top-down approaches anchored in the change in the structural primary balance, whereby positive (negative) figures correspond to contractionary (expansionary) policies. Other methods include purely narrative approaches based on inventories of fiscal measures, whose determination is not straightforward and features several limitations. There are also mixed approaches combining elements of the aforementioned methodologies. Braz and Campos (2021) propose an alternative mixed approach that is simple to compute and offers suitable results in normal times.

The top-down approach highlights that, in the last decades, the most relevant discretionary fiscal policy reactions in Portugal occurred around crisis periods: 2003, 2009 and 2020, classified as fiscal stimulus years; 2011 and 2012, characterised by consolidation policies adopted during the Economic and Financial Assistance Programme. When cyclical conditions are more favourable discretionary fiscal policy tends to be more muted. The alternative mixed approach in Braz and Campos (2021) yields qualitatively similar results in most years. 

For more details see Braz and Campos (2021), “Challenges in measuring fiscal effects”, Economic Studies, Banco de Portugal, Vol. VII – No 3, July.

Prepared by Cláudia Braz and Maria Manuel Campos. The opinions 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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