The Cyclically-Adjusted Budget Balance in EU Fiscal Policy Making: A Love at First Sight Turned into a Mature Relationship

European Economy Economic Paper No. 374

46 Pages Posted: 6 Jan 2010

See all articles by Alessandro Turrini

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Martin Larch

European Fiscal Board

Date Written: March 2009

Abstract

The cyclically-adjusted budget balance (CAB) plays a key role in the fiscal surveillance framework of the Economic and Monetary Union. It started off in a supporting role in the shadow of the headline deficit and, before long, turned into the linchpin of the rules and requirements of the Stability and Growth Pact. The steep ascent was driven by high hopes and expectations which, with the passing of time were only partly met. The everyday practice of the EU fiscal surveillance rapidly revealed a number of caveats of the instrument which, at times, hampered the effectiveness of fiscal surveillance. This paper provides a comprehensive review of the changing fortunes of the CAB in the EU fiscal surveillance framework. It portrays its main shortcomings and the way they can be dealt with in practice. As an overall conclusion the paper argues that, although the CAB is not devoid of problems and imperfections, it is superior to the headline deficit in most respects.

Keywords: budget balance, cyclical adjustment, EU fiscal surveillance framework

JEL Classification: E61, H3, H6

Suggested Citation

Turrini, Alessandro and Larch, Martin, The Cyclically-Adjusted Budget Balance in EU Fiscal Policy Making: A Love at First Sight Turned into a Mature Relationship (March 2009). European Economy Economic Paper No. 374. Available at SSRN: https://ssrn.com/abstract=1531628 or http://dx.doi.org/10.2139/ssrn.1531628

Alessandro Turrini

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martin Larch (Contact Author)

European Fiscal Board ( email )

Belgium
0032 2 2969244 (Phone)

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