Abstract
Public Deficits in Europe: Suggestions for a New Fiscal Policy Trend Indicator by Catherine Bruno The growth in public deficits in Europe since 1970 may give the impression of widespread laxity. However, economic downturns such as the slump in the early 1990s generally lead to tax revenue losses and social transfers, which aggravate the budget deficit. Hence, the apparent "drift" in public balances is not always the result of deliberate government choices. An accurate measure of policy trends is therefore called for. In this study, we break down the primary budget balance into permanent and transitory components using a vector autoregressive model. The estimation is made for six European countries: Germany, Denmark, Spain, Italy, France and the United Kingdom. The fiscal policy trend in Germany and Denmark appears to be stable and could be said to obey fiscal rules. In the other four countries, especially in Italy and France, fiscal policy is conditional on the economy.
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