In the news: Last Wednesday (April 17), the French government unveiled its « stability program » in the Council of Ministers. The document, intended for the European Commission, outlines the strategy for restoring public finances. The government hopes to bring the budget balance down to 4.8% of GDP for 2012, specifying that « the structural effort will be 1.9 points of GDP. »
Two types of effects can influence government spending and revenue, i.e., the budget balance: the cyclical effect and the structural effect.
The cyclical balance represents public expenditure and revenue that fluctuate in line with the economic cycle. For example, when growth is weak, public expenditure will grow faster as unemployment benefits rise and public revenue will fall as tax revenues decline. The cyclical balance will then increase.
The structural balance represents the budget balance after subtracting the effects of the economic cycle. It can be calculated as follows:
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SBSn = SBn – e*output gap where SBS is the structural budget balance, SB is the budget balance, and ‘e’ is the elasticity of the public balance to growth. The output gap is expressed here as the difference between actual growth and potential growth. Potential growth is the maximum growth a country can achieve if all production capacity is utilized. |
Changes in the structural balance are referred to as the fiscal impulse. This impulse is a quality criterion for measuring the orientation of fiscal policy. A negative change represents a restrictive policy (and vice versa).
It is therefore more useful to look at the cyclical and structural balances rather than simply observing the budget balance.
Sandrine E-H
