11/2003 Rasmus Kattai, Alvar Kangur, Tanel Liiv ja Martti Randveer. Automatic fiscal stabilisers in Estonia: The impact of economic fluctuations on general government budget balance

Working Papers of Eesti Pank. No 11, 2003

The paper discusses the functioning of automatic fiscal stabilisers in Estonia. The aim of the research is to evaluate government budget sensitivity to economic fluctuations and thereby assess the importance of automatic fiscal stabilisers in Estonia. Specifically we are interested in whether the functioning of automatic fiscal stabilisers might under certain circumstances create difficulties for the fulfilment of the Maastricht deficit criterion according to which public deficit is not allowed to exceed the limit of 3% of GDP.
The results of our research show that the role of automatic fiscal stabilisers is modest in Estonia. Budgetary sensitivity was approximately 0.35 in the period 1996-2001 - an increase in output gap by 1 percentage point causes a change in the budget balance by 0.35% of GDP. According to that maximum value, the budget's reaction was only 1.3% of GDP (while the output gap was -3.9%). A positive implication of this is that Estonia has good chances of holding the budget balance within the requested ceilings. If the output gap reaches -5%, structural deficit may still be 1% of GDP without the actual balance exceeding the 3% deficit boundary.

JEL classification: E32, H2, H5, H6, H87
Keywords: automatic fiscal stabilisers, structural budget balance, economic cycle, fiscal policy

Authors' e-mail addresses: rasmus.kattai [at] epbe.ee, ea03bf025 [at] student.ucd.ie, tliiv [at] epbe.ee; martti.randveer [at] epbe.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Table of Contents

Introduction
1. The Role of Automatic Fiscal Stabilisers in the EU
2. Estonia's Potential GDP and GDP Gap
2.1. Measuring GDP Gap Using the Hodrick-Prescott Filter
2.2. Measuring GDP Gap Using Production Functions
3. Cyclical Sensitivity of Budget Components
3.1. Sensitivity of Budget Revenues
3.1.1. Personal Income Tax
3.1.2. Social Tax
3.1.3. Excises
3.1.4. Value-Added Tax
3.1.5. Corporate Income Tax
3.1.6. Non-Tax Revenues
3.2. Government Sector Expenditure
4. Calculating the Structural Balance and the Size of Automatic Fiscal Stabilisers
Conclusions
References
Appendices
Appendix 1. Cyclically adjusted budget balance in EU countries
Appendix 2. The list of acronyms
Appendix 3. Results of sensitivity estimation

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