Chapter

I Introduction

Author(s):
Ahsan Mansur, Richard Haas, and Peter Heller
Published Date:
May 1986
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In its World Economic Outlook exercise, the International Monetary Fund uses a quantitative indicator to gauge the direct expansionary or contractionary impulse that fiscal policy exerts on aggregate demand in the Group of Seven major industrial countries.1 The current approach involves adjusting the actual fiscal balance for transitory cyclical effects to obtain a more accurate measure of the fiscal policy stance. This indicator is obtained by contrasting the evolution of the actual budget balance with the budget balance which would be obtained if the growth of government expenditure were proportional to changes in potential gross domestic product (GDP),2 valued at current prices, and tax receipts were to grow at the same rate as actual nominal GDP. This study reviews the methodology underlying the calculation of this fiscal indicator and examines several ways in which it might be revised. How the present methodology might be extended to include the estimation of the structural budget balance is also discussed. Analytical results are based on data and staff estimates as of the end of February 1984.3

Section II surveys the various quantitative indicators of fiscal policy stance that are used by other multinational and national agencies that currently undertake regular appraisals of fiscal policy. Alternative modifications to the existing fiscal impulse methodology are evaluated in Sections III through VI. Section III examines the approach used for estimating potential output and Section IV, the treatment of unemployment insurance benefits. Section V discusses alternative ways to adjust the budget balance and fiscal impulse measures for the effects of inflation. Section VI compares and evaluates the cash and national accounts approaches to measuring government budgets. Section VII proposes a simple methodology for estimating the structural budget balance. Section VIII summarizes the issues discussed and suggests possible directions for further research.

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