engleski

Automatic Stabilizers vs. Discretionary Measures: Evidence from Croatia

The role of fiscal policy as a tool to stabilize business cycle fluctuations has been at the center of recent public debates. The popular view on automatic stabilizers relies on the assumption that GDP fluctuations are partly smoothed by changes in taxes and transfers over the business cycle making the disposable income actually less volatile than income. If governments allow automatic fiscal stabilizers to work fully in a downswing but fail to resist the temptation to spend cyclical revenue increases during an upswing, the stabilizers may lead to bias toward budget positions. This paper assesses to what extent some items of the Croatian central government budget operate to smooth the business cycle. For disentangling automatic stabilizers from discretionary measures, this research relies on the European Commission methodology. Results show that the structural budget balance was on average 1.74% of GDP in deficit in the period between 1995 and 2009. The Croatian fiscal policy was countercyclical in period 1999-2002 and 2004-2007. Moreover, in the latter, government had directed more resources to the economy and carried out expansive fiscal policies, while in 1998-1999 fiscal policy was counter-cyclical and restrictive. Automatic stabilisation in Croatia is relatively weak and supplemented by discretionary measures, which led to “destabilizing” the economic activity in a pro-cyclical manner in Croatia in several observed periods. Additionally, targeting the structural (instead of the actual) budget balance would improve fiscal surveillance in Croatia, especially in case of public debt management.

fiscal policy; automatic stabilizers; discretionary measures; cyclically adjusted budget balance; Croatia

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