Discussion

The chapter by Peter Brandner, Leopold Diebalek and Walpurga Köhler-Töglhofer presents an unobserved component model that decomposes the budget balance into different components, namely a ‘core’, an ‘automatic stabilizer’, a ‘discretionary stabilization’ and a ‘residual’ component. The method has been, for illustrative purposes, applied to Austrian budget data but the model is easily applicable to any country as the necessary budgetary data are readily available across countries. Indeed, the easy applicability is one of the key advantages of the approach. In terms of the results for Austria, they mainly confirm ‘conventional wisdom’, in parti-

cular in that they indicate that discretionary fiscal policy has been pro-cyclical off-setting some of the impact of the automatic stabilizers, especially in up-turns. Below I will concentrate my comments in this area and the implication of decomposing the cyclical part of the budget balance into a component related to the ‘automatic stabilizers’ and a part related to ‘discretionary stabilization’. This decomposition allows the study of whether budget policies have been counter-or pro-cyclical over and beyond what can be ascribed to the automatic stabilizers. If pro-cyclical budget behaviour is observed, it may be of particular interest to know whether this ‘bad outcome’ is due to active government policies or whether it is events outside its control that are to blame. This distinction is important in the context of the application of the revised Stability and Growth Pact where the government’s intent carries more weight than before the reform. Equally, it is an important distinction to make when assessing failures/accomplishments of the past budget behaviour with a view to drawing conclusions on how to improve budget rules and institutions for the future. In this context I would like to make some comparisons between the authors’ decom-

position and the most common alternative indicator used for the same purposes, namely the cyclically adjusted budget balance: the CAB.2 The CAB is the nominal budget balance adjusted with the (unobservable) estimated budget impact from the cycle. Several international institutions estimate CABs, notably the Commission, the ECB, the OECD and the IMF. Methods vary and the results differ on the margin across compilers but the basic approach is the same. I will first comment on what the authors’ decomposition and the CAB implies in relation to commonly used budget terms such as the ‘fiscal stance’, the ‘structural’ budget balance, the ‘discretionary’ policy component and the ‘fiscal impulse’. These budget concepts are useful to discuss various fiscal policy issues. However, lacking alternatives, the concepts are often captured by using the CAB across the board. As a starting point, Figure 4.11 provides a two-dimensional decomposition of the budget

balance. Vertically, the budget balance is decomposed into factors which are economy-induced and those which are policy-induced. Horizontally, a distinction is made between factors with a temporary impact on the budget as opposed to those which have a permanent impact.