The Cyclically Adjusted Budget Balance in EU Fiscal Policymaking

ing from the issue of “creative” accounting, the increasing recourse to one-off measures gave rise to a number of problems for fi scal surveillance. First and foremost, since they were temporary but not cyclical, they impaired the CAB as a measure of both the underlying budgetary position and of the lasting consolidation effort. For instance, revenues from real estate sales, which in some cases reached signifi cant levels in successive years, 23 A detailed analysis of the link between the constraints imposed by the SGP and the recourse to one-off and temporary factors is provided by V. K o e n , P. Va n D e n N o o rd : Fiscal Gimmickry in Europe: Oneoff Measures and Creative Accounting. , in: P. W i e r t s , S. D e e ro s e , E. F l o re s , A. Tu r r i n i , (eds.): Fiscal Policy Surveillance in Europe, Basingstoke 2006, Palgrave McMillan, pp. 45-76. 24 J. Vo n H a g e n , G. Wo l f f : What Do Defi cits Tell Us About Debt? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU, in: Journal of Banking & Finance, Vol. 30, No. 12, 2006, pp. 32593279; M. B u t i , J. N o g u e i r a M a r t i n s , A. Tu r r i n i : From Defi cits to Debt and Back: Political Incentives under Numerical Fiscal Rules, in: CESifo Economic Studies, Vol. 53, No. 1, 2007, pp. 115-152. 25 European Commission: Public Finances in EMU – 2004, in: European Economy, No. 3, 2004. would embellish all key indicators of the EU fi scal surveillance framework, i.e. the headline defi cit, the CAB and the change in the CAB, without having a permanent effect on the medium-term orientation of public fi nances. The obvious fi x to exclude one-offs from the CAB was not without problems. Leaving aside revenues accruing from the sale of UMTS licences, which are one of the few clear cases, views frequently diverged with regard to the actual impact of one-off measures over time.26 The diffi culty in fi nding an encompassing defi nition of one-offs was refl ected in the March 2003 European Council conclusions of the November 2002 Commission communication “strengthening economic policy coordination”, reporting that one-off measures had to be considered “on their own merits on a case-by-case basis”. 27 Fix It, Don’t Break It: Living with Compromises In retrospect, the diffi culties encountered with the CAB materialised bit by bit and were, as highlighted above, linked to specifi c economic or policy episodes. At the level of the EU fi scal surveillance, the response to gradually emerging issues was dominated by a sense of pragmatism. Instead of abandoning the CAB altogether, targeted attempts were made to better understand the reasons for the shortcomings and to look for ways to improve the accuracy of the instrument. To follow this line of compromise was not always easy. Criticism from both academia and fi scal policymakers was at times harsh and hinted at scrapping the CAB as a way forward. The fact that, at the end of the day, this did not happen indicates that there were no viable alternatives, or that alternatives would not have been superior. It is relatively undisputed that in a fi scal surveillance framework geared towards the achievement of medium-term objectives, the CAB, in spite of its shortcomings, provides better guidance than the headline defi cit. After all, it was the volatility of the headline numbers that motivated the decision to ditch the nominal budget balance as the offi cial yardstick of fi scal surveillance under the “old” SGP. A simple back-of-the-envelope calculation illustrates the point. In most euro-area countries, the cyclical component of aggregate economic activity, as measured by the output gap, has exceeded +/3% of GDP at least once in the past twenty years and has frequently reached levels 26 By way of example, it was argued that tax amnesties, combined with the intention to strengthen tax controls, would produce a permanent improvement in the budget. To prove the contrary from an ex ante point of view was not always easy. 27 ECOFON Council report on “Strengthening the coordination of budgetary policies”, 7 March 2003, 6877/03.