The Semi-Elasticities Underlying the Cyclically-Adjusted Budget Balance: An Update and Further Analysis

Summary:

We update the semi-elasticities of the budget balance to output for the 28 EU Member States using new weights based on ESA2010 data (with unchanged elasticities for individual fiscal items). The revisions of the semi-elasticities are fairly small across Member States and leave the assessment of fiscal developments in the EU broadly unchanged. The revision of the Cyclically Adjusted Balance (CAB) is mainly driven by that in the headline balance and the estimated output gap, not by the update of the fiscal semi-elasticities. A sensitivity analysis shows that revenue and expenditure weights, if allowed to vary over time, can have a larger impact on the semi-elasticities than the present update would suggest, although this would affect the CAB only marginally. Based on the existing four vintages of the estimated semi-elasticities, exploratory panel data analysis confirms that semi-elasticities are country-specific structural parameters, mostly of fiscal nature: they are linked to the size of government, the share of unemployment-related spending, the share of non-tax revenue and tax progressivity. They can also be influenced by the belonging to specific country groupings and an emulation effect between neighbours.

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