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Thanks are due to Marco Cangiano, Stephan Danninger, Jorg Decressin, Richard Hemming, Sanjay Kaira, Selma Mahfouz, and Steve Symansky, for helpful comments, and to Estella Macke for research assistance.
Other exogenous factors could also impact the structural balance (such as changing demographics or shifts in parameters of taste or technology) but these are unlikely to be an important factor in the year-on-year change in structural fiscal aggregates.
Of course, if the Ricardian view is correct, then the “true” indicator of the demand stimulus from fiscal policy is simply zero (since private consumers fully offset the activities of the government).
Structural indicators are presented as a percentage of potential GDP while all other indicators are shown as a percentage of actual GDP.
Note that conducting the same exercise on a fiscal year basis does not materially alter the conclusions presented here.
While consumption tax revenues did rise in 1997, this was offset by declines in corporate tax revenues and stagnant growth in other revenues (beyond those that would be predicted by the cyclical adjustment embedded in the structural revenue measure). It could be the case that, since the increase in the tax was anticipated, consumption was brought forward, which lessened the impact of the tax on structural revenues (although there appeared to be little impact on structural revenues in 1996 either).
For example, in 1994, despite a major expenditure effort in late 1993 and early 1994, the overall structural expenditure picture indicates a reduction in expenditure stimulus.
Posen (1998) has suggested implementation problems at the local level have meant that even the “real water” content of the supplements may overstate the true fiscal policy action by the Japanese government.
In calculating the aggregate demand impact, national accounts data are used rather than budgetary data.
It appears this difference is due to the use of SNA data to calculate the aggregate demand impact, which differs slightly from the calculation using IMF general government data.
It should be noted that, since there is a structural break in the data in 1991 due to reunification, measures of the change in the fiscal position for that year have to be discarded.
Although the definition of the fiscal aggregates was affected by previously off-budget debt of the Treuhand and housing sector’s being brought on budget this should not have affected the primary structural balance. The main reason the primary structural balance shows a neutral picture in 1995 is because of a corporate revenue shortfall—resulting from the lagged effect of the 1992–93 recession and the increased use of East German investment incentives during that year.
Both seem to miss out on the withdrawal of stimulus in 1995 and the scale of the policy actions taken in 1997.
This helps explain why changes in the cyclically adjusted balance are virtually identical to those of the structural balance since the primary difference between the two constructs is the level of trend or potential GDP used.