AUTOMATIC STABILIZERS VS. DISCRETIONARY MEASURES: EVIDENCE FROM CROATIA ANA GRDOVIĆ GNIP

AUTOMATIC STABILIZERS VS. DISCRETIONARY MEASURES: EVIDENCE FROM CROATIA ANA GRDOVIĆ GNIP

Content Short introductory theoretical background e case of Croatia o Empirical framework Data and limitations Output gap o o o Automatic stabilizers vs. Discretionary measures Croatia vs. EU member states Budget balance and public debt Concluding remarks

Fiscal policy and business cycles overall budget balance = cyclical component + structural component Contractions (Ya<Yp) o actual budget balance in deficit actual deficit > structural deficit (cyclical deficit) o actual budget balance in surplus actual surplus < structural surplus (cyclical deficit) Expansions (Ya>Yp) o actual budget balance in deficit actual deficit < structural deficit (cyclical surplus) o actual budget balance in surplus actual surplus > structural surplus (cyclical surplus)

Data and limitations uarterly data from 1995:1 till 2009:4 Ministry of finance and Croatian Bureau of Statistics Central government level GFSM 1986 vs. GFSM 2001 Output gap HP filtering (λ=480) Cyclically adjusted budget balance EC approach

Output gap Figure 1 Output gap (le scale) and real output growth rates (right scale) in Croatia in the period between 1995 and 2009 4 8 3 6 2 4 1 2 0-1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0-2 -2-4 -3 OG_480 (left scale) real GDP growth rate (right scale) -4 Source: Croatian Bureau of Statistics (2010); Author s calculations -6-8

Budget balance Figure 2 Central go ernment budget balance in millions HRK (le scale) and in percentage GDP (right scale) in Croatia in the period between 1995 and 2009 2000 1 0-2000 -4000-6000 -8000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0-1 -2-3 -10000-12000 CG_BB mil HRK (left scale) CG_BB %GDP (right scale) Note: Central government (CG) budget balance is expresed according ti GFSM 1986 Source: Ministry of finance s Statistical Report (several issues); Author s calculation -4-5

Budget elasticity Table 1 Summary of elasticities and the overall budget sensitivity in Croatia Personal income tax Social security contributions Corporate income tax Indirect taxes Current expenditure 0.36 0.32 1.31 0.50-0.01 Overall budget balance elasticity Source: Author s calculation 0.47

Cyclically adjusted budget balance Figure 3 Output gap and actual, cyclical and structural budget balance in Croatia in the period between 1995 and 2009, percent GDP Note: OG output gap; CBB cyclical budget balance; SBB structural budget balance; ABB actual budget balance; Source: Author s calculation

Automatic stabilizers Related to the size of government o van den Noord (2000) and Girouard and Andre (2005) the size of the general government sector important for determining the cyclical sensitivity o Deroose, Larch and Schaechter (2008) it is predominantly the differences in size of go ernments that impact how strong automatic stabilizers are

Overall budget sensitivity Figure 4a Overall budget sensitivity and the go ernment size in EU countries and Croatia Overall budget sensitivity 0.7 0.65 0.6 0.55 0.5 0.45 0.4 0.35 0.3 0.25 0.2 RO LT IE EE LV LU HR ES BG SK UK PL CY MT DE PT SI EL CZ NL IT EA EU-27 30.0 35.0 40.0 45.0 50.0 55.0 60.0 FI HU Average annual expenditure to GDP (2000-2008) Figure 4b Overall budget sensitivity and the go ernment size in EU countries and Croatia 0.7 0.65 DK 0.6 NL BE SE 0.55 DE IT FR FI 0.5 LU PT HR HU EA 0.45 SI AT IE EL ES EU-27 0.4 PL UK MT CZ CY 0.35 BG RO EE 0.3 LV SK 0.25 LT 0.2 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 Annual average revenue to GDP (2000-2008) Source: Eurostat (2010), Eller (2009), Ministry of finance s Yearbook (several issues), Author s calculation BE AT DK FR SE

Discretionarism Figure 5 Output gap and changes in the cyclically adjusted budget balance in Croatia for the period between 1995 and 2009, percent GDP Source: Author s calculation

Fiscal (de)stimulus in 2009 Figure 6 Fiscal stimulus (as change in the structural budget balance in 2009 against 2008) and overall budget sensitivity in EU member states and Croatia, percent GDP 6.0 EE 4.0 HU HR 2.0 MT SI LV RO SE 0.0 IT DE CZ AT LU FI LT -2.0 EA SK BE PL EU-27 NL BG FR DK UK -4.0 IE EL PT ES CY -6.0 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 Source: European Commission (2009), Eller (2009) and Author s calculation

Public debt and structural budget Figure 6 Fiscal stimulus (as change in the structural budget balance in 2009 against 2008) and overall budget sensitivity in EU member states and Croatia, percent GDP Source: Croatian National Bank (2010) and Author s calculation

Concluding remarks Weak automatic stabilizers supplemented by discretionary fiscal policy or strong stabilizers? In the Croatian case more discretion than automatic stabilization General view stabilization trough the work of automatic stabilizers o BUT, the recent crisis evidence of discretionary fiscal stimulus

Future research directions Cyclically adjusted budget balance according to other methods OLS - biased Fiscal policy rules

ank You for Your attention ANA GRDOVIĆ GNIP Juraj Dobrila University Department for economics and tourism Dr. Mijo Mirković Preradovićeva 1/1, 52100 Pula agrdovic@efpu.hr