FILL THE GAP – MEASUREMENT OF THE CYCLICAL EFFECT ON THE BUDGET

Assessment of fiscal policy involves one of the most vivid discussions in every country. Since budgets are influenced by business cycles there is enormous interest in disentangling the underlying fiscal position from the effect of the business cycle. There are two distinguished methods advocated by international institutions to determine this cyclical factor. Apparently, neither is able to fulfil all requirements. In this paper we introduce a disaggregate methodology, which is not only able to incorporate theoretical considerations but also easily computable while not requiring unavailable data. Besides the derivation of the cyclical component we show that if the deflators of variables are different then the real cyclical component has to be corrected to obtain the nominal cyclical component. We show that the underlying, structural deficit can be obtained by employing unit elasticities between taxes and tax bases. Alternatively, discretionary measures can be re-calculated by estimating elasticities from the distribution of the tax burden in each year. We have found that specific features of tax and unemployment systems sometimes render the direct estimation of the cyclical component useless. In this case the cyclical component can be obtained as a residual by estimating directly the underlying trends of those budget items. JEL Classification Number: H62, E32