2008), “Uncertainty in measuring the underlying budgetary position and fiscal stance, paper presented at the DG‐ECFIN Workshop on achieving and safeguarding budgetary positions

Assessing the underlying budgetary position and the fiscal stance requires abstracting from cyclical and transitory influences on the budget balance. Cyclically adjusted budget balance estimates are therefore an important component of the fiscal policy maker's tool-kit. They are, however, subject to considerable measurement uncertainty. Standard methods of cyclical adjustment depend on estimates of the cyclical position of the economy in real time and are based on the simplifying assumption of a fixed relationship between fiscal variables and changes in output. In practice, however, estimates of the output gap can be revised significantly ex post while changes in fiscal variables, especially the performance of tax revenues, can often not be fully explained either by policy actions or by changes in output or its sub-components. Cyclically adjusted budget balance estimates need therefore to be interpreted with caution and their interpretation supported by sound fiscal analysis