Cover of EconPol Working Paper 59

Survey-Based Structural Budget Balances

Marcell Göttert, Timo Wollmershäuser (EconPol Europe, ifo Institute – Leibniz Institute for Economic Research at the University of Munich)

The budget dispute between Italy and the European Commission in 2018 gave new impetus for the debate about the reliability of output gap estimation methods and their use for calculating structural budget balances. In this paper, Marcell Göttert and Timo Wollmershäuser review the main properties of the mainstream approaches. They show that the structural budget balances resulting from the production function approach and the time series approach are imprecise, subject to large revisions and often biased. Apart from these technical flaws, the mainstream approaches also suffer from political economy problems. As the computation of structural budget balances in the mainstream approach is difficult and model-dependent, it is not easy to explain to the public and prone to manipulation. In addition, the first ex post estimation is only available late with the first publication of GDP. The authors propose an alternative approach to calculate structural budget balances on the basis of a business survey.

Abstract

The budget dispute between Italy and the European Commission in 2018 gave new impetus for the debate about the reliability of output gap estimation methods and their use for calculating structural budget balances. In this paper we review the main properties of the mainstream approaches and compare their performance with structural budget balances, whose calculation is based on a business survey. Our main result is that while the survey-based measure is highly correlated with the existing structural budget balances which are calculated based on some estimates of the output gap, it is significantly less revised over time and almost unbiased. Moreover, the survey-based measure could be easily implemented into the existing EU fiscal rules without any major changes.

Citation

Marcell Göttert, Timo Wollmershäuser: "Survey-Based Structural Budget Balances", EconPol Working Paper 59, February 2021