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.

ANOTHER CURRENCY UNION or CHAOS?

       We all know that Europe have a common currency called Euro. It is still trembling to find stability. The euro crisis has put most people off currency unions. But, it seems that, Africa is not shaken up or put off due to this crisis. An African Monetary Union is proposed (like European Union) creation of economic and monetary union for the countries of the African Union. This union will be administered by the African Central Bank. By forming such union the Africa will go for the creation of new unified currency (same like EURO)

        An International Agreement was signed on June 3, 1991 in Abuja, Nigeria (called as The Abuja Treaty) and created the African Economic Community. They called for African Central Bank to follow by 2028 and the current plan is to establish an African Economic Community with a single currency by 2023. (Source: Wikipedia)

        An article in “The Economist” (in 7^th December, 2013 print edition) said that “In November the leaders of five countries of the East African Community (EAC) agreed to form a monetary union within ten years. A month before West African politicians agreed on a plan to introduce a new shared currency, the Eco, over the next few years. It should eventually subsume West Africa’s existing currency bloc—but not its central African cousin.”

        “Under the proposal an initial group of six countries will adopt the eco by 2015 (see map). Five years later the members of the West African Economic and Monetary Union (known as UEMOA, its French acronym), which currently share a currency called the West African CFA franc, are to adopt the Eco too, creating a currency union of over 300 million people.”(for full article click here)

        The Economist concluded that “If a region as rich as the euro zone has struggled to cope with such pressures, the likelihood that the poorer and less well-governed places hoping to adopt the Eco could is tiny.”

My Perception

        When the entire global economy is debating whether EURO as a currency will survive or not? This new currency union is really an eyebrow raiser. Despite of having many developed economies EURO is facing so many crises then how can Eco or Afro (hypothetically it may be name of African common currency) survive. Some may think that there is a scope that Eco or Afro may survive, because, there are many developing economies (even though tiny) in Africa. But, to have a common currency means to have common policy measures and common (more) effective administration. Can Africa do it?

John Maynard Keynes – A misunderstood economist!!

     John Maynard Keynes (J.M. Keynes) an economist who had given solution during the great depression. Later he was criticized for his theories and proved to be wrong. There is age old debates which are still going for and against J.M. Keynes. Recently, in economist an article titled “A Keynes for all seasons” – by C.R. | CAMBRIDGE, says why Keynes was one of the misunderstood economist.(for full post click here)    

   The author quotes that “Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time…Good economists are scarce because the gift for using "vigilant observation" to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one.” (for full post click here)

     John Wasik, a contributer in Forbes has once said “One of the most misunderstood economists haunting the global economy is John Maynard Keynes, a truly friendly ghost who many have transformed into a poltergeist.” (for full post click here)

     Another writer Andrew Murphy had stated in Harry’s Place that “Hayek in the 1970s, in an interview with a Chilean newspaper, gave a backhanded endorsement to the Pinochet regime, saying, “My personal preference leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism.”  

          It is safe to say, Keynes is a very misunderstood man. It is time for the centre-right to embrace their inner Keynes. He is a man of the middle.” (for full post click here)

  Keynes “The General Theory of Employment, Interest, and Money” came at a specific time during the 1930s, it was not a blueprint for good times or forever. Whenever he was criticized for his latest ideas he retorted by saying: “When the facts change, I change my mind. What do you do, sir?”

    Any economic theory evolves based on the particular condition or situation of that period of time. So, it is not appropriate to criticize any economist or his works without considering their timeline, situation of the economy at that particular period of time, etc… (views are personal)