Output Gap and Structural Deficit for Austria. Critical Analysis of the Calculation Method Adopted by the European Commission

Recent institutional changes in the European Union have strengthened the original Stability and Growth Pact by negotiating the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union ("fiscal compact"). The cyclically-adjusted budget balance is the main quantitative instrument in both the preventive and the corrective arms of this treaty. Since 2012, the calculation of the cyclically-adjusted budget balance follows the methodology suggested by the European Commission that combines an output gap and a budget elasticity. The output gap measures the capacity utilisation in the overall economy, whereas the budget elasticity reflects the sensitivity of the budget balance to fluctuations in the business cycle. The theoretical background behind the methodology of the European Commission sees potential output as the long-term trend in output around which actual output fluctuates over the business cycle.