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Working Paper 2013-01
Structural budget balance estimates adjust for temporary factors that have a significant impact on the underlying cash balance. Considered in conjunction with other measures, structural budget balance estimates can provide an insight to the sustainability of current fiscal settings. In order to draw the appropriate conclusions, though, it is critical that the limitations of these estimates are acknowledged – in particular, the fact that structural balance estimates can be revised dramatically as new data emerges, means they have limited use as a tool to fine tune fiscal policy from year to year. Structural budget balance estimates are also sensitive to the assumptions and parameters used. For Australia, these pre-existing limitations are exacerbated by the difficulty in identifying the structural (or long run) level of the terms of trade, with a range of plausible assumptions producing significantly different structural balance estimates.
This Working Paper presents an overview of structural budget balance models and the adjustments most relevant for Australia. Three models (the OECD model, the IMF model and Treasury’s previously published model in the Australian Government’s 2009-10 Budget and McDonald et al (2010)) are discussed. Updated estimates of the Australian Government’s structural budget balance are presented alongside analysis showing the sensitivity of the results to plausible changes in key parameters. The updated structural budget balance estimates are based on the model used by McDonald et al (2010) and updated for the Australian Government’s 2013-14 Budget.