A decomposition of structural revenue developments for euro area member states.
Date: 2020-09-04
Institutions: European Central Bank
Subjects: EU Member State, economic cycle, euro area, financial policy, revenue, stability pact

Richard Morris, Lukas Reiss 

Working Paper Series 

A decomposition of  
structural revenue developments  
for euro area member states 

No 2455 / August 2020 

Disclaimer: This paper should not be reported as representing the views of the European Central Bank 
(ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. 

 
 
 
Abstract

This paper presents a framework for analysing the evolution of the structural government

deﬁcit estimated using the oﬃcial EU methodology relevant for the Stability and Growth

Pact. The focus of our framework lies in the analysis of the main driving forces of changes in

estimated structural government revenue, including the impact of changes to tax legislation,

ﬁscal drag (caused e.g. by the non-indexation of income tax brackets), the composition

of economic growth, and a residual. This approach allows us to scrutinise estimates of

discretionary revenue measures and ﬁscal elasticities, both of which play a crucial role in the

current EU ﬁscal governance framework.

Between 2010 and 2018, Germany’s structural revenue ratio increased substantially even

though the estimated impact of changes to tax legislation was close to zero. In most other

larger euro area countries, by contrast, structural revenue performed worse than could have

been expected based on the estimated impact of discretionary revenue measures. Our ap-

proach shows that the composition of economic growth was unfavorable for generating rev-

enue in all analysed countries over this time span. Moreover, in most countries actual revenue

grew by less than what could have been expected in view of the discretionary measures taken

and developments in the macroeconomic aggregates used to approximate tax bases.

Keywords: cyclical adjustment, ﬁscal policy, revenue windfalls

JEL codes: H3, H6, E32, E62

ECB Working Paper Series No 2455 / August 20201Non-technical summary

Fluctuations in economic activity exert a major inﬂuence on the public ﬁnances. Adjusting for

the economic cycle, to distinguish between a “cyclical” and “structural” deﬁcit, therefore plays

an important role in ﬁscal analysis. The EU’s approach to ﬁscal surveillance is no exception in

this respect, where ﬁscal consolidation has been assessed with reference to the evolution of the

estimated structural government deﬁcit for many years. To account for measurement problems

with this concept, the European Commission has estimated consolidation eﬀorts also via the

so-called “expenditure benchmark” in recent years. In the latter approach, revenue-based ad-

justments are approximated “bottom-up” via the estimated impact of discretionary measures,

while the “top-down” change in estimated structural revenue is used for the traditional consoli-

dation indicator, namely the change in the structural balance.

Our main contribution is to help to better understand the observed sizeable diﬀerences

between these two diﬀerent indicators for revenue-based adjustments. For this purpose, we

decompose the diﬀerence between the change in structural revenue and legislative changes (dis-

cretionary revenue measures) into three diﬀerent factors: First, “ﬁscal drag” indicates how the

(structural) ratio of a particular tax to (potential) GDP is expected to evolve over time given the

structure of the tax system. This factor gauges, in particular, the bracket creep caused when

taxpayers’ average tax rates increase as a result of rising average incomes (partly by moving

into diﬀerent tax brackets). Second, the “composition eﬀect” is a gauge of how the structural

revenue ratio is being inﬂuenced by the composition of economic growth. In this respect, the

point is that the cyclical component of the budget balance is derived using a set of elasticities

which imply a certain “typical” evolution of macroeconomic aggregates with respect to GDP,

with wages assumed to be less cyclical than proﬁts and (at least presently in the OECD/EC

methodology) private consumption assumed to grow in line with GDP. Every economic cycle is

diﬀerent, however, and as macroeconomic aggregates grow at rates diﬀerent to those implied by

their elasticities, other things equal, this will exert upward – or downward – pressure on esti-

mated structural revenue. Finally, there remains a residual which captures all other inﬂuences on

structural revenue. Speciﬁcally, this residual captures measurement errors of any kind including

(i) under-/over-estimation of tax elasticities, (ii) the fact that actual tax bases are diﬀerent to

the macroeconomic aggregates used to approximate them, and (iii) under-/over-estimation of

ECB Working Paper Series No 2455 / August 20202the eﬀect of tax measures.

In this paper we present two applications of the framework. The ﬁrst is a more detailed

analysis applied to the case of Spain. This country has been chosen because the Spanish tax

administration publishes detailed estimates of the impact of tax measures, which means that

revenues can be analysed at the level of diﬀerent revenue streams (personal income tax, corpo-

rate income tax, etc.). In this example, we show how our analytical framework can be used to

interpret the eﬀect that Spain’s housing market boom and subsequent bust had on the structural

deﬁcit as revenues were aﬀected in a way not well gauged by the OECD/EC elasticities used for

cyclical adjustment. In this example, we can also see how the structure of government expendi-

ture changed over the course of the substantial ﬁscal consolidation which took place from 2010

onwards.

The second application of the framework is a more rudimentary one, using mainly AMECO

data, but applied to a number of the larger euro area Member States. The analysis shows that in

most countries estimated discretionary revenue measures indicated a larger revenue based ﬁscal

adjustment than the change in structural revenue. Furthermore, in several countries over the

period 2010-18, ﬁscal drag has played an important role in delivering ﬁscal consolidation on the

revenue side (as tax brackets have not been adjusted (fully) in line with rising incomes), while

the composition of economic growth has tended to make ﬁscal consolidation diﬃcult, as e.g. a

declining wage share dampened growth of personal income tax revenue and social contributions.

ECB Working Paper Series No 2455 / August 202031 Introduction

Fluctuations in economic activity exert a major inﬂuence on the public ﬁnances. Adjusting for

the economic cycle, to distinguish between a “cyclical” and “structural” deﬁcit, therefore plays

an important role in ﬁscal analysis. The relationship between the economy and public ﬁnances

is, however, complex, so estimates of the structural government deﬁcit are only a broad gauge.

Understanding the factors driving the evolution of the structural deﬁcit requires subsequent

analysis, not least to disentangle the eﬀects of “policy” from other inﬂuences.

Over time these measurement issues have been increasingly recognised in the European ﬁs-

cal governance framework. Until the early 2010s, the change in the structural balance was the

stand-alone gauge of ﬁscal adjustment in the European ﬁscal framework. There the amount of

revenue-based adjustment is proxied by the change in the structural revenue ratio. After the

“six-pack” legislation and some smaller reﬁnements to the Stability and Growth Pact (SGP),

the change in the structural balance is now complemented by an “expenditure benchmark”, in

which revenue-based consolidation is instead measured on the basis of the discretionary revenue

measures adopted (European Commission, 2019).

As can be seen in ﬁgure 1.1, diﬀerences between the change in the structural revenue ratio

and the amount of discretionary measures are sizeable for most larger euro area countries1. For

example, if we take Germany over the period 2010-18, the structural revenue ratio increased

by more than 2 percentage points, but the estimated impact of discretionary revenue measures

(reported in the AMECO database) was even slightly negative. This raises the question of what

was driving the increase in the structural revenue ratio during this period. Was it ﬁscal drag

caused by non-indexation of progressive income tax brackets? Was it a favourable (”tax rich”)

composition of economic growth? Which components of revenue were aﬀected? Were or should

these developments have been anticipated when making revenue forecasts?2 May the impact of

discretionary measures have been misestimated? Are these discrepancies more of a cyclical or a

structural nature? Similar questions arise for countries where estimated discretionary measures

1Ireland has been left out due to the distortive eﬀect of the high actual (and estimated potential) GDP growth

in 2015.

2When a country is subject to an Excessive Deﬁcit Procedure, the higher the projected discrepancy between
the change in structural revenue and discretionary measures, the lower are consolidation requirements under the
expenditure benchmark (see annex B).

ECB Working Paper Series No 2455 / August 20204Figure 1.1: Decomposition of change in structural revenue from 2010 to 2018 based on Euro-

pean Commission numbers

Source: Own calculations based on European Commission and ECB data.

were far smaller than the change in structural revenue (like Greece, Italy, Portugal and Finland).

In this paper we present an analytical framework which can be used to examine these issues.

We intend to decompose the residual shown in ﬁgure 1.1 into three components, namely the

eﬀect of non-indexation of tax brackets (“ﬁscal drag”), the eﬀect of unexpected behaviour of

tax bases for given changes in output gap and nominal GDP (“composition eﬀects”), and into

a narrower residual covering revenue developments inconsistent with tax elasticities and growth

in tax bases (“residual”).

A similar decomposition has been made before in the “disaggregated framework for analysing

structural developments in public ﬁnances” developed by Kremer and Wendorﬀ (2004) and Kre-

mer et al. (2006). However, their approach was meant to explain the evolution of the structural

government balance based on the disaggregated method of cyclical adjustment developed by

Momigliano and Staderini (1999) and Bouthevillain et al. (2001). While this method of cyclical

adjustment has its merits, it diﬀers substantially from the one relevant for the EU ﬁscal gover-

nance framework as it calculates the cyclical component based on individual gaps for diﬀerent

ECB Working Paper Series No 2455 / August 20205macroeconomic tax bases (instead of only using the gap between GDP and its trend/potential).

Therefore, our contribution is to substantially modify this earlier framework to decompose the

evolution of structural revenue based on the OECD/EC methodology used for EU ﬁscal surveil-

lance described in Mourre et al. (2019).3

Our paper is structured as follows. In section 2 we recall the OECD/EC methodology of

cyclical adjustment used in EU ﬁscal surveillance and explain how to decompose the cyclical

component derived using this methodology. In section 3 we develop our approach for analysing

changes in structural revenue.

In section 4 we present two applications of the analysis, one

requiring detailed country-speciﬁc information on discretionary measures (discussing Spain) and

one relying (predominantly) on AMECO data (focussing on Germany and Austria). Section 5

concludes.

2 Calculation of the cyclical component

In the OECD/EC cyclical adjustment methodology, the cyclical component of the budget balance

in any given year is estimated as the product of the output gap in that year and the semi-elasticity

of the budget balance with respect to output, which is a constant parameter. So the cyclically

adjusted balance cab and the structural balance sb (both in % of potential GDP) are given by:

cabt = bbt − (cid:15) ogt,

sbt = cabt − tmt = bt − tmt − (cid:15) ogt,

(2.1)

(2.2)

denotes the headline budget balance BBt in per cent of nominal GDP Yt, tmt

where bbt = BBt
Yt
are temporary measures (one-oﬀs) in per cent of nominal GDP and ogt = Yt−Y ∗
Y ∗
t
output gap in per cent of potential GDP.4 Finally, the semi-elasticity (cid:15) is a constant parameter

denotes the

t

which gauges the typical reaction of the budget balance (as a ratio to GDP) to a one percentage

3Appendix C shortly explains this alternative method and compares it to the OECD/EC method and to our

decomposition.

4We will base our notation on that contained in the annually published Vade Mecum on the SGP (most
recently European Commission, 2019). However, we will consistently use large letters to denote variables in
nominal terms and small latters to denote ratios to nominal or potential GDP. Furthermore, growth rates will be
expressed by using hats.

ECB Working Paper Series No 2455 / August 20206point increase in the output gap. It is calculated as in Mourre et al. (2019):

(cid:15) = (ηR − 1)r0 − (ηG − 1)g0,

(2.3)

where ηR and ηG are the elasticities of revenue and expenditure with respect to output and

r0 and g0 denote the average (typical) revenue and expenditure ratios.5 The semi-elasticity is

calculated for each EU Member State by the European Commission (Mourre et al., 2019), who

in turn rely on ﬁscal (ﬁscal-to-base) and macro (base-to-output) elasticities estimated by the

OECD (Price et al., 2014).6

Now, (2.3) can be decomposed as follows: First, let ri,0 and gi,0 denote the (typical) shares

in GDP of, respectively, i = 1, ..., k revenue components and i = k + 1, ..., n expenditure com-

ponents. Second, let ηi denote the elasticity of each revenue (or expenditure) component with

respect to output (the ﬁscal-to-output elasticity). Third, note that ηi is the product of the

elasticity of the revenue (expenditure) component with respect to its base (the “ﬁscal-to-base

elasticity”, which we will denote ηRB

i

) and the elasticity of its base with respect to output (the

“base-to-ouput elasticity”, which we will denote ηBY

i

):

ηi = ηRB

i

ηBY
i

.

(2.4)

The overall semi-elasticity can then be expressed (and decomposed) in terms of contributions of

individual revenue and expenditure components:

(cid:15) =

k
(cid:88)

i=1

ri,0(ηRB

i

ηBY
i − 1) −

n
(cid:88)

i=k+1

gi,0(ηRB

i

ηBY
i − 1).

(2.5)

The contribution of each revenue component to the semi-elasticity is given by:

(cid:15)i = ri,0(ηRB

i

ηBY
i − 1).

(2.6)

If for a particular component of revenue ηRB

i

ηBY
i > 1, then this component of revenue will tend

to rise as share of GDP during upturns and fall during downturns (i.e.

it has relatively high

5Presently, a 10-year average covering the period 2008-2017 is used (Mourre et al., 2019).
6This division of work is the reason why we refer to the “OECD/EC cyclical adjustment methodology”.

ECB Working Paper Series No 2455 / August 20207cyclicality) and its contribution to (cid:15) is positive. By contrast, if ηRB

i

ηBY
i < 1, then the revenue

stream has relatively low cyclicality and its contribution to (cid:15) is negative.

In the OECD/EC

cyclical adjustment model structure, for most components of revenue ηRB

i

ηBY
i

is relatively close

to 1 and so the contribution to (cid:15) is small. Overall, revenue is expected to rise and fall with the

economic cycle leaving the revenue-to-GDP ratio roughly unchanged.

The contribution of each expenditure component to the semi-elasticity is calculated in the

same way (just entering the ﬁnal calculation with the opposite sign). In the OECD/EC struc-

ture, only unemployment-related expenditure is viewed as cyclical, and this is a relatively small

component of overall spending. For all other (non-cyclical) expenditure ηRB

i

ηBY
i = 0 and so

(cid:15)i = gi,0, and the contribution of non-cyclical expenditure items to (cid:15) simply corresponds to its

(typical) weight in GDP (the same is true for non-tax revenue).

A crucial point here is that, whereas ηRB

i

ηBY
i

tells us how cyclical components of revenue

and expenditure respond to cyclical ﬂuctuations in output in “levels”, (ηRB

i

ηBY
i − 1) tells us

how both cyclical and non-cyclical revenue and spending ﬂuctuate as “ratios” to GDP over the

economic cycle. While cyclical ﬂuctuations in economic activity mainly inﬂuence government

revenue, when we analyse the public ﬁnances in terms of ratios, the impact of the economic

cycle comes mainly through ﬂuctuations in the expenditure-to-GDP ratio.

The derivation of the semi-elasticity is summarised in table 2.1 for the case of Spain. Ac-

cording to the OECD/EC estimates and calculations, the overall contribution of revenue to

the semi-elasticity is just 0.01. This means that, for every one percentage point change in the

output gap, the revenue-to-GDP ratio would be expected to rise by 0.01 of a percentage point.

The ratios of personal and corporate income tax to GDP would rise, but this would be oﬀset

by a decline in the ratios of social contributions and (non-cyclical) non-tax revenue to GDP.

The overall contribution of expenditure to the semi-elasticity is 0.53. For every one percentage

point change in the output gap, the ratio of non-cyclical expenditure to GDP falls by 0.42 of a

percentage point (pure denominator eﬀect) on top of which the ratio of unemployment-related

expenditure to GDP falls by 0.17 of a percentage point. The latter reﬂects both the denominator

eﬀect and the sensitivity of unemployment (and therefore of unemployment beneﬁts) to output.

ECB Working Paper Series No 2455 / August 20208Table 2.1: Decomposition of the semi-elasticity for Spain

Fiscal- Weight
in GDP

Revenue/expenditure

Base

Earnings
Self-employment income
Capital income
Gross operating surplus
Private consumption
Earnings
-

Personal income tax
PIT on earnings
PIT on self-employment income
PIT on capital income

Corporate income tax
Indirect taxes
Social contributions
Non-tax revenue
Total revenue
Unemployment-related expenditure Unemployment
Other expenditure
Total expenditure
TOTAL

-

Fiscal-
to-base
elasticity
νi
1.88
1.93
1.48
1.83
1.32
1.00
0.82
0.00

Base-
to-output
elasticity
γi
0.99
0.88
0.98
4.55
1.18
1.00
0.88
0.00

1.00
0.00

-5.83
0.00

to-output
elasticity
ηi = νiγi
1.84
1.69
1.44
8.33
1.56
1.00
0.72
0.00
1.02
-5.83
0.00
-0.33

Semi-elasticity

(cid:15)i = ri,0(ηi − 1)
0.07
0.05
0.00
0.01
0.01
0.00
-0.04
-0.04
0.01
-0.17
-0.42
-0.59
0.60

ri,0
0.08
0.07
0.01
0.00
0.02
0.11
0.13
0.04
0.37
0.03
0.42
0.44

Source: OECD, European Commission.

Table 2.2: Decomposition of the cyclical component for Spain

Budget balance
Total revenue

“Corporate income tax”
“Personal income tax”
Indirect taxes
Social contributions
Capital taxes
Non-tax-related revenue

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
% of potential GDP
-1.9
0.0
0.0
-0.2
0.0
0.1
0.0
0.1
1.9
0.1
0.9
0.6
0.4
Compensation of employees
0.3
Intermediate consumption and D.632
Other current expenditure
0.1
0.2
Gross ﬁxed capital formation
0.0
Other capital expenditure
-3.2
Memorandum item: Output gap
Source: Own calculations based on European Commission and ECB data. Note: D.632 = social transfers in kind provided via market producers.

-5.3
-0.1
-0.1
-0.6
0.0
0.3
0.0
0.3
5.3
0.3
2.8
1.5
1.0
0.8
0.2
0.2
0.1
-8.9

-4.8
-0.1
-0.1
-0.5
0.0
0.3
0.0
0.3
4.7
0.2
2.4
1.4
0.8
0.7
0.1
0.2
0.3
-8.0

-0.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.0
0.2
0.1
0.1
0.0
0.0
0.0
0.0
-0.5

-1.4
0.0
0.0
-0.2
0.0
0.1
0.0
0.1
1.4
0.1
0.7
0.4
0.3
0.2
0.0
0.0
0.0
-2.3

-2.8
0.0
-0.1
-0.3
0.0
0.2
0.0
0.1
2.8
0.1
1.4
0.8
0.5
0.4
0.1
0.1
0.0
-4.7

-4.6
0.0
-0.1
-0.5
0.0
0.3
0.0
0.2
4.5
0.3
2.4
1.3
0.8
0.7
0.1
0.2
0.1
-7.7

-3.4
0.0
-0.1
-0.4
0.0
0.2
0.0
0.2
3.4
0.1
1.7
1.0
0.6
0.5
0.1
0.2
0.1
-5.7

-2.6
0.0
-0.1
-0.3
0.0
0.2
0.0
0.1
2.5
0.1
1.3
0.7
0.5
0.4
0.1
0.2
0.0
-4.3

0.5
0.0
0.0
0.1
0.0
0.0
0.0
0.0
-0.5
0.0
-0.3
-0.2
-0.1
-0.1
0.0
0.0
0.0
0.9

0.7
0.0
0.0
0.1
0.0
0.0
0.0
0.0
-0.7
0.0
-0.3
-0.2
-0.1
-0.1
0.0
-0.1
0.0
1.2

1.7
0.0
0.0
0.2
0.0
-0.1
0.0
-0.1
-1.7
-0.1
-0.8
-0.5
-0.3
-0.3
-0.1
-0.1
0.0
2.8

Interest payments
Social beneﬁts in cash

of which: unemployment beneﬁts

Expenditure

Keeping with our example of Spain, table 2.2 reports the decomposition of the cyclical

component (cid:15) ogt = bt − cabt over the period 2007-18. This serves to illustrate, for example, how,

in theory, a recession (like in 2009) is expected to put downward pressure on the personal

and corporate income tax-to-GDP ratios, oﬀset by upward pressure on the ratios of social

contributions and (non-cyclical) non-tax revenue to GDP, while leaving the overall revenue-

to-GDP ratio unaﬀected.

ECB Working Paper Series No 2455 / August 202093 Analytical decomposition of the structural revenue ratio

In the following we will show how to decompose the change in the structural revenue ratio in a

manner consistent with the method used for EU ﬁscal surveillance. Our calculations have been

inspired by Kremer et al. (2006), who did so for a quite diﬀerent method of cyclical adjustment

laid out in Bouthevillain et al. (2001). Appendix C explains the most important diﬀerences

between these two methods of cyclical adjustment and the two diﬀerent decompositions.

The change in the structural revenue ratio srt is given by ∆srt = ∆cart − (tmR

t − tmR

t−1),

where tmR

t are temporary revenue measures, and where the change in the cyclically-adjusted

revenue ratio cart can be expressed as follows (see also European Commission, 2016, page 144):

∆cart = ∆rt − r0(ηR − 1)∆ogt.

(3.1)

∆rt = Rt
Yt

− Rt−1
Yt−1

is the change in the actual revenue ratio and r0(ηR − 1)∆ogt is the change in

the economic cycle’s inﬂuence on the revenue ratio.

The change of cyclically adjusted revenue from an individual component i is given by:

∆cari,t = ∆ri,t − ri,0(ηRB

i

=

(cid:16)

Ri,t−1
Yt

(cid:98)Ri,t − (cid:98)Yt

ηBY
i − 1)∆ogt
(cid:17)

− ri,0(ηRB

i

ηBY
i − 1)∆ogt,

(3.2)

where ∆cart =

n
(cid:80)
i=1

∆cari,t, and where (cid:98)Ri,t and (cid:98)Yt refer to the growth rates in revenue category

Ri and in nominal GDP Y . To arrive at the change in the structural revenue ratio, one has to

deduct the change in revenue one-oﬀs tmR:

∆sri,t =

(cid:16)

Ri,t−1
Yt

(cid:17)

(cid:98)Ri,t − (cid:98)Yt

− ri,0(ηRB

i

i − 1)∆ogt − ∆tmR
ηBY
i,t.

(3.3)

3.1 Tax elasticities and the law of motion for tax revenue

We can decompose growth in revene item i (cid:98)Ri,t in terms of a typical model (equation) for making

revenue forecasts, where tax revenue will depend on the evolution of some base (approximated

by a macroeconomic aggregate), the elasticity of tax revenue to that base and the estimated

ECB Working Paper Series No 2455 / August 202010impact of any discretionary measures. In general, this equation will look as follows:

(cid:98)Ri,t = f

(cid:16)

(cid:98)Bi,t, ηRB

i

(cid:17)

+

DMi,t + RESi,t
Ri,t−1

,

(3.4)

where (cid:98)Bi,t is the growth of the tax base (or whatever macroeconomic variable is used to approxi-

mate the tax base), DMi,t is the estimated impact of any changes to tax legislation (discretionary

measures) and RESi,t is a residual capturing any other forecast judgements. The same model

(equation) can also be used to analyse outturns; only in this case RESi,t now captures the

diﬀerence between the outturn and what would be predicted by the model equation and the

(potentially erroneous) estimate of DMi,t.7

One important ingredient in our decomposition of the change in structural revenue will be

ﬁscal drag, which is the eﬀect of non-indexation of tax brackets (to inﬂation or wage growth) of

non-proportional (i.e. progressive or regressive) taxes on tax revenue. The estimation of ﬁscal

drag is closely related to the exact functional relationship f

(cid:16)

(cid:98)Bi,t, ηRB

i

(cid:17)

between revenue growth

and tax bases and tax elasticities. In case of a unit tax elasticity (like for indirect taxes in all

countries except Italy), i.e. ηRB

i = 1, we simply have f

(cid:16)

(cid:98)Bi,t, ηRB

i

(cid:17)

= ηRB
i

(cid:98)Bi,t = (cid:98)Bi,t; and ﬁscal

drag is zero.

However, non-unit tax elasticities in the OECD framework can be interpreted in diﬀerent

ways. As explained in section 2, the European Commission relies on tax-to-base elasticities

estimated by the OECD, most recently by Price et al. (2014) and before that by Girouard and

Andre (2005). The earlier paper only used tax codes (partially applying microsimulations) for

estimating these elasticities, such that a proportional tax like the corporate income tax would

have a tax-to-base elasticity of 1.

To account for the potentially high cyclicality of corporate taxes, Price et al. (2014) estimated

the elasticity of corporate taxes to gross operating surplus econometrically, which for most

countries leads to elasticities far above 1 (e.g.

the 1.32 for Spain reported in table 2.1; for

France it is even 2.03). The reasoning is that the true corporate tax base tends to be much more

7As discretionary measures DMi,t and residuals RESi,t are expressed in units of national currency, they need

to be divided by Ri,t−1 to yield their contribution to the growth rate of the tax category.

ECB Working Paper Series No 2455 / August 202011cyclical than the gross operating surplus (which is used as macro base by the OECD), meaning

that ηRB

i

is really just an extension of ηBY

i

trying to correct for imperfect measurement of the

tax base. So here ηRB

i

represents what we will call a “short-run elasticity”, translating trend

deviations of the tax base into trend deviations of tax revenue. For example, if the tax elasticity

were 2, we would expect growth of gross operating surplus of 1% above trend to translate into a

growth in corporate taxes of 2% above trend. However, when gross operating surplus grows by

50% over a decade (and trend and actual growth are roughly the same), we should expect revenue

in corporate taxes not to double, but only to increase by about 50% as they are proportional

to their true tax base (so there is no ﬁscal drag). This has to be distinguished from the case

of progressive taxes like the personal income tax (on wages), where tax-to-base elasticities are

typically around 2. Should average wages increase by 50% over a decade, we would expect –

in the absence of discretionary measures and for stable employment – revenue from personal

income tax on wages to double (as it is a progressive tax, there is ﬁscal drag).8

3.1.1 Long-run-elasticity

The most intuitive cases are non-proportional taxes, where a 1% growth in the tax base typically

leads to a growth in revenue by ηRB

i %, both in the short and the long run (which we call a “long-

run elasticity”). In the absence of discretionary measures, the trend growth of the aﬀected taxes

will be diﬀerent from that of the tax base; this phenomenon is called ﬁscal drag throughout the

paper. So it holds that ηRB

(cid:98)Bi,t, ηRB
the following law of motion for growth in unadjusted revenue (cid:98)Ri,t:9

, implying that f

:= ∂ ln Ri,t
∂ ln Bi,t

i

i

(cid:16)

(cid:17)

= ηRB
i

(cid:98)Bi,t. This leads to

(cid:98)Ri,t = ηRB

i

(cid:98)Bi,t +

DMi,t + RESi,t
Ri,t−1

.

(3.5)

This speciﬁcation is only employed for personal income taxes on capital income (for an expla-

nation see section 3.1.3).

8The European Commission does not need to make this distinction, as this is actually not needed for calcu-

lating the cyclical component of revenue, which is only about trend deviations.

9This equation can also be rewritten as Ri,t =

Ri,t−1 + DMi,t + RESi,t, which would be a

(cid:16)

1 + ηRB

i

(cid:98)Bi,t

(cid:17)

typical formulation of a ﬁscal forecasting equation using variables in currency units.

ECB Working Paper Series No 2455 / August 2020123.1.2 Short-run-elasticity

When a non-unit tax elasticity is applied to a proportional tax, we use the label “short-run

elasticity”. If the tax base grows by 1% above trend, tax revenue will grow by ηRB

i %, while if

in the long run the tax base grows by x%, tax revenue will grow by x%, too (i.e. there is no
∂ ln

, which implies that f

(cid:16)

(cid:17)

(cid:98)Bi,t, ηRB

i

− (cid:98)B∗

i,t =

ﬁscal drag). In this case it holds that ηRB

i

(cid:16)

ηRB
i

(cid:98)Bi,t − (cid:98)B∗
i,t

(cid:17)

and (cid:98)Ri,t − (cid:98)B∗

i,t = ηRB

i

(cid:16)

:=

Ri,t
B∗
i,t
Bi,t
B∗
i,t
(cid:17)
(cid:98)Bi,t − (cid:98)B∗
i,t

∂ ln

+ DMi,t+RESi,t
Ri,t−1

, which can be rewritten as:

(cid:98)Ri,t = ηRB

i

(cid:16)

(cid:98)Bi,t − (cid:98)B∗
i,t

(cid:17)

+ (cid:98)B∗

t +

DMi,t + RESi,t
Ri,t−1
DMi,t + RESi,t
Ri,t−1

= ηRB

i

(cid:98)Bi,t − (ηRB

i − 1) (cid:98)B∗

i,t +

.

(3.6)

This speciﬁcation is not only applied for corporate income taxes, but also for indirect taxes10

and social contributions (for an explanation see section 3.1.3). As the European Commission’s

method for estimating output gaps does not make any statements on trend growth rates of GDP

income components, we will assume a balanced growth path in the following. This means that

the trend growth of the tax base will be identical to the one of trend GDP, i.e. (cid:98)B∗

i,t = (cid:98)Y ∗
t .

3.1.3 Personal income taxes

In Price et al. (2014) the elasticities of personal income tax (PIT) with respect to personal in-

come (and of social contributions with respect to earnings) are derived via a microsimulation of

tax codes. This approach gives an indication of how the tax paid by a representative household

will tend to rise as their income rises. In the case of personal income taxes, ηRB

i > 1 because

individuals’ (households’) average tax rate tends to increase as their income rises due to a pro-

gressive tax schedule (“bracket creep”). In the case of social contributions, usually ηRB

i ≈ 1,

but it can be a bit above or below one depending on whether there are ceilings and/or ﬂoors on

the size of the tax base.

When the non-unit ﬁscal-to-base elasticity is calibrated in this way and ﬁscal drag is under-

stood to refer to bracket creep, ηRB

i > 1 is applicable to growth in “average” incomes Wt, not

“total” income Bt = NtWt. The application of the non-unit elasticity for personal income tax

10This is only relevant for Italy as for all other countries the tax elasticity of indirect taxes is 1.

ECB Working Paper Series No 2455 / August 202013to total income is a quirk of the OECD/EC methodology, which tends to exaggerate the cycli-

cal component in relation to these particular components of revenue. If, for example, earnings

growth is only driven by an increase in the number of employees Nt (rather than average earn-

ings), then revenue from PIT on wages should increase by the same rate, while the OECD/EC

method assumes an elasticity far above 1.

In order to avoid exaggerating the inﬂuence of this assumption on ﬁscal drag, it is necessary

to interpret ηRB

i

as a long-term elasticity with regard to average income Wt, but as a short-

term-elasticity with regard to the number of taxpayers Nt, i.e. ηRB

i = ∂ ln Ri,t
∂ ln Wt

=

Ri,t
∂ ln
N ∗
t
∂ ln Nt
N ∗
t

, which

+ (cid:98)N ∗

t . This leads to the following law of

implies that f

(cid:16)

(cid:98)Bi,t, ηRB

i

(cid:17)

motion for PIT revenue:

= ηRB

i (cid:99)Wt + ηRB

i

(cid:16)

(cid:98)Nt − (cid:98)N ∗
t

(cid:17)

(cid:98)Ri,t = ηRB

i (cid:99)Wt + ηRB

i

(cid:98)Nt − (ηRB

i − 1) (cid:98)N ∗

t +

DMi,t + RESi,t
Ri,t−1

= ηRB

i

(cid:98)Bi,t − (ηRB

i − 1) (cid:98)N ∗

t +

DMi,t + RESi,t
Ri,t−1

.

(3.7)

The same modiﬁcation is also applied for self-employment income, where the tax elasticity is

diﬀerent from 1, too. As there is no macroeconomic information on the number of taxpayers

for capital income taxes, we are unable to make this modiﬁcation for PIT on capital income.

However, we might generally expect that ﬂuctuations in capital income (interest, dividends,

capital gains) are mainly due to ﬂuctuations in average incomes. Therefore, we use equation

(3.5) to describe the development of the latter subcategory. Furthermore, note that the OECD

estimates the elasticity of social contributions with regard to compensation of employees to be

below 1 for most countries based on tax codes, likely due to the eﬀect of ceilings on the tax

base. As these ceilings tend to be indexed in most countries, we apply equation (3.6) for social

contributions.

3.2 Decomposing the change in the structural revenue ratio

In the following we will decompose the change in the cyclically adjusted revenue ratio in equa-

tion (3.2) into the following components: (trend) ﬁscal drag, composition eﬀect, discretionary

measures and a residual. The latter two components already show up in the equations for

unadjusted revenue in section 3.1. Fiscal drag describes the eﬀect that – in the absence of

ECB Working Paper Series No 2455 / August 202014discretionary measures – non-proportional taxes have a diﬀerent trend growth rate than their

bases. The composition eﬀect is driven by the diﬀerence between the actual growth of the tax

base and its predicted growth based on GDP growth and the change in the output gap, i.e. it

is based on the residuals from the equations estimating the macro elasticities ηBY

i

. It is derived

such that the expression is identical regardless of whether the tax elasticity is a short-run- or

a long-run-elasticity and such that ﬁscal drag is not driven by cyclical movements in real vari-

ables. Appendix A discusses the rationale for the exact deﬁnitions of ﬁscal drag and composition

eﬀects.

3.2.1 Long-run-elasticity

Putting (3.5) into (3.2) yields:

∆cari,t =

(cid:16)

Ri,t−1
Yt

ηRB
i

(cid:98)Bi,t − (cid:98)Yt

(cid:17)

− ri,0(ηRB

i

= cari,t−1

(cid:16)

ηRB
i

(cid:98)Bi,t − (cid:98)Yt − ηRB

i

i ∆ogt + (cid:98)Yt − (cid:98)Y ∗
ηBY

ηBY
i − 1)∆ogt +

Ri,t−1
Yt
t + ηRB

DMi,t + RESi,t
Ri,t−1
(cid:98)Y ∗
t

t − ηRB
(cid:98)Y ∗

(cid:17)

i

i

+dmi,t + resi,t

i − 1) (cid:98)Y ∗
= cari,t−1(ηRB
t
(cid:123)(cid:122)
(cid:125)
ﬁscal drag

(cid:124)

+dmi,t + resi,t,

(cid:124)

+ cari,t−1ηRB

i

t − ηBY

i ∆ogt

(cid:16)

(cid:98)Bi,t − (cid:98)Y ∗
(cid:123)(cid:122)
composition eﬀect

(cid:17)

(cid:125)

(3.8)

where dmi,t refers to discretionary measures in per cent of nominal GDP, and the residual resi,t

contains the approximation errors due to linearization. For the intermediate steps we have
used that (due to the low cyclicality of the revenue ratio) Ri,t−1

≈ ri,t ≈ ri,0 ≈ cari,t and that

Yt

(cid:98)Y ∗
t ≈ (cid:98)Yt − ∆ogt.

i − 1) (cid:98)Y ∗
The expression cari,t−1(ηRB
t
much the ﬁscal-to-base elasticity ηRB

i

is now the structural ﬁscal drag, which depends on how

diﬀers from one and on the structural growth of the tax

base (which according to our assumption of a balanced growth path is identical to that of trend

output).

The term cari,t−1ηRB

i

(cid:16)

(cid:98)Bi,t − (cid:98)Y ∗

t − ηBY

i ∆ogt

(cid:17)

is the composition eﬀect which derives from

any diﬀerence between the actual growth of the tax base (cid:98)Bi,t and its stylised cyclical path, which

is to ﬂuctuate around the growth path of overall trend output in the order of magnitude given

ECB Working Paper Series No 2455 / August 202015by the base-to-output elasticity ηBY

i

.

This distinction between ﬁscal drag, composition eﬀect and residual is also important for

assessing the “true” structural adjustment on the revenue side: Fiscal drag should be considered

as a discretionary revenue measure in a broader sense. In case all tax bases have indeed the

same trend growth rate as GDP, the composition eﬀect is of a purely cyclical nature. But if

there were indeed deviations in long-term trend growth rates (e.g. a downward trending wage

share), the composition eﬀect would be partly structural.11 As the residual in our approach

is directly taken from the underlying equations for unadjusted revenue (i.e. equations 3.5, 3.6

and 3.7), systematically large residuals may indicate that one or more of the ingredients of this

equation (i.e. tax base, tax elasticity, estimate of discretionary revenue measures) suﬀers from

problems.

3.2.2 Short-run-elasticity

Putting (3.6) into (3.2) (assuming (cid:98)B∗

i,t = (cid:98)Y ∗

t ) yields:

∆cari,t =

Ri,t−1
Yt

(cid:16)

ηRB
i

(cid:98)Bi,t − (ηRB

(cid:17)

i,t − (cid:98)Yt

−ri,0(ηRB

i

ηBY
i − 1)∆ogt +

= cari,t−1

(cid:16)

ηRB
i

(cid:98)Bi,t − (ηRB

i − 1) (cid:98)B∗
Ri,t−1
Yt
i − 1) (cid:98)Y ∗

DMi,t + RESi,t
Ri,t−1
t − (cid:98)Yt − ηRB

i

i ∆ogt + (cid:98)Yt − (cid:98)Y ∗
ηBY
t

(cid:17)

+dmi,t + resi,t

= cari,t−1ηRB

i

t − ηBY

i ∆ogt

(cid:16)

(cid:98)Bi,t − (cid:98)Y ∗
(cid:123)(cid:122)
composition eﬀect

(cid:124)

+dmi,t + resi,t.

(3.9)

(cid:17)

(cid:125)

This equation is similar to (3.8), with the composition eﬀect being the same, but the ﬁscal drag

is set to 0.

11This is one of the largest diﬀerences to the approach of Kremer et al. (2006), where the change in cyclically
adjusted revenue (calculated using an alternative method of cyclical adjustment described in Bouthevillain et al.,
2001) is decomposed into ﬁscal drag, decoupling, discretionary measures and a residual. There “decoupling”
shows the impact of the tax base having a diﬀerent trend growth rate than GDP, which is therefore in principle
of a structural nature.

ECB Working Paper Series No 2455 / August 2020163.2.3 Personal income taxes

Putting (3.7) into (3.2) (assuming (cid:98)B∗

t = (cid:98)Y ∗

t ) yields:

∆cari,t =

Ri,t−1
Yt

(cid:16)

ηRB
i

(cid:98)Bi,t − (ηRB

(cid:17)

t − (cid:98)Yt

i − 1) (cid:98)N ∗
Ri,t−1
Yt

−ri,0(ηRB

i

ηBY
i − 1)∆ogt +

= cari,t−1

(cid:16)

+cari,t−1

ηRB
i
(cid:16)

ηRB
i

= cari,t−1(ηRB

(cid:98)Bi,t − (ηRB

i − 1) (cid:98)N ∗
(cid:17)

t − ηRB
(cid:98)Y ∗
(cid:16)

i

(cid:98)Y ∗
t

t − (cid:98)N ∗
(cid:98)Y ∗
t

DMi,t + RESi,t
Ri,t−1
t − (cid:98)Yt − ηRB

i

+ dmi,t + resi,t

i − 1)
(cid:123)(cid:122)
ﬁscal drag
(cid:16)

(cid:17)

(cid:125)

i ∆ogt + (cid:98)Yt − (cid:98)Y ∗
ηBY
t

(cid:17)

(cid:124)

(cid:124)

+ cari,t−1ηRB

i

t − ηBY

i ∆ogt

(cid:98)Bi,t − (cid:98)Y ∗
(cid:123)(cid:122)
composition eﬀect

+dmi,t + resi,t.

(3.10)

(cid:17)

(cid:125)

The expression for the composition eﬀect is identical to the one in (3.8) and (3.9), but the

ﬁscal drag is now driven by the trend growth of nominal GDP per person employed. This

adjustment is necessary as trend growth in employment of 1% should induce structural revenue

to increase by exactly 1%, too. Due to the OECD’s assumption of a non-unit elasticity for overall

earnings, the composition eﬀect can take somewhat odd values in case actual employment growth

diﬀers signiﬁcantly from trend employment growth.

3.2.4 Equations for the change in structural revenue ratios

To get from the decomposed change in cyclically adjusted revenue cari,t to the one in structural
revenue sri,t = cari,t − tmR

i,t, one has to adjust both sides of equations (3.8), (3.9) and (3.10) for

temporary measures:

∆sri,t = f di,t + cari,t−1ηRB

i

(cid:16)

(cid:98)Bi,t − (cid:98)Y ∗

t − ηBY

i ∆ogt

(cid:17)

+ (cid:102)dmi,t + resi,t,

(3.11)

where (cid:102)dmi,t := dmi,t − (tmR
measures dmi,t adjusted for temporary measures) and ﬁscal drag f di,t = cari,t−1(ηRB
i − 1) (cid:98)Y ∗
t
case of a long-run elasticity, f di,t = 0 in case of a short-run elasticity and f di,t = cari,t−1(ηRB

i,t−1) are structural revenue measures (i.e.

i,t − tmR

total revenue

in

i −

(cid:16)

1)

t − (cid:98)N ∗
(cid:98)Y ∗
t

(cid:17)

for personal income taxes.

ECB Working Paper Series No 2455 / August 2020174 Shedding some light on the diﬀerences between discretionary

revenue measures and changes in structural revenue

In this section we illustrate diﬀerent ways of applying this framework: In subsection 4.1 we

show a detailed decomposition of the change in the structural balance of Spain from 2008 to

2018, which requires detailed information on the composition of discretionary revenue measures

across tax categories. If such data is not available, a fallback is to use data on total revenue

measures contained in the AMECO database, which then limits us to a less detailed analysis

than in subsection 4.2.

Most of the data used for the following decompositions (and for the ﬁgures and tables in

the previous sections) is taken from the spring 2019 vintage of the AMECO database of the

European Commission12, with the exceptions of the discretionary and temporary measures for

the detailed decomposition in section 4.1, revenue from EU transfers (taken – if available –

from Eurostat or alternatively from the ECB’s external Statistical Data Warehouse) and the

labour contribution to potential growth13 (taken from the European Commission’s CIRCABC

platform).

4.1 Detailed decomposition of structural revenue in Spain

A full application of the framework requires detailed information regarding the (estimated) im-

pact of changes to tax legislation as well as the eﬀect of temporary or one-oﬀ inﬂuences which

may also be excluded from the structural deﬁcit. Unfortunately, the European Commission only

provides estimates for the sum of discretionary revenue measures (over all tax categories), and

temporary measures are only available for total revenue and for total expenditure. Furthermore,

these series in the Commissions’ AMECO database only start in 2010. Therefore, we have to rely

on alternative (and country-speciﬁc) data sources for a detailed analysis. In the case of Spain,

the tax administration (AEAT) provides estimates of the impact of changes to tax legislation

in its monthly and annual reports on tax receipts.14 In this application we use these estimates,

12Note that in the EC/OECD method “Corporate income tax” and “Personal income tax” are supposed to
cover all current taxes on income, wealth, etc., and not only taxes on income. Total revenue from current taxes
on income, wealth, etc. has been attributed to corporates and households according to information from the
household and corporate sector accounts provided in AMECO.

13As the Commission method assumes a labour share of 0.65 in a Cobb-Douglas production function, trend

employment growth equals the labour contribution to potential growth divided by 0.65.

14www.agenciatributaria.es

ECB Working Paper Series No 2455 / August 202018with a few very minor adjustments.15 Overall, these estimates tend to be much smaller than

the ones released by the European Commission in its AMECO database (which are used in

ﬁgures 1.1, 4.1) and 4.2 as well as in table E.3). As far as temporary or one-oﬀ inﬂuences on the

government balance are concerned, in this section we exclude (only) the impact of government

support to ﬁnancial institutions on capital expenditure (based on information contained in Euro-

stat’s supplementary tables for the ﬁnancial crisis). Hence the temporary or one-oﬀ inﬂuences we

identify here will not be the same as those identiﬁed by the EC in its implementation of the SGP.

Table 4.1 reports the resulting decomposition of the change in the structural balance over

the period 2008-18. The numbers in the ﬁrst 10 columns refer to year-on-year changes, while

the ﬁnal column shows the cumulated ﬁgures for the entire period. This period consists of two

years of substantial ﬁscal deterioration in 2008-09 at the time of the global economic and ﬁnan-

cial crisis, followed by several years of subsequent ﬁscal consolidation (2010-13), and ﬁnally an

episode of neutral to expansive policies (2014-18). The ﬁrst four lines show the transition from

the change in the headline balance-to-GDP ratio to the change in the structural balance ratio

(in per cent of potential GDP). The remaining lines decompose the change in the structural

balance ratio across diﬀerent components of revenue and expenditure.

To illustrate succinctly the beneﬁts of the analysis, let us ﬁrst say a few words about the

ﬁscal deterioration in 2008-09 and then focus on the ﬁscal consolidation period from 2010-2018.

In 2008-09, Spain’s government balance ratio lurched from a surplus of almost 2% to a deﬁcit

of 11%. As gauged by the EC cyclical adjustment methodology, most (around three-quarters)

of this deterioration was structural, which in turn was mainly caused by a decline in the struc-

tural revenue ratio. Our analytical framework, however, attributes most of this decline in the

structural revenue ratio to the residual (i.e. meaning that it was neither caused by discretionary

measures nor by ﬁscal drag nor by the composition of GDP growth). Instead, it reﬂects the fact

that tax receipts were hit hard by developments not reﬂected in the evolution of the macroe-

conomic aggregates used to approximate tax bases. Before the ﬁnancial crisis, tax revenue in

Spain had been boosted by rising property values and transactions, reﬂected in higher corporate

15We exclude a measure which changed the way VAT on imports was paid and which aﬀected annual VAT
collection on a cash - but not on an accrual - basis. We also exclude the estimated impact on personal in-
come tax stemming from the suspension of government employees’ Christmas bonus in 2012 and its subsequent
compensation in 2015-16, as the eﬀect on revenue would be captured by the evolution of the base.

ECB Working Paper Series No 2455 / August 202019Table 4.1: Detailed decomposition of the change in the structural balance for Spain

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

“Corporate income tax”

Fiscal drag
Composition eﬀect
Discretionary measures
Residual

“Personal income tax”

Fiscal drag
Composition eﬀect
Discretionary measures
Residual
Indirect taxes
Fiscal drag
Composition eﬀect
Discretionary measures
Residual

Social contributions

Fiscal drag
Composition eﬀect
Discretionary measures
Residual
Capital taxes

Discretionary measures
Residual

Total taxes and social contributions

Fiscal drag
Composition eﬀect
Discretionary measures
Residual

Non-tax-related revenue

EU transfers
Residual

Change in structural expenditure

Interest payments
Structural primary expenditure

Social beneﬁts in cash
Compensation of employees
Intermediate consumption and D.632
Other current expenditure
Gross ﬁxed capital formation
Other capital expenditure

Memorandum items

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
% of potential GDP
1.6
-6.5
-6.3
-0.7
-2.6
-1.0
0.0
0.0
0.0
2.3
-3.9
-5.3
1.4
-1.9
-4.2
-0.4
-0.5
-1.8
0.0
0.0
0.0
-0.1
0.1
0.0
-0.1
0.1
-0.7
-0.3
-0.7
-1.1
0.4
-0.2
-0.4
0.1
0.1
0.2
-0.2
0.1
0.3
0.3
-0.3
-0.8
0.3
-0.1
-0.2
1.7
-1.1
-1.8
0.0
0.0
0.0
0.2
-0.1
-0.1
0.4
0.1
0.0
1.1
-1.1
-1.8
-0.2
0.1
0.0
0.0
0.0
0.0
-0.2
0.1
0.4
0.0
0.0
0.0
0.0
0.0
-0.3
0.0
-0.1
-0.1
0.0
0.0
0.0
0.0
-0.1
-0.1
1.5
-1.8
-4.0
0.1
0.1
0.2
-0.3
0.2
0.7
0.6
-0.1
-1.5
1.1
-2.0
-3.5
0.0
-0.1
-0.2
0.1
-0.1
-0.1
-0.1
0.0
-0.1
-0.8
2.0
1.1
0.1
0.1
0.0
-1.0
2.0
1.2
0.3
0.8
0.4
-0.2
0.6
0.5
-0.1
0.3
0.3
-0.2
0.1
0.2
-0.5
0.3
-0.1
-0.3
-0.1
0.0

0.8
1.4
-0.2
-0.4
-0.7
-0.2
0.0
0.0
0.1
-0.3
-0.2
0.1
-0.1
-0.4
0.2
-0.2
0.0
-0.1
0.0
-0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.6
0.1
-0.2
-0.3
-0.2
-0.2
-0.2
0.1
-0.3
-0.2
-0.1
0.5
0.1
-0.1
0.1
-0.5
-0.1

0.7
1.8
0.1
-1.2
-0.4
0.3
0.0
-0.1
-0.3
0.6
-0.6
0.1
0.0
-0.4
-0.2
0.3
0.0
-0.1
0.1
0.3
-0.2
0.0
0.1
0.0
-0.3
0.0
0.0
0.0
-0.2
0.1
-0.1
-0.6
0.4
-0.3
0.0
-0.2
0.7
-0.3
1.0
0.2
0.3
0.2
-0.1
0.4
0.0

-0.8
-1.3
-3.3
3.8
1.5
0.4
0.0
0.1
0.4
-0.1
0.5
0.1
-0.4
0.5
0.4
0.5
0.0
0.2
0.2
0.2
-0.3
0.0
-0.4
0.0
0.1
0.0
0.0
0.0
1.1
0.1
-0.6
1.1
0.5
0.4
0.1
0.3
-2.3
0.4
-2.8
0.2
-0.7
-0.5
-0.2
-1.2
-0.4

0.6
0.8
0.0
-0.3
0.9
0.2
0.0
0.0
0.0
0.2
0.2
0.1
0.1
0.0
0.1
0.1
0.0
0.0
0.0
0.1
0.2
0.0
0.1
0.0
0.1
0.0
0.0
0.0
0.7
0.1
0.1
0.0
0.5
0.2
0.2
0.0
1.2
-0.1
1.3
0.5
0.1
0.1
0.1
0.2
0.3

-0.3
-0.9
-0.4
1.0
0.0
0.0
0.0
0.0
0.1
-0.2
0.4
0.1
0.1
0.2
0.0
-0.3
0.0
0.1
0.4
-0.7
0.0
0.0
-0.1
0.0
0.1
0.0
0.0
0.0
0.0
0.1
0.1
0.7
-0.8
-0.1
0.1
-0.1
-1.1
0.5
-1.6
-0.2
-0.3
-0.1
0.1
-1.0
-0.2

1.4
1.1
0.2
0.1
0.2
0.0
0.0
0.0
-0.1
0.1
0.1
0.1
-0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.2
0.0
0.0
0.0
0.2
-0.1
0.0
-0.1
0.2
0.1
-0.2
0.0
0.2
-0.1
0.0
-0.1
0.0
-0.2
0.2
0.2
-0.1
0.1
-0.1
0.1
0.1

3.5
-0.6
3.4
0.6
0.9
-0.1
0.0
0.0
0.0
0.0
0.2
0.1
-0.1
0.1
0.1
0.8
0.0
-0.1
1.1
-0.2
-0.2
0.0
-0.2
0.0
-0.1
0.1
0.0
0.1
0.8
0.1
-0.4
1.2
-0.1
0.2
-0.1
0.3
0.3
0.4
-0.1
0.0
0.1
-0.3
0.1
-0.3
0.3

1.0
0.8
0.2
0.1
0.3
-0.1
0.0
0.0
-0.1
0.1
-0.1
0.0
0.1
0.0
-0.2
0.3
0.0
0.1
0.1
0.1
0.1
0.0
0.0
0.0
0.0
0.1
0.0
0.1
0.3
0.0
0.1
0.0
0.1
0.0
0.0
0.1
0.2
0.0
0.2
0.2
0.0
0.0
-0.1
-0.1
0.0

08-18

-4.4
-1.2
0.0
-3.2
-2.1
-2.3
0.0
0.1
-0.5
-1.8
0.3
1.0
-0.4
-0.7
0.4
0.2
0.0
0.1
2.3
-2.2
-0.3
0.0
-0.2
0.0
0.0
0.0
0.0
0.0
-2.0
1.0
-0.5
1.1
-3.7
0.0
0.0
0.0
1.1
0.9
0.3
3.3
0.3
-0.1
-0.1
-2.7
-0.5

Growth rate of real potential GDP
Growth rate of GDP deﬂator
Growth rate of nominal potential GDP

2.8
2.1
5.0

0.8
0.3
1.0

1.2
0.2
1.3

0.5
0.0
0.5

-0.6
0.1
-0.5

-0.7
0.4
-0.3

0.0
-0.2
-0.2

0.4
0.5
0.9

0.7
0.3
1.0

1.1
1.2
2.3

1.2
1.0
2.2

Source: Own calculations based on European Commission, Eurostat, AEAT and ECB data. Note: D.632 = social transfers in kind provided via market producers.

income tax and revenue from stamp duties. Revenue then fell sharply as the market ceased up,

prices and transactions fell and corporates suﬀered substantial losses. This is why the negative

residuals in 2008-09 appear mainly under corporate income tax and indirect taxes.

From 2010 to 2018, Spain’s headline government balance-to-GDP ratio improved by almost

8 percentage points (the deﬁcit-to-GDP ratio was reduced from a peak of 11 per cent in 2009

to below 3 per cent in 2018). Applying the OECD/EC methodology and current EC estimates

ECB Working Paper Series No 2455 / August 202020of the output gap, this improvement was mostly structural. The improvement in the structural

balance-to-GDP ratio, of about 6 percentage points, came by about 2/3 from an increase in the

structural revenue ratio and by 1/3 from a reduction in the structural expenditure ratio.

When looking at expenditure, we notice a signiﬁcant increase in the structural ratios of in-

terest payments to GDP and social beneﬁts in cash. The latter was largely due to the growing

number of pensioners in a period during which potential output was overall broadly stagnant.

The overall reduction of the structural expenditure ratio was delivered ﬁrst and foremost by

reducing investment (gross ﬁxed capital formation) and consumption (compensation of employ-

ees, intermediate consumption and social transfers in kind provided via market producers). In

the case of expenditure, our analytical framework does not go beyond the decomposition of the

change in the expenditure ratio across components, leaving interpretation in the hands of the

analyst.

In the case of revenue, however, for taxes and social contributions we can analyse the driving

forces of developments in the structural revenue ratio based on the model set out in section

3. This decomposition illustrates that the increase in the structural revenue ratio during the

consolidation period was mainly driven by indirect taxes, which in turn reﬂected changes to

tax legislation introduced during this period (there were important increases in VAT rates in

mid-2010 and in mid-2012).

The composition eﬀect has weighed down on the structural revenue ratio since 2010, which is

a consequence of the wage moderation during this period, while wages grew somewhat more than

predicted by macro elasticities in 2008-09 (leading to positive composition eﬀects in those years).

Revenue residuals over the consolidation period have tended to be positive, although far from

oﬀsetting the development during the 2008-09 recession. Some of this can be seen as the ﬂip-side

of earlier developments as, for example, house prices and transaction have gradually recovered.

In the case of personal income tax, the positive residuals over the consolidation period reﬂects

(at least in part) the taxation of pension income, the growth of which has outpaced that of wage

income. An increase in the share of people who are self-employed is another factor contributing

to positive residuals for both personal income tax and social contributions.16 Revenue residuals

16For the informed analyst, nearly every number in table 4.1 may have a story behind it. But our purpose

ECB Working Paper Series No 2455 / August 202021were signiﬁcantly negative in 2011 (mainly due to indirect taxes, which also include property-

related taxes), also reﬂecting the surprisingly poor headline ﬁscal performance of Spain that

year (in autumn 2011, the European Commission projected a headline deﬁcit of 6.6% of GDP

for 2011, while the autumn 2012 notiﬁcation for 2011 was at 9.4% of GDP). These developments

contributed to the European Commission going beyond using only the change in the structural

balance for assessing consolidations of countries in Excessive Deﬁcit Procedures,17 which was

initially done via the “adjusted ﬁscal eﬀort” (page 66ﬀ in European Commission, 2013).

This analysis also shows the merits of having somewhat more detailed data on revenue

measures than published by the European Commission, as here we can analyse residuals for

each of the broad revenue subcategories. Such information is useful when scrutinizing future

discretionary revenue measures and when revising the tax-to-base elasticities (and possibly the

tax bases themselves). For example, in Spain residuals have been much larger in absolute value

for corporate and indirect taxes than for social security contributions and personal income taxes.

This indicates that the evolution of the ﬁrst two revenue categories has been harder to model

than the latter two. Especially for corporate income taxes, the tax-to-base elasticity may be too

low, as residuals were highly negative in the downturn around 2009 and tended to be positive

during the recovery.

4.2 Decomposition for the larger euro area countries

Calculating the decomposition shown in the previous section requires detailed information con-

cerning which tax revenue subcategories are aﬀected by discretionary measures and which rev-

enue and expenditure items are aﬀected by one-oﬀs. However, the European Commission’s

AMECO database only oﬀers a separation of discretionary revenue measures into current and

capital revenue and a separation of one-oﬀs into revenue and expenditure.

Therefore, this section shows a less detailed approach, which can be easily replicated for any

EU country. Expenditure is just decomposed into primary expenditure and interest expendi-

ture (assuming that expenditure-side one-oﬀs do not aﬀect interest spending). On the revenue

side ﬁscal drag, composition eﬀects, discretionary measures and residuals are summed up over

here is limited to illustrating the usefulness of having such an analytical framework.

17In the “six-pack” legislation of 2011, the use of an expenditure benchmark for assessing ﬁscal eﬀorts was only

foreseen for the preventive arm of the SGP (i.e. for countries not subject to an Excessive Deﬁcit Procedure).

ECB Working Paper Series No 2455 / August 202022all subcategories. This also includes non-tax revenue, which is why the revenue residual also

contains unexplained changes in the ratio of non-tax revenue over potential GDP. As govern-

ment revenue from the EU budget (part of non-tax revenue) is accounted for separately in EU

ﬁscal rules, the change in this subcategory is also reported in the following tables and ﬁgures.

For most euro area countries these transfers are typically below 1

4 % of GDP in all years (and

year-on-year changes are mostly very close to 0).18

Table 4.2: Decomposition of the change in the structural balance for Germany

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
-0.1
-0.6
0.1
0.4
0.3
0.2
-0.1
-0.2
0.0
0.4
-0.1
0.3
-0.3

0.2
0.0
0.3
-0.1
0.0
0.2
-0.3
0.0
0.0
0.1
0.1
0.3
-0.2

0.1
0.3
0.0
-0.2
0.3
0.2
-0.2
-0.1
0.0
0.5
0.5
0.7
-0.2

0.7
-0.1
0.0
0.7
0.6
0.2
0.1
-0.1
0.0
0.3
-0.1
0.0
-0.1

0.9
-0.2
0.1
1.1
0.5
0.2
0.4
0.1
0.0
-0.2
-0.6
-0.3
-0.2

3.3
1.4
1.1
0.8
0.7
0.1
0.0
0.3
0.0
0.4
-0.1
-0.2
0.1

0.7
0.2
-0.3
0.7
0.0
0.2
-0.3
-0.1
0.0
0.2
-0.8
-0.4
-0.4

5.9
1.3
1.1
3.6
2.6
1.5
-0.4
-0.1
-0.1
1.7
-1.0
0.5
-1.5

0.1
0.2
-0.2
0.1
0.2
0.2
0.1
-0.1
-0.1
0.0
0.0
0.2
-0.1

composition eﬀects and residuals

0.6
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-0.6

-0.3

-0.1

0.5

0.0

0.6

0.2

0.8

Table 4.3: Decomposition of the change in the structural balance for Austria

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
0.2
-0.5
0.0
0.7
0.5
0.2
0.2
0.2
0.0
0.0
-0.2
-0.1
-0.1

-0.5
0.3
0.2
-1.1
-1.2
0.2
-0.1
-1.1
0.0
-0.3
-0.1
0.1
-0.2

0.8
0.5
0.1
0.3
-0.3
0.2
-0.1
-0.2
0.0
-0.1
-0.6
-0.3
-0.2

-0.8
-0.2
-1.0
0.5
0.1
0.2
-0.1
0.3
0.0
-0.3
-0.3
-0.1
-0.2

0.4
-0.1
-0.2
0.7
0.6
0.2
0.4
0.2
0.0
-0.3
-0.1
0.0
-0.1

0.9
0.5
0.0
0.3
0.2
0.2
0.1
-0.1
0.0
-0.1
-0.2
0.0
-0.2

1.9
1.1
0.1
0.6
0.0
0.2
-0.2
0.3
0.0
-0.4
-0.7
-0.6
-0.1

1.7
-0.1
1.2
0.6
0.3
0.3
-0.4
0.1
0.0
0.3
-0.3
-0.2
-0.1

4.6
1.5
0.3
2.7
0.2
1.7
-0.1
-0.2
0.0
-1.2
-2.5
-1.3
-1.2

composition eﬀects and residuals

0.5
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-1.0

0.6

0.5

0.7

1.1

0.1

0.3

2.9

18For France there is no publicly available data on these revenue items (therefore EU transfers are also not

shown in table E.4).

ECB Working Paper Series No 2455 / August 202023Tables 4.2 and 4.3 show this decomposition for Germany and Austria. They are the only

two larger euro area countries with a positive gap between structural revenue developments and

discretionary revenue measures in ﬁgure 1.1, with Germany showing a relatively large gap.19

In both countries, ﬁscal drag contributed signiﬁcantly to the observed increase in structural

revenue, while explicit discretionary measures were close to 0 in cumulated terms. Composition

eﬀects tended to be negative (except for 2012) as relatively high growth in compensation of em-

ployees was more than compensated by weak growth in private consumption, capital income and

the number of self-employed20. For Germany, the revenue residual becomes much smaller when

accounting for ﬁscal drag and composition eﬀects, but it still amounts to about 1 1

2 % of GDP
(indicating a strong over-performance of tax revenue even when accounting for the composition

of GDP growth). For Austria the residual becomes even negative, which is to a large extent due

to the strong decline in the government’s non-tax revenue from property income over this period.

Developments on the expenditure side are dominated by a strong decline in interest spending

in both countries, which in Germany actually compensates for an increase in structural primary

spending. For both countries the “true” revenue-based adjustment is very likely between the

change in structural revenue and estimated discretionary measures. On the one hand, increases

in structural revenue have been partly driven by factors like increases in prepayments of corpo-

rate taxes, making the size of discretionary revenue measures relatively more meaningful. On

the other hand, non-adjustment of income tax brackets pushes up structural revenue each year

and is not reported as a measure, while income tax cuts (resp. increases in income tax brackets)

are indeed reported as discretionary measures (which distorts discretionary revenue measures

for personal income taxes).

Figure 4.1 decomposes the change in structural revenue from 2010 to 2018 for all large euro

area countries. On average, the absolute value of the residual (the unexplained component)

shrinks by about 1

3 % of GDP when comparing it to the more simplistic decomposition shown in
ﬁgure 1.1.21 For ﬁve of the six countries with cumulative residuals above 1% of GDP in absolute

value in ﬁgure 1.1, the residual shrinks by more than 1

4 % of GDP (DE, GR, ES, PT, FI); for most

19Tables for the other large euro area countries can be found in the appendix.
20In case of Austria, the composition eﬀect is not only distorted by the non-unit-elasticity on employment,
but also by the strong decline in agricultural self-employment, which artiﬁcially dampens the trend growth of the
constructed base for income taxes payable by the self-employed.

21Note that discretionary revenue measures and EU transfers are identical in both ﬁgures.

ECB Working Paper Series No 2455 / August 202024Figure 4.1: Decomposition of the change in structural revenue from 2010 to 2018

Source: Own calculations based on European Commission, Eurostat and ECB data.

other countries the residual is broadly unchanged (except for NL and AT, where it increases by

more than 1

2 % of GDP). However, residuals are still below -2% of GDP for Greece, Italy and
Portugal. This indicates signiﬁcant problems with the ex-ante estimates of discretionary tax

measures, or with the collection of taxes, or with the European Commission’s choice of tax

bases and tax elasticities. If the latter point were true, then the expenditure benchmark would

be the more appropriate way of measuring revenue-based consolidation; otherwise the change

in structural revenue would be superior (or more eﬀort has to be put in collecting and verifying

estimates of discretionary revenue measures).

Furthermore, one can see that all countries suﬀered from negative composition eﬀects over

this time period. This a relatively strong argument in favour of using the expenditure bench-

mark, as pure reliance on the change in the structural balance would penalize Member States for

an unfavourable composition of growth. Figure D.1 in the appendix shows that this was mainly

due to developments in compensation of employees (which tends to be taxed higher than proﬁts)

and private consumption (which tends to be taxed higher than investment and exports), which

were even more unfavorable than what could have been expected on developments in the output

ECB Working Paper Series No 2455 / August 202025gap. This was partly a reversal from the very positive composition eﬀects from 2008 to 2010

(ﬁgure D.2), where euro area labor markets performed better than one would have expected

based on output gap developments.

For all countries except Greece (where nominal trend GDP per person employed dropped),

ﬁscal drag was in positive territory. The European Commission’s expenditure benchmark ex-

cludes ﬁscal drag, so it may underestimate revenue-based consolidation eﬀorts for certain Mem-

ber States. This is especially true for countries like Germany, where the residual is positive, too.

Figure 4.2: Decomposition of the change in the structural balance from 2010 to 2018

Source: Own calculations based on European Commission, Eurostat and ECB data.

Figure 4.2 shows the underlying drivers of the overall change in the structural balance from

2010 to 2018. All countries showed improvements in their structural balances over that period,

with Greece and Portugal having the largest ﬁscal adjustments. This still holds when taking out

the change in interest payments, composition eﬀects and revenue residuals. However, excluding

these factors (none of which are included in the ﬁscal adjustment as deﬁned by the SGP’s

expenditure benchmark22), Germany has had by far the smallest ﬁscal consolidation, while the

22However, these ﬁgures diﬀer from the ones based on the expenditure benchmark as the latter does not account

for the impact of ﬁscal drag on government revenue.

ECB Working Paper Series No 2455 / August 202026estimated adjustment of Finland and Italy becomes larger.

5 Conclusions

The current EU ﬁscal governance framework uses both the change in structural revenue and

estimates of the impact of discretionary revenue measures to assess consolidation eﬀorts on the

revenue side. This paper seeks to improve the understanding of the diﬀerence between these two

concepts, which is typically referred to as “revenue windfall/shortfall” by the European Com-

mission. We present a framework where these “windfalls” are decomposed into three diﬀerent

components: ﬁscal drag, composition eﬀects and a residual.

Fiscal drag, which is mostly caused by the non-indexation of non-proportional taxes, is im-

portant as it also constitutes a kind of discretionary measure. Composition eﬀects, which denote

the impact of macroeconomic aggregates behaving diﬀerently to their assumed cyclical charac-

teristics, can inform us about the ﬁscal eﬀects of changes in the composition of economic growth,

as well as potentially ﬂagging problems with the employed elasticities. Residuals, meanwhile,

capture any remaining measurement error and may be caused by actual tax bases behaving

diﬀerently to the corresponding macroeconomic aggregates employed in the cyclical adjustment

model, mis-estimation of elasticities and/or errors in the estimates of the impact of discretionary

measures. For ﬁscal developments to be interpreted correctly, it is important for each of these

elements to be gauged and understood. Employing this framework also exposes some oversights

or questionable choices (e.g. the non-unit elasticity of PIT with regard to the number of employ-

ees) in the underlying OECD/EC cyclical adjustment methodology, which could be improved

upon in future updates.

While some of the modelling assumptions underlying the OECD/EC method can lead to

somewhat strange results, especially for composition eﬀects, our suggested decomposition still

helps to explain the large cumulative diﬀerences between changes in structural revenue and the

amount of discretionary revenue measures between 2010 and 2018. Most importantly, we were

able to reduce the residual in absolute value by more than 1

4 pp for ﬁve of the six countries with
the largest residuals according to the EC. This has been achieved by accounting for the relatively

large ﬁscal drag in Germany and by quantifying the impact of the unfavorable composition of

ECB Working Paper Series No 2455 / August 202027GDP growth in Southern Europe. However, for some countries a sizeable unexplained component

remains, indicating that underperformance of structural revenue compared to the oﬃcial amount

of discretionary revenue measures cannot be solely explained by an unfavourable composition of

growth.

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ed. by B. d’Italia.

ECB Working Paper Series No 2455 / August 202028Mourre, G., A. Poissonnier, and M. Lausegger (2019): “The Semi-Elasticities Under-

lying the Cyclically-Adjusted Budget Balance: An Update and Further Analysis,” European

Economy - Discussion Paper 098, Directorate General Economic and Financial Aﬀairs (DG

ECFIN), European Commission.

Price, R. W., T.-T. Dang, and Y. Guillemette (2014): “New Tax and Expenditure

Elasticity Estimates for EU Budget Surveillance,” OECD Economics Department Working

Papers 1174.

A Rationales behind the deﬁnition of composition eﬀect and

ﬁscal drag

A.1 Deﬁning ﬁscal drag

The impact of ﬁscal drag on trend revenue growth is computed by evaluating equations (3.5),

(3.6) and (3.7) at a balanced growth path with a stable output gap, where (cid:98)Bi,t = (cid:98)B∗

i,t = (cid:98)Y ∗

t , and

by setting discretionary measures and residuals to 0 (as they are already separate categories in

our decomposition). To get from the impact on trend growth of this tax category to the eﬀect

on the cyclically adjusted revenue ratio, one deducts (cid:98)Y ∗

t and multiplies the whole expression by

cari,t. This yields

(cid:16)

(cid:16)

(cid:16)

cari,t

cari,t

cari,t

ηRB
i

ηRB
i

ηRB
i

(cid:98)B∗

i,t − (cid:98)Y ∗
t

(cid:17)

= cari,t

(cid:16)

ηRB
i

(cid:98)B∗

i,t − (ηRB

i − 1) (cid:98)B∗

(cid:98)B∗

i,t − (ηRB

i − 1) (cid:98)N ∗

i,t − (cid:98)Y ∗
t
(cid:17)

t − (cid:98)Y ∗
t

(cid:98)Y ∗
t − (cid:98)Y ∗
t
(cid:17)

= 0

(cid:17)

= cari,t

(cid:0)ηRB

i − 1(cid:1)

(cid:98)Y ∗
t

for (3.5),

for (3.6),

= cari,t

(cid:0)ηRB

i − 1(cid:1) (cid:16)

t − (cid:98)N ∗
(cid:98)Y ∗
t

(cid:17)

for (3.7).

In principle, alternative deﬁnitions of (trend) ﬁscal drag are thinkable, too. For example, for
i − 1(cid:1)

t (actual growth in average wages) or

personal income taxes one may use cari,t

(cid:0)ηRB

(cid:99)W ∗

cari,t

i − 1(cid:1) (cid:16)
(cid:0)ηRB

(cid:99)W ∗

t − ηBY

W ∆ogt

(cid:17)

(actual growth in average wages corrected for the “cyclical

component” of average wages)23. However, both speciﬁcations would make ﬁscal drag dependent

on cyclical movements in real average wages.

23ηBY

W would correspond to the part of the cyclicality of the overall wage bill (described by ηBY , the elasticity

of the wage bill with regard to the output gap) which is driven by movements in average wages.

ECB Working Paper Series No 2455 / August 202029Furthermore, by allocating parts of cyclical developments in macro variables to ﬁscal drag,

using one of these alternative speciﬁcations would also lead to diﬀering expressions for the

composition eﬀect between the case of a long-run and a short-run elasticity. This would be in

contradiction to the approach of the OECD, which does not distinguish between the short-run

impact of non-unit long-run-elasticities (like for personal income tax on wages) or short-run-

elasticities (like for corporate income taxes), and where the composition eﬀect can be directly

derived from the deﬁnition of macro elasticities (as explained in the next section).

A.2 Macro elasticities and composition eﬀects

The macro elasticities ηBY
Bi,t
∂ ln
Y ∗
t
∂ ln Yt
Y ∗
t

. This implies (cid:98)Bi,t − (cid:98)Y ∗

i

are estimated as short-run-elasticities, i.e. they are deﬁned as ηBY

i

:=

t = ηBY

i

(cid:16)

(cid:98)Yt − (cid:98)Y ∗
t

(cid:17)

+ resB

i,t, which can be rewritten as:

(cid:98)Bi,t = (cid:98)Y ∗

t + ηBY

i ∆ogt + resB

i,t = (cid:98)Yt + (ηBY

i − 1)∆ogt + resB
i,t.

The tax base equation residual resB

i,t = shows how the actual composition of GDP (described

by the development of tax bases (cid:98)Bi,t) diﬀers from the predicted one (i.e. (cid:98)Yt + (ηBY
The product of resB

shows up in the equations for the change in the cyclically

i − 1)∆ogt).

i,t with cari,t−1ηRB

i

adjusted ratio, i.e. cari,t−1ηRB

i

(cid:98)Bi,t − (cid:98)Y ∗

t − ηBY

i ∆ogt

(cid:16)

(cid:17)

. This term is labelled composition eﬀect

because it describes the eﬀect of deviations of the actual from the predicted composition of GDP

on the cyclically adjusted revenue ratio.

B Revenue “residuals” in the SGP

SGP-related documents by the European Commission typically do not use the term (revenue)

residual, but they occasionally refer to revenue windfalls or shortfalls (e.g. page 32 in Mourre

et al., 2019). They are explicitly deﬁned in the derivation of the so-called beta-correction of the

(meanwhile abandoned) adjusted change in the structural budget balance (page 144 in European

Commission, 2016). In this correction the following term is deducted from the observed change

in the structural balance:

βt =

(cid:16)

∆Ra

t − (cid:103)DM

a
t −

(cid:16)
t + (η − 1)∆oga
(cid:98)Y a
t

(cid:17)

Ra

t−1

(cid:17)

(cid:16)

−

∆Re

t − (cid:103)DM

e
t −

(cid:16)
t + (η − 1)∆oge
(cid:98)Y e
t

(cid:17)

Re

t−1

(cid:17)

Y a
t

,

ECB Working Paper Series No 2455 / August 202030where superscript a refers to the vintage of (ex-post) assessment and e to the vintage of the

EDP recommendation. Rearranging the part referring to the vintage of assessment leads to the

following deﬁnition of revenue windfalls resp. residuals:

resβ
t

:=

=

∆Rt − DMt − ( (cid:98)Yt + (ηR − 1)∆ogt)Rt−1
Yt

∆Rt
Rt−1

(cid:16)

− dmt −

Rt−1
Yt
(cid:98)Rt − (cid:98)Yt − (ηR − 1)∆ogt

Rt−1
Yt

(cid:16)

≈ srt−1

(cid:17)

− dmt

(cid:98)Yt + (ηR − 1)∆ogt

(cid:17)

≈ ∆srt − dmt.

So ∆srt = (cid:102)dmt + resβ

t , which implies that (as stated in the main text) the European Commis-

sion’s revenue windfalls (residuals) merge our residual rest, ﬁscal drag and composition eﬀects.

Adjusting the change in structural revenue at the time of assessment ∆sra

t by βt yields:

∆srβ

t = ∆sra

t − βt = ∆sra

t − (resa,β

t − rese,β

t

) = (cid:102)dm

a

t + rese,β

t

.

This means that ex-post consolidation on the revenue side is measured as the sum of structural
discretionary revenue measures and the European Commission’s projected residual rese,β

, which

t

implies an important role for these revenue projections.

The adjusted change in the structural balance has recently been sidelined (it is not covered

by the most recent SGP vade mecum; see European Commission, 2019). However, when only

looking at the revenue side, the currently applied “expenditure benchmark” in Excessive Deﬁcit

Procedures can shown to be (roughly) equivalent to the adjusted change in the structural bal-

ance. EDP recommendations (at vintage e) now include “the maximum allowable growth rate

of expenditure net of discretionary revenue measures and of one-oﬀ (revenue and expenditure)

measures” (European Commission, 2019, page 56) which is consistent with achieving the en-

visaged improvement in the structural balance. This implies that at the time of assessment a,

consolidation on the revenue side is measured by adjusting the projected (at the time of recom-

mendation e) change in structural revenue sre

t by discretionary measures implemented after the

ECB Working Paper Series No 2455 / August 202031EDP recommendation (by adding dma

t − dme

t ).24 This can be rearranged as follows:

∆srexp

t = ∆sre

e
a
t ) = dma
t − (cid:102)dm
t + ( (cid:102)dm

t + rese,β

t

.

C Comparison to “disaggregated approach”

The disaggregated framework by Kremer and Wendorﬀ (2004) and Kremer et al. (2006) de-

composes ﬁgures based on the disaggregated method of cyclical adjustment by Momigliano and

Staderini (1999) and Bouthevillain et al. (2001). There the cyclical component of the budget

balance has been calculated by applying ﬁscal-to-base elasticities revenue category by category

to an estimated gap between the respective macroeconomic (tax) base Bi,t and its estimated

trend B∗

i,t (via HP ﬁlter with λ = 30). The term “disaggregate” refers to the use of diﬀer-

ent “gaps” for each individual tax base instead of just using an “aggregate” approach where

only a gap for GDP (the output gap) is needed. The cyclical adjustment method described in

Bouthevillain et al. (2001) can be expressed analytically as follows:

cabDA

t =

BBt −

k
(cid:80)
i=1

Ri,tηRB
i

Bi,t−B∗DA
i,t
B∗DA
i,t

+

n
(cid:80)
i=k+1

Gi,tηRB
i

Bi,t−B∗DA
i,t
B∗DA
i,t

Y ∗
t

,

where we have used the superscript DA for the cyclically adjusted balance cab and the trend of

ﬁscal bases B∗ to indicate that they are conceptually diﬀerent from the European Commission

method (while variables like tax elasticities and output gaps are diﬀerent in practice, too, their

deﬁnitions are identical or at least very similar between the two methods). Cyclically adjusted

revenue from category i is given by:

carDA

i,t =

Ri,t − Ri,tηRB

i
Y ∗
t

Bi,t−B∗DA
i,t
B∗DA
i,t

=

Ri,t
Y ∗
t

(cid:32)

1 − ηRB

i

Bi,t − B∗DA
i,t
B∗DA
i,t

(cid:33)

.

24This presentation abstracts from comparatively minor diﬀerences such as the treatment of revenue from EU

funds.

ECB Working Paper Series No 2455 / August 202032Kremer et al. (2006) decompose the change in cyclically adjusted revenue as follows:25

∆carDA

i,t =

R∗DA
i,t−1
Y ∗
(cid:124)

t−1

(cid:0)ηRB

i − 1(cid:1)
(cid:123)(cid:122)
ﬁscal drag

(cid:98)B∗DA
i,t

+

(cid:125)

R∗DA
i,t−1
Y ∗
(cid:124)

t−1

(cid:16)

(cid:98)B∗DA

i,t − (cid:98)Y ∗
t
(cid:123)(cid:122)
decoupling

+dmi,t + resi,t.

(cid:17)

(cid:125)

Except for approximation errors, discretionary measures and residuals are identical to the ones

in our approach. However, Kremer et al. (2006) compute ﬁscal drag based on the trend growth

of the individual tax base (computed by HP-ﬁltering private consumption, compensation of em-

ployees, etc.), which may – in their approach – diﬀer from the one of GDP. The most important

diﬀerence is that they have no composition eﬀect as the cyclical component is calculated directly

via HP-ﬁltering tax bases and not by making naive predictions based on changes in the output

gap. If trend growth of tax bases diﬀers from that of GDP, they have a decoupling eﬀect (e.g.

if the trend growth of compensation of employees is below the one of GDP, this will decrease

cyclically adjusted social contributions).

These diﬀerences can also be illustrated by comparing the change in cyclically adjusted

revenue to t − 1 in the two diﬀerent concepts. For getting there, we ﬁrst compare the two

diﬀerent deﬁnitions of cyclically adjusted revenue:

cari,t − carDA

i,t = ri,t − ri,0

(cid:0)ηRB
i

i − 1(cid:1) ogt −
ηBY

= ri,t − ri,0

(cid:0)ηRB
i

i − 1(cid:1) ogt −
ηBY

Ri,t
Y ∗
t

Ri,t
Yt

(cid:32)

1 − ηRB

i

(cid:33)

Bi,t − B∗DA
i,t
B∗DA
i,t

(cid:32)

(1 + ogt)

1 − ηRB

≈ ri,0

(cid:0)1 − ηRB

i

ηBY
i

ogt + ogt

(cid:1) − ri,0

(cid:32)

1 + ogt − ηRB

i

= ri,0ηRB

i

(cid:32) Bi,t − B∗DA
i,t
B∗DA
i,t

(cid:33)

− ηBY
i

ogt

.

(cid:33)

i

Bi,t − B∗DA
i,t
B∗DA
i,t
(cid:33)
Bi,t − B∗DA
i,t
B∗DA
i,t

25In the following we compare their decomposition to ours for a “long-run tax elasticity”. Kremer et al. (2006)

do not make such a distinction.

ECB Working Paper Series No 2455 / August 202033Taking the change in that expression compared to t − 1 yields:

∆cari,t − ∆carDA

i,t = ri,0ηRB

i

= ri,0ηRB

i

− ηBY
i

(ogt − ogt−1)

(cid:33)

(cid:32) Bi,t − B∗DA
i,t
B∗DA
i,t
(cid:98)Bi,t − (cid:98)B∗DA

(cid:16)

−

i,t − ηBY

Bi,t−1 − B∗DA
i,t−1
B∗DA
i,t−1
i ∆ogt + (cid:98)Y ∗
(cid:17)

(cid:17)

t − (cid:98)Y ∗
t
(cid:16)

(cid:98)Bi,t − (cid:98)Y ∗

t − ηBY

i ∆ogt

+ ri,0ηRB

t − (cid:98)B∗DA
(cid:98)Y ∗

= ri,0ηRB

i

(cid:16)

= ri,0ηRB

i

(cid:16)

(cid:98)Bi,t − (cid:98)Y ∗
i − 1(cid:1) (cid:16)

(cid:0)ηRB

t − ηBY

i ∆ogt
(cid:17)

t − (cid:98)B∗DA
(cid:98)Y ∗

i,t

+ri,0

i,t
(cid:17)

(cid:98)B∗DA

i,t − (cid:98)Y ∗
t

i
(cid:16)

− ri,0

(cid:17)

,

(cid:17)

(C.1)

where we have used that in the EC/OECD method cari,t = ri,t − ri,0

i − 1(cid:1) ogt, that
ηBY
ri,0 ≈ ri,t and that the change in the relative diﬀerence between a variable and its trend can be
t ). As ri,0 ≈ cari,t−1 ≈ R∗
t −1
approximated by the diﬀerence in growth rates (e.g. ∆ogt ≈ (cid:98)Yt − (cid:98)Y ∗
Y ∗
t

(cid:0)ηRB
i

,

the ﬁrst part of (C.1) is approximately the composition eﬀect (i.e. the eﬀect of tax bases behaving

diﬀerently from a naive projection based on the output gap) from our approach, while the second

one is decoupling from Kremer et al. (2006). The third expression is the diﬀerence in the two

deﬁnitions of ﬁscal drag. Should the trend growth rate of the tax base by identical to that of

GDP, then the only diﬀerence between the two approaches would be the composition eﬀect.

ECB Working Paper Series No 2455 / August 202034D Figures on composition eﬀects

Figure D.1: Composition eﬀects from 2011 to 2018

Source: Own calculations based on European Commission, Eurostat and ECB data.

Figure D.2: Composition eﬀects from 2008 to 2010

Source: Own calculations based on European Commission, Eurostat and ECB data.

ECB Working Paper Series No 2455 / August 202035E Tables for the other large euro area countries

Table E.1: Decomposition of the change in the structural balance for Belgium

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
-0.2
1.1
0.3
-0.4
-0.2
1.0
-0.2
0.5
1.1
0.8
0.2
0.1
0.1
0.2
0.4
0.3
0.0
0.0
0.4
0.2
1.3
0.4
1.3
0.7
0.0
-0.3

0.7
0.3
-0.2
0.6
-0.5
0.1
-0.8
0.0
0.0
0.1
-1.1
-0.9
-0.2

0.0
0.1
-0.1
0.0
-0.7
0.2
-0.6
-0.1
0.0
-0.2
-0.7
-0.6
-0.2

0.0
0.2
-0.3
0.2
-0.3
0.1
-0.3
0.0
0.0
-0.1
-0.5
-0.5
0.0

1.6
0.2
0.5
0.8
0.3
0.2
-0.1
0.3
0.0
-0.1
-0.5
-0.1
-0.4

3.3
0.3
0.5
2.5
1.8
1.2
-1.2
2.2
0.0
-0.5
-0.7
0.7
-1.3

0.1
0.0
0.1
0.0
0.3
0.1
0.1
0.3
0.0
-0.2
0.3
0.5
-0.2

0.0
-0.4
-0.2
0.6
0.8
0.2
0.2
1.0
0.0
-0.6
0.3
0.3
0.0

composition eﬀects and residuals

0.9
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-0.7

-0.2

-0.1

0.6

0.6

1.0

0.6

2.8

Table E.2: Decomposition of the change in the structural balance for Greece

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
-4.3
-0.2
-6.2
2.1
1.1
-0.5
-0.6
0.5
0.7
1.1
-1.0
-0.1
-0.9

12.3
-0.9
-1.0
14.2
6.8
-1.4
-2.2
11.4
0.6
-1.7
-7.4
-4.9
-2.5

0.3
1.3
-0.9
-0.1
-0.1
0.0
0.1
0.2
0.8
-1.3
-0.1
-0.3
0.3

0.2
1.1
-0.4
-0.5
-1.0
0.0
0.2
0.5
-1.0
-0.7
-0.5
-0.5
0.0

-2.1
0.7
-2.5
-0.2
1.3
-0.1
-0.5
0.3
-0.4
2.0
1.5
1.7
-0.3

9.6
1.3
8.5
-0.2
-0.6
-0.3
-0.1
1.4
0.1
-1.8
-0.5
-0.3
-0.1

1.4
-2.1
-2.9
6.4
2.6
-0.3
-0.5
2.5
0.0
0.8
-3.9
-1.7
-2.1

0.9
-3.5
0.1
4.3
2.2
-0.1
-0.6
4.9
0.4
-2.3
-2.1
-3.0
0.9

6.1
0.6
3.3
2.3
1.4
-0.1
-0.2
1.1
0.0
0.5
-0.9
-0.6
-0.3

composition eﬀects and residuals

4.0
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-1.5

7.7

0.1

1.4

1.6

1.0

0.6

14.9

ECB Working Paper Series No 2455 / August 202036Table E.3: Decomposition of the change in the structural balance for Spain

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
-0.3
3.5
-0.8
-0.9
-0.6
-1.3
-0.2
2.5
-2.7
0.8
1.5
3.2
-0.2
1.3
1.2
0.1
0.1
0.1
0.1
-0.4
-0.6
0.7
2.0
1.3
0.1
-0.1
0.1
-1.0
-0.2
0.3
-1.0
-0.2
-2.0
-1.6
-0.6
-2.5
0.5
0.4
0.4

0.7
1.8
0.0
-1.1
-0.4
0.1
-0.1
-0.6
0.0
0.1
0.7
1.0
-0.3

0.8
1.4
0.3
-0.9
-1.1
0.1
-0.2
-0.3
-0.2
-0.5
-0.1
0.1
-0.2

6.9
3.1
-0.3
4.1
2.6
0.6
-1.0
3.6
0.0
-0.7
-1.5
-2.2
0.7

0.6
0.8
-0.2
0.0
1.0
0.1
0.1
0.0
0.2
0.5
1.0
1.0
-0.1

1.4
1.1
-0.1
0.4
0.5
0.1
-0.2
0.2
0.0
0.2
0.1
0.3
-0.2

1.0
0.8
0.1
0.2
0.3
0.0
0.1
0.2
0.0
0.0
0.2
0.1
0.0

composition eﬀects and residuals

3.8
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-0.3

-1.4

-0.9

2.3

2.7

0.1

0.1

6.4

Table E.4: Decomposition of the change in the structural balance for France

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
0.9
-0.3
0.1
1.0
0.9
0.1
-0.3
1.1
0.0
-0.1
0.2
-0.3

0.2
0.2
-0.2
0.2
0.1
0.1
0.1
0.0
-0.1
-0.1
0.0
0.0

0.1
0.1
0.0
0.0
-0.1
0.1
-0.1
-0.2
0.2
-0.1
0.0
-0.1

0.3
0.1
0.0
0.2
-0.1
0.1
-0.3
0.1
0.0
-0.3
-0.2
-0.2

0.2
0.0
-0.2
0.4
0.4
0.1
-0.1
0.6
-0.2
0.0
0.2
-0.1

0.8
0.6
0.0
0.1
0.3
0.1
0.1
0.0
0.1
0.2
0.3
-0.1

1.7
0.7
0.3
0.8
0.9
0.1
-0.3
0.8
0.3
0.1
-0.1
0.2

0.2
-0.4
-0.1
0.7
1.0
0.1
0.0
1.1
-0.2
0.4
0.5
-0.1

4.4
1.1
0.0
3.3
3.4
0.7
-1.0
3.6
0.1
0.1
0.9
-0.8

composition eﬀects and residuals

0.8
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-0.1

-0.2

1.0

1.0

0.5

0.3

0.2

3.4

Table E.5: Decomposition of the change in the structural balance for Italy

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
0.0
-0.8
0.1
0.7
0.3
0.0
-0.2
0.5
0.0
0.0
-0.4
0.0
-0.4

0.3
0.2
0.1
-0.1
0.3
0.1
0.3
0.3
-0.1
-0.4
0.4
0.4
-0.1

0.1
0.8
-0.2
-0.4
-0.2
0.0
0.1
-0.2
0.1
-0.3
0.2
0.3
-0.1

-0.1
0.1
-0.1
-0.2
-0.3
0.0
-0.4
0.2
0.1
-0.2
-0.1
0.1
-0.2

0.1
0.7
0.4
-1.0
-1.3
0.1
0.0
-0.5
-0.3
-0.7
-0.2
-0.1
-0.1

0.4
0.6
-0.4
0.2
-0.2
0.0
0.1
0.3
0.0
-0.7
-0.5
-0.1
-0.4

0.5
0.3
0.2
0.0
-0.1
0.1
0.0
-0.2
0.1
-0.1
-0.2
-0.6
0.4

2.1
1.0
-0.1
1.2
0.8
0.5
-0.3
3.5
0.0
-2.8
-0.4
0.1
-0.5

0.8
-1.0
-0.3
2.0
2.5
0.1
-0.3
3.0
0.0
-0.3
0.5
0.0
0.4

composition eﬀects and residuals

3.1
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-0.3

-0.4

0.4

0.5

0.2

0.4

0.0

3.8

ECB Working Paper Series No 2455 / August 202037Table E.6: Decomposition of the change in the structural balance for the Netherlands

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
1.0
-0.3
0.6
0.7
0.8
0.1
-0.2
1.4
0.0
-0.6
0.1
0.2
-0.1

0.1
0.3
0.1
-0.3
-1.0
0.1
-0.3
-0.6
0.0
-0.3
-0.7
-0.6
-0.2

1.2
0.7
0.2
0.3
-0.4
0.1
-0.1
0.0
0.0
-0.5
-0.7
-0.5
-0.1

0.5
-0.9
0.0
1.4
0.5
0.2
0.2
0.1
0.0
0.0
-0.9
-0.7
-0.1

2.0
0.5
0.3
1.3
1.0
0.1
-0.1
-0.2
0.0
1.2
-0.3
-0.2
-0.1

0.8
0.5
-0.7
1.0
0.0
0.0
0.0
0.7
0.0
-0.7
-1.0
-0.9
-0.1

0.8
0.4
0.1
0.2
-0.3
0.1
0.3
0.1
0.0
-0.8
-0.5
-0.5
0.0

6.7
1.9
0.2
4.7
0.8
1.0
-0.1
1.5
0.0
-1.6
-3.9
-3.0
-0.8

0.3
0.5
-0.4
0.2
0.3
0.3
-0.1
0.0
0.0
0.1
0.1
0.2
-0.1

composition eﬀects and residuals

1.0
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

1.7

0.1

0.7

1.3

0.1

0.7

0.0

5.5

Table E.7: Decomposition of the change in the structural balance for Portugal

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
0.8
-0.1
0.3
0.6
1.8
0.2
-0.1
2.6
-0.3
-0.5
1.2
1.3
0.0

10.7
0.7
2.0
8.0
2.9
0.9
-1.3
6.6
-0.8
-2.4
-5.1
-5.7
0.6

-1.0
0.8
-2.5
0.7
0.1
0.1
0.0
0.0
-0.1
0.1
-0.6
-0.3
-0.3

2.8
0.7
2.6
-0.6
-0.9
0.2
-0.4
0.3
-0.3
-0.8
-0.3
-0.1
-0.3

2.4
0.6
1.7
0.2
-1.2
0.1
0.0
-0.1
-0.3
-1.0
-1.4
-1.1
-0.3

-2.3
0.5
-4.1
1.2
0.2
0.1
-0.2
0.3
-0.1
0.2
-1.0
-1.1
0.1

1.7
-1.5
0.0
3.1
0.4
0.0
-0.5
1.8
0.4
-1.3
-2.7
-3.2
0.4

3.8
-0.7
2.6
1.9
1.5
0.0
-0.4
1.7
-0.2
0.4
-0.4
-1.7
1.3

2.5
0.3
1.4
0.9
1.0
0.1
0.3
0.0
0.0
0.6
0.1
0.5
-0.4

composition eﬀects and residuals

5.0
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-0.4

1.5

1.5

0.6

3.5

1.1

0.4

13.2

ECB Working Paper Series No 2455 / August 202038Table E.8: Decomposition of the change in the structural balance for Finland

Change in unadjusted balance

Cyclical component
Temporary measures
Change in structural balance

Change in structural revenue

Fiscal drag
Composition eﬀect
Discretionary measures
EU transfers
Residual

Change in structural expenditure

Structural primary expenditure
Interest payments

Change in SPB adjusted for

2011 2012 2013 2014 2015 2016 2017 2018 2011-18
% of potential GDP
-0.4
-1.1
-0.5
-0.9
0.0
0.0
0.0
-0.2
0.8
0.6
0.2
0.2
-0.2
0.5
1.0
0.3
0.0
0.0
-0.1
-0.4
0.8
0.8
0.9
0.8
-0.2
0.0

0.1
0.5
-0.1
-0.3
-0.8
0.2
-0.2
-0.2
0.0
-0.5
-0.5
-0.4
-0.1

0.9
0.9
0.0
0.1
-0.7
0.1
-0.9
-0.6
0.0
0.7
-0.8
-0.7
-0.1

0.5
0.0
-0.1
0.5
-0.5
0.1
-0.3
0.5
-0.1
-0.8
-1.1
-1.0
0.0

-0.6
-0.5
0.2
-0.3
-0.1
0.1
-0.1
0.4
0.0
-0.5
0.2
0.2
-0.1

1.0
1.0
0.0
0.0
0.0
0.0
-0.3
0.3
0.0
-0.1
0.0
0.0
-0.1

1.9
1.9
0.0
0.1
0.6
1.0
-1.3
1.8
0.0
-0.9
0.5
0.9
-0.4

1.6
1.3
0.0
0.3
1.3
0.2
0.1
0.3
0.0
0.8
1.1
1.0
0.1

composition eﬀects and residuals

-0.4
Source: Own calculations based on European Commission, Eurostat and ECB data. Note: SPB = structural primary balance.

-0.5

0.3

0.3

0.3

0.2

0.2

1.6

1.9

ECB Working Paper Series No 2455 / August 202039Richard Morris 
European Central Bank, Frankfurt am Main, Germany; email: richard.morris@ecb.europa.eu 

Lukas Reiss 
Oesterreichische Nationalbank, Vienna, Austria; email: lukas.reiss@oenb.at 

© European Central Bank, 2020 

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ISSN 1725-2806 

doi:10.2866/349647 

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