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The Measurement of Fiscal Stance

Published online by Cambridge University Press:  26 March 2020

Rajiv Biswas ,
Christopher Johns  and
David Savage
Rajiv Biswas
Affiliation:
National Institute of Economic and Social Research
Christopher Johns
Affiliation:
National Institute of Economic and Social Research
David Savage*
Affiliation:
National Institute of Economic and Social Research
*
∗The authors are grateful to Andrew Britton and other colleagues for helpful comments, but remain responsible for any errors. In common with the other conference papers, this has not been considered by the Editorial Board.
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Extract

Most economists would doubtless reject the idea that policy makers or the public should judge budgets solely in terms of a single summary concept, surplus or deficit. Yet there is an undoubted demand for a single statistic which provides at least a rough-and-ready summary of the fiscal position. The attempt to specify such a single statistic has given rise to controversy for many years.

Type
Research Article
Information
National Institute Economic Review , Volume 113 , August 1985 , pp. 50 - 64
Copyright
Copyright © 1985 National Institute of Economic and Social Research

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References

(1) Much of the groundwork was laid some years ago by R. W. R. Price when preparing his contribution to the volume, edited by F. T. Blackaby, British Economic Policy, 1960-74, Cambridge University Press, 1978.

(1) While national accounts estimates of general government consumption do include an ‘imputed charge for the consumption of non-trading capital’, an offsetting imputation is made to current receipts, so that saving is unaffected.

(2) T. Taylor and A. R. Threadgold, “Real” national saving and its sectoral composition', Bank of England Discussion Paper no. 6, October 1979; also various issues of the Quarterly Bulletin.

(3) It Should also be remembered that no allowance is made for the effect of general inflation on non-monetary assets and liabilities or for capital gains or losses. Moreover the distinction between current and capital spending by the public sector is to a degree arbitrary, all defence spending for example being treated as current.

(1) Willem H. Buiter, ‘The proper measurement of government budget deficits’, Centre for Labour Economics, Discussion Paper no. 140.

(2) The concept of wealth being empioyed here is very broad. It includes publicly-owned assets, and should not be identified with net worth as it is ordinarily measured, as a variable in a consumption function for example. Definitionally, the level of public sector saving does not contribute to the growth in this narrower concept of wealth, which is the stock counterpart of private sector saving (appropriately defined, of course, to include revaluations, etc.).

(1) The scale, and even the direction, of the impact of such sales on total demand is uncertain. If the private sector's purchases of shares in public enterprises were at the expense of purchases of government debt, long-term interest rates would not be affected. If, as is perhaps more likely, they were, in part at least, at the expense of purchases of company securities, there would probably be some downward pressure on long-term interest rates, on the one hand, but also some weakening in the equity market, on the other.

(1) In the current NIESR model changes in net profits have substantial effects on fixed investment in manufacturing, but not in investment in other industries or stockbuilding.

(2) A useful analogy may be drawn between the weighted deficit and an index of the effective exchange rate. Intended to be used as an indicator of exchange rate effects on the trade balance, such an index has to use as weights some estimates, however imperfect, of the relative influence on trade flows of (proportionate) changes in the home currency against various foreign currencies. Export or import shares are sometimes used as very simple approximations. The weighting scheme devised by the IMF, while more sophisticated, is based on a limited number of parameters (trade shares and import and export price elasticities) from a static model. Like the weighted fiscal deficit, competitiveness indicators or exchange rate indicators take no account of lags or of ‘second round’ (e.g. multiplier) effects. They are nevertheless indispensable summary statistics for anyone who wants to analyse the behaviour of export or import volumes.

(1) For a recent account of OECD methodology see Working Paper no. 15, ‘Structural Budget Deficits and Fiscal Stance’ by P. Muller and R. Price.

(2) Since North Sea production and profits do not obviously vary with the economic cycle, no adjustment is made to oil revenues.

(3) In addition to Taylor and Threadgold, op. cit., see for example, C. V. Downton, ‘The trend of the national debt in relation to national income’, Bank of England Quarterly Bulletin, September 1977, and, in the context of the falling price level of the 1930s, S. N. Broadberry, ‘Fiscal policy in Britain in the 1930s’, Economic History Review, February 1984.

(1) These points are made in M. Miller, ‘Inflation—adjusting the public sector financial deficit: measurement and implications for policy’, Warwick Economic Research Paper no. 209, 1982, and amplified in ‘Measuring the Stance of Fiscal Policy’ by the same author in the first number of the Oxford Review of Economic Policyz, 1985. See also the reply by Roger Middleton to Broadberry, op. cit., in the same issue of the Economic History Review.

(2) See, for example, M. J. Artis and C. Green, ‘The measurement of fiscal policy’ in Demand Management Supply Constraints and Inflation, Manchester University Press, 1982.

(1) See W. H. Buiter, ‘Allocation and Stabilisation Aspects of Budgetary and Financial Policy’, Centre for Economic Policy Research, Discussion Paper no. 2, 1984, p. 55.

(2) OECD assumes 2½ per cent a year for the latter half of the 1970s slowing to 2 per cent a year since 1981.

(3) In recent years the seasonally-adjusted series for public investment has gone up consistently in the first quarter of the year and come down again in the second.

(4) For an account of fiscal policy during the earlier part of the period see R. W. R. Price, ‘Budgetary policy’, chapter 4 in F. T. Blackaby (ed.), British Economic Policy, Cambridge University Press, 1978. For an account of a later period see David Savage, ‘Fiscal policy, 1974/5-1980/1: description and measurement’, National Institute Economic Review, no. 99, February 1982.

(1) This is true of changes in the volume of public spending on goods and services. Changes in the price index of spending, mainly the result of changes in public sector pay, affect the volume of GDP only by increasing consumer spending. They are therefore given a weight of only 0.59.

(2) Described in ‘Modeling fiscal policy: the personal income tax system’, NIESR Discussion Paper, no. 22. Elasticities for years up to 1974, derived from this model, are given in R. W. R. Price, ‘Budgetary Policy’, Chapter 4, table 4.7, of F. T. Blackaby (ed.), British Economic Policy, Cambridge University Press, 1978.

(3) They are described in ‘The change in revenue from an indirect tax change’, Economic Trends, March 1980.

(4) This series is described in C. Trinder, ‘Income in work and when unemployed: some problems in calculating replacement ratios’, National Institute Economic Review, no. 103, February 1983.