Estimation of the structural balance based on the OECD approach – Theoretical considerations and empirical experiences

Abstract

Correlations between the performance of the real economy and the budget position of the general government have been a key area of methodological research for decades. The related concepts focus on the recognition that the same budget may equally result in a surplus or a deficit depending on what happens on the national income side (Mackenzie, 1983). “All” we need to do in order to identify the underlying processes behind the budgetary position is to “remove” the impact of cyclical changes in the real economy. An improvement of the fiscal position can be a reflection of improvement in the real economy while a turnaround in fiscal developments is to be counted on once macroeconomic conditions deteriorate. Under these circumstances, fiscal policy cannot be claimed to be on the right track even if the related indicators suggest an improvement. No wonder that in the context of Hungary's convergence program, both the Ministry of Finance and the European Commission focus on assessing Hungary's budget from this viewpoint. The Research and Development Institute of the State Audit Office of Hungary (SAO RDI, hereinafter RDI) issued an evaluating study both in 2007 and 2008, highlighting to the National Assembly of Hungary the risks associated with the macroeconomic viability of the budget bill. The 2008 macroeconomic study of the RDI already contained calculations on the trends of the structural balance (RDI 2008). Although the budgeting process for 2009 took place under extraordinary circumstances which forced both the Ministry of Finance and the State Audit Office to depart from their usual work procedure (for further details refer to Báger – Pulay, 2008b), this third macroeconomic study of the RDI made a cautious attempt to forecast the structural balance for 2009 based on the budget bill figures. Here we review the arguments supporting the estimation of the cyclically adjusted budget balance first. Then we move on to discuss the method recommended by the OECD for the quantification of the structural deficit and the related results. We will not strive for either presenting the methodology in full or highlighting the potential errors therein. Both of these are discussed extensively in technical literature. What we go for is to apply the method as consistently and possible and to present the results generated this way.