16 February 2001 • The Cyclical Adjustment of the Austrian Budget Balance by the European Central Bank • Thomas Url

The Stability and Growth Pact connects the decentralised fiscal policy of individual countries of the Euro zone with the fully centralised monetary policy conducted by the European Central Bank. The Pact prescribes a threshold for government net lending of 3 percent of GDP and puts a sanction on the violation of this value. Moreover, member countries have to submit Stability Programmes to the European Commission in order to provide a timely insight into their fiscal programme of the next few years.

The cyclically adjusted budget balance is a key indicator for the assessment of the fiscal policy stance and it will be used in the evaluation of submitted Stability Programmes. By establishing a unified method to compute the cyclically adjusted budget balance the European Central Bank will be able to integrate own forecasts of budgetary numbers with its forecast of the economic environment. Updates of the Stability Programme by national fiscal authorities can be quickly assessed. Furthermore, a refinement of the computation procedure allows a more accurate picture of the underlying budgetary position.

In the case of Austria the technical modifications in the computation of the cyclically adjusted balance for the general government result in a slightly larger cyclical component. Nevertheless, the deviation of the cyclically adjusted budget balance from estimates of other international organisations like the European Commission, the OECD, and the International Monetary Fund is small (Figure 1). The advantage of speedy integration of updated fiscal programmes into the estimate of the cyclically adjusted budget balance can be seen at the end of the sample in Figure 1. The most recent estimate from the OECD dates back to December 2000 and already shows the implication of a more restrictive budget programme over the years 2000 through 2002.

Figure 1: Cyclical component of Austrian public sector net lending