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The main focus of this paper is the relation between the cyclical components of total
revenues and expenditures and the budget balance in France, Germany, Portugal, and
Spain. We try to uncover past trends behind the development of public finances that
contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal
policy in an SVAR that mixes long and short-term constraints allows us to look into the
transmission channels of fiscal policy and to derive a model-based indicator of structural
balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax
policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise
when economic conditions worsen but cause a ‘ratcheting up’ in the size of government in
economic booms. The Stability and Growth Pact has not eradicated these procyclical
policies. Bad policies in good times also contribute to aggregate macroeconomic instability.
Keywords: fiscal indicator, structural balance, output gap, SGP, EMU, SVAR, short and long-term
restrictions.
JEL Classification Numbers: E62, E65, E66, H61, H62.
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We are grateful to Luís Costa, Arne Gieseck, Michael Thöne, Jürgen von Hagen, Jan in't Veld, seminar
participants at the ECB (Frankfurt), at ISEG/UTL (Lisbon), at the 61
ST
European Meeting of the Econometric
Society (Vienna), and at the DG ECFIN workshop on Fiscal Indicators for EU Budgetary Surveillance (Brussels)
for helpful comments and discussions. Valuable assistance of Renate Dreiskena with the data is highly
appreciated. The opinions expressed herein are those of the authors and do not necessarily reflect those of the
ECB or the Eurosystem. Peter Claeys thanks the Fiscal Policies Division of the ECB for its hospitality. * European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am...