5th Biennial International
Business, Banking and Finance Conference
University of the West Indies, St. Augustine Campus.
Presenter: Joseph Jason Cotton
May 3rd, 2013
I.
Background
II.
Methodology
III.
Results
IV.
Conclusions
2
Main
Concepts
What does it tell us?
Overall Fiscal
Provides an indication of the impact of
fiscal policy on domestic demand and
financial resources.
Overall Fiscal Balance
=TR-TE
Provides an indication as to whether
fiscal policy is becoming more or less
expansionary over time.
Measured as the change in
the structural balance
An increase in government
expenditures and/or a decrease in
taxes that causes the government's
budget deficit to increase or its budget
surplus to decrease.
Measured as the change in
the overall fiscal balance or
primary balance.
A decrease in government
expenditures and/or an increase in
taxes that causes the government's
budget deficit to decrease or its budget
surplus to increase.
Measured as the change in
the overall fiscal balance or
primary balance.
Balance
Fiscal impulse
Expansionary
Fiscal Policy
Contractionary
Fiscal Policy
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How is it
measured?
Main
Concepts
What does it tell us?
Cyclical
Adjustment
It removes the cyclical component of a time
series and provides a sense of the underlying
movements in a time series.
The Hodrick-Prescott
(HP) Filter
Structural
Adjustment
Goes beyond the cyclical adjustment and
corrects for changes in asset or commodity
prices which do not affect the underlying fiscal
position
Structurally adjusted
balance
Countercyclical
Adding to aggregate demand during
downturns (through deficits) and withdrawing
from aggregate demand during upturns
(through surpluses)
It is measured by the
fiscal impulse
Pro cyclical
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How is it
measured?
Adding to aggregate demand during upturns
It is measured by the
(through deficits) and withdrawing from
fiscal impulse
aggregate demand during downturns (through
surpluses).
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Austerity vs Stimulus: Measurement Indicators

The overall fiscal balance

The primary fiscal balance

The cyclical fiscal balance

The structural fiscal balance
5


The fiscal impulse was mostly
positive during 2002-2008 and
negative during 2009-2011.
This suggests a countercyclical
response to the economic cycle.
This type of assessment can be
misleading because it does not
adjust for the impact of the
business
cycle
and/or
commodity price fluctuations on
the budget.
15,000
10,000
5,000
TT$ Million

0
-5,000
-10,000
-15,000
-20,000
Change in the overall fiscal balance
Change in the primary balance
-25,000
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Fiscal
Indicator
What does it
tell us?
Provides a
measure of the
The cyclical
country’s
fiscal
underlying fiscal
balance
position.
The
structural
fiscal
balance
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Provides a
measure of the
country’s
underlying fiscal
position excluding
commodity related
revenue and
expenditure.
How is it
measured?
Strength
Weaknesses
CAB= OB -CB
•Eliminates the
impact of the
business cycle
on the budget.
•May not detect the
impact of a commodity
price boom.
SB= OB-SB
•Eliminates the
impact of the
business cycle
and changes in
asset or
commodity
prices.
•Some level of
subjectivity required in
adjustment of revenue
and expenditure.
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Usefulness of estimating the cyclical and structural fiscal
balances:
1.
They provide a more accurate indication of the budget impact
on the economy.
2.
Allows for improved formulation of medium-term fiscal
frameworks.
3.
Practical for international comparisons.
4.
Changes in the structural balance can indicate the impact of
discretionary fiscal policy on the economy.
8
The two main methods of calculating the cyclical and
structural balances were put forward by:
I.
The International Monetary Fund (IMF)
II.
The Organization for Economic Co-operation and
Development (OECD)
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IMF Methodology
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Revenue is adjusted for output and commodity price gaps.
Where
∗
𝐶 𝐸
𝑟,a adjusts revenue for the deviation of commodity prices from and average
𝐶
commodity price index.
𝐸 𝑟,c – once this is > 0. Deviations in commodity prices will affect the structural balance
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The IMF methodology draws on arithmetic
formulas to assess the budget’s impact on
aggregate demand and involves three
conceptual issues:
I.
The choice of the base year
II. Deriving the Cyclical fiscal balance
III. Deriving the Structural fiscal balance
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Deriving the Cyclical fiscal balance involves:

Data gathering

Identifying relevant one-off factors

Remove one-off factors from data

Adjust for cyclical factors

Add back one-off factors
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Deriving the Structural fiscal balance involves:

Data gathering

Identifying relevant one-off factors

Remove one-off factors from data

Remove energy related revenue and expenditure

Compute the asset price adjustment

Adjust for cyclical factors
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Limitations:
1.
The Output gap and elasticities’ of revenue and
expenditure were estimated.
2.
Subjectivity in determining one-off factors.
3.
No adjustment was made for changes in property
prices.
4.
ECPI data only available from 2004.
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…the effect of the business cycle on revenue and expenditure did
not appear to significantly distort the fiscal analysis during the
review period.
10.00
8.00
6.00
per cent of GDP
4.00
2.00
0.00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-2.00
-4.00
-6.00
Overall balance (per cent of GDP)
-8.00
Primary balance (per cent of GDP)
-10.00
Cyclically adjusted balance (per cent of potential GDP)
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…the graph shows that the CAB displayed more volatility than the
SFB during the review period.
10.00
8.00
per cent of potential GDP
6.00
4.00
2.00
0.00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-2.00
-4.00
-6.00
Cyclically adjusted balance (per cent of
potential GDP)
-8.00
Structural Fiscal Balance (per cent of
potential GDP)
-10.00
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…fiscal policy is predominantly pro cyclical in Trinidad and
Tobago.
15.00
5.00
2011
2010
2009
2008
2007
2006
2005
2004
2003
0.00
2002
per cent
10.00
-5.00
Output gap (as a per cent of potential GDP)
Cyclical Fiscal impulse as per cent of potential GDP
-10.00
21
…as the economy attempts to return to a path of sustainable
economic growth, particularly in the non-energy sector,
governments’ active participation will be critical.
15
10
8
6
4
5
2
Growth rates
Per cent
10
0
0
2002
-5
-10
2003
2004
2005
2006
2007
2008
2009
2010
2011
-2
Output gap (as a per cent of potential GDP)
-4
Fiscal impulse as per cent of potential GDP
-6
Non-Energy Real GDP growth
-8
22
…during the pre-crisis years (2003-2008) the energy sector
provided most of the impetus for changes in aggregate demand.
However, there have also been signs of an improved fiscal impulse
from the non-energy sector since the year 2009.
per cent of potential GDP
15.00
10.00
5.00
0.00
2002
-5.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
Output gap (as a per cent of potential GDP)
Cyclical Fiscal impulse as per cent of potential GDP
Structural Fiscal impulse as per cent of potential GDP
-10.00
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1.
The fiscal impulse was much stronger in the pre-crisis
period (2003-2008) than the post crisis period (20092011).
2.
Fiscal policy is predominantly pro-cyclical in Trinidad
and Tobago.
3.
The effect of the business cycle on revenue and
expenditure did not significantly distort the fiscal outturn
during the review period.
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4.
In resource dependent economies like Trinidad and Tobago
it may be useful to estimate the structural fiscal balance to
get a clearer picture of the underlying fiscal position and the
effect of fiscal policy on aggregate demand.
5.
The energy sector provides most of the impetus for changes
in aggregate demand. However, there have also been signs
of an improved fiscal impulse from the non-energy sector
since 2009.
6.
As the economy attempts to return to a path of sustainable
economic growth, particularly in the non-energy sector,
governments’ active participation will be critical.
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Thank you for your
attention.
Please feel free to e-mail your comments to
. This paper can be
accessed on the website of the Central Bank of
Trinidad and Tobago. See WP12/2013 April 2013.
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