Alternatives for Measuring Structural Budgetary Position

Abstract

In this report are assessed the challenges in the European Commission’s method of calculating SBP based on an output gap. The perspective adopted is that of recent Finnish history. This report also examines alternative indicators that might serve as inputs for tuning financial policy. In spite of its conceptual clarity, SPB based on an output gap is challenging to measure in practice, since the method requires an assessment of several quantities that are difficult to measure. First, the output gap must be defined, i.e. the difference between actual financial activity and potential financial activity must be estimated. The structural budgetary balance is calculated next, taking account of the historical sensitivity of tax revenue and public expenditure to fluctuations in the output gap.