Nu Nu Win, Simon Duggan, Phil Garton, Spiro Premetis and Bonnie Li1
Treasury Working Paper 2013-012
Date created: May 2013
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 into 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.
JEL Classification Numbers: E62, H62, H69
Keywords: fiscal policy, cyclical adjustment, structural fiscal balance, commodity prices
Macroeconomic Policy Division
Parkes ACT 2600
1 Macroeconomic Policy Division, The Treasury, Langton Crescent, Parkes ACT 2600, Australia. We thank Martin Parkinson, David Gruen and Tony McDonald for their valuable comments on this Working Paper. We would also like to thank Alex Beames, John Clark, Hayden Dimes, Huey Jiang, Iyanoosh Reporter, Rhett Wilcox, Nathan Wonder and Michael Woods for their contributions.
2 The views expressed in this paper are those of the authors and do not necessarily reflect those of the Australian Government.