The Fiscal Council has published its second occasional paper. This paper is directed at policy makers, institutions and those interested in the revision of fiscal rules. It studies the revisions made by the European Commission, the IMF and the OECD to the data for Estonia on the structural budget balance, the output gap and the budget balance. It shows that the revisions to the structural budget balance and output gap data are large and sign revisions are common, indicating that the structural budget balance data are imprecise and unreliable and the estimates of the output gap are imprecise and of debatable reliability. The paper argues that those estimates are not a good basis for setting and evaluating fiscal policy.

Assuming though that they continue to be used, the paper suggests and discusses a simple method for calculating structural budget balance thresholds and a simple algorithm that uses a composite indicator of macroeconomic leading variables to assess how trustworthy the structural budget balance and output gap estimates are, and how likely it is that the sign of the structural budget balance will change in later revisions.

These topics are highly relevant as the European Commission and other institutions discuss and review the EU’s framework for economic governance, which the fiscal rules are an important part of, in the aftermath of the Covid-19 pandemic.

FISCAL COUNCIL OCCASIONAL PAPER 2. Structural Budget Balance Revisions for Estonia and How to Live with Them (If You Have to). Ricardo Vicente