Fiscal rules, inertia and discretionary fiscal policy - Martin Larch and Matteo Salto
Martin Larch (Directorate General for Economic and Financial Affairs) and Matteo Salto (Directorate General for Competition)
Fiscal rules, inertia and discretionary fiscal policy - Martin Larch and Matteo Salto(126 kB)
In current practice, changes in the cyclically-adjusted budget balance (CAB) are generally interpreted as reflecting the effort of discretionary fiscal policy. This paper shows that such an interpretation is not a sufficiently accurate description of the behaviour of fiscal policy, and, in some cases, it may even conceal an important deficit bias. Specifically, as growth projections are an important building block of budgetary plans, optimism in forecasting growth, coupled with pervasive lags and inertia in the implementation phase of the budget, will result in a fiscal expansion, even in the absence of discretionary measures.
(European Economy. Economic Papers. 194. October 2003.
Brussels. 21pp. Tab. Free.)