The cyclically-adjusted budget balance used in the EU fiscal framework: an update

The cyclically-adjusted budget balance (CAB) is the backbone of the EU framework of fiscal surveillance, both in its preventive and corrective arms. The concept corresponds to the budget balance prevailing if the economy was running at potential.

After correcting for the one-off and temporary measures, it is called structural budget balance and used to assess the fiscal policy stance. The importance of the CAB has been restated forcefully with the recent reform of the European economic governance. This paper aims at methodologically improving the CAB to better measure the reaction of the balance-to-GDP ratio to cyclical conditions.

This was achieved by using a more precise concept of the cyclical-adjustment parameter and by updating the decade-old fiscal elasticities underlying the computation of the CAB. This paper reviews and explains in detail these recent improvements and describes the impact thereof on the CAB results.