Economics in a picture

Fiscal policy changes and their output effects are at the centre of the economic policy debate in Europe. In the Economic and Monetary Union, fiscal policy remains a national competence subject to the rules of the Stability and Growth Pact. In this context, the overall fiscal stance of the euro area results from the addition of national fiscal policies.

Based on a consistent and robust methodology, Braz and Carnot (2019) define “fiscal changes” as headline changes in the annual budget balance of general government in percent of GDP. These changes are decomposed into a discretionary component (resulting from fiscal policy actions), a cyclical component (representing a measure of automatic stabilisers) and a net residual (encompassing the remaining change). The authors conclude that in the last two decades fiscal changes in the euro area are large: they average out over the long term but their standard deviation from one year to the next exceeds 1 percent of GDP. They stem in similar proportions from discretionary actions and from the cyclical automatic stabilisers. On average, the discretionary contribution involves both revenue measures and expenditure changes, working in conjunction and with comparable magnitudes. This discretionary contribution does not appear systematically driven by cyclical developments.

Additionally, the authors offer an account of the “fiscal effect” on growth over the same time period, showing that fiscal effects are relatively large too, of the order of ¾ percent of GDP on average. The authors still conclude that, in the same period, fiscal changes have contributed to smooth the euro area economic cycle, mostly due to the automatic stabilisers.

For further details see Braz and Carnot (2019): “Euro area fiscal policy changes: stylised features of the past two decades”, Banco de Portugal Working Papers 2019/10.

Prepared by Cláudia Braz and Nicolas Carnot. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the European Commission.

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