A Small Note on Fiscal Balance

What is fiscal Balance?  

           

The balance of a government's tax revenues (plus any proceeds from asset sales) minus government spending is called fiscal balance. This is also called as Government Budget Balance, Public budget balance, or Public fiscal balance (for convenient purpose let us keep as fiscal balance). When the balance is positive then the government has a fiscal surplus, if negative then fiscal deficit.

The fiscal balance is further classified into Primary balance and Structural Balance (also known as cyclically-adjusted balance).

What is Primary Balance?

The primary balance is government budget balance before interest payments. In simple terms fiscal balance minus interest payments gives us primary balance.

What is Structural Balance?

Structural balances are an extension of cyclically adjusted balances, correcting for a broader range of factors such as asset and commodity prices and output composition effects.

The need for calculation of structural balance: 

In order to assess the fiscal sustainability the adjustment of fiscal balances for the output cycle is really crucial and needed. There is no single method is considered as the appropriate adjustment method for adjusting fiscal balance. The appropriate adjustment method depends on country specific factors, data availability, fiscal regime and the economic structure of the country.

Source: IMF Fiscal Monitor, 2013.

Note: Interest rate as a percentage is difference between primary balance (which is not given in the above table) from overall balance. The Bolded numbers are Percent of GDP for Advanced Economies as a whole and EME’s as a whole             

If one read the table carefully, then one can see that emerging markets are doing better compared to developed economy (all data are for the year 2012).          

                              

Note:  In many European countries, they have set an independent body to carry out the study of fiscal balance and they are called Fiscal councils. In India it is not easy to calculate the structural balance due to multiple factors mentioned above.