Automatic fiscal stabilisers in Estonia: the impact of economic fluctatios on general government budget balance

Rasmus Kattai (), Alvar Kangur and Martti Randveer ()

No 2003-11, Bank of Estonia Working Papers from Bank of Estonia

Abstract: The paper discusses the functioning of automatic fiscal stabilisers in Estonia. The aim of the research is to evaluate government budget sensitivity to economic fluctuations and thereby assess the importance of automatic fiscal stabilisers in Estonia. Specifically we are interested in whether the functioning of automatic fiscal stabilisers might under certain circumstances create difficulties for the fulfilment of the Maastricht deficit criterion according to which public deficit is not allowed to exceed the limit of 3% of GDP. The results of our research show that the role of automatic fiscal stabilisers is modest in Estonia. Budgetary sensitivity was approximately 0.35 in the period 1996-2001 - an increase in output gap by 1 percentage point causes a change in the budget balance by 0.35% of GDP. According to that maximum value, the budget\'s reaction was only 1.3% of GDP (while the output gap was -3.9%). A positive implication of this is that Estonia has good chances of holding the budget balance within the requested ceilings. If the output gap reaches -5%, structural deficit may still be 1% of GDP without the actual balance exceeding the 3% deficit boundary.

Keywords: automatic fiscal stabilisers; structural budget balance; economic cycle; fiscal policy (search for similar items in EconPapers)
JEL-codes: E32 H2 H5 H6 H87 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2003-10-10, Revised 2003-10-10
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