Table 1 shows the change in the cyclically adjusted primary balance
of some European countries in 2015 and 2016, with negative numbers indicating expansion and positive numbers indicating contraction.
We consider four OECD measures of a country's fiscal position: (i) net lending as a share of GDP; (ii) primary balance as a share of GDP; (iii) cyclically adjusted net lending as a share of potential GDP; and (iv) cyclically adjusted primary balance as a share of potential GDP.
The explanatory power of the output gap factor for the cyclically adjusted surpluses is surprisingly large, however, with very sizable R-squared statistics of 41 percent and 24 percent for the cyclically adjusted net lending and cyclically adjusted primary balance, respectively.
Alesina and Perotti (1996) define an adjustment as a year when the cyclically adjusted primary balance
falls by more than 1.5 percent of GDP for a period of two consecutive years, in which the cyclically adjusted primary balance
falls by at least 1.25 percent of GDP in both years.
These episodes include only those that, once started, resulted in a noticeable improvement in the measure used of the underlying budget position, the cyclically adjusted primary balance (CAPB).
According to this definition, a fiscal consolidation episode: * Starts if the cyclically adjusted primary balance (CAPB) improves by at least one percentage point of potential GDP in one year or in two consecutive years with at least 1/2 percentage point improvement occurring in the first of the two years.
Table 9 The Stability Programme of November 2002 (1) 2001 2002 2003 2004 Growth of GDP at constant prices 0.8 0.7 2.1 2.5 Output gap 0.6 -0.9 -1.0 -0.8 Actual financing balance 0.4 0.0 0.0 0.3 Cyclically adjusted financing balance (2) -0.1 0.5 0.6 0.8 Cyclically adjusted primary balance
(2) 6.4 6.6 6.1 6.1 Interest payments 6.5 6.1 5.6 5.3 Gross debt ratio (3) 108.6 106.1 102.3 97.9 2005 Growth of GDP at constant prices 2.5 Output gap -0.6 Actual financing balance 0.5 Cyclically adjusted financing balance (2) 0.8 Cyclically adjusted primary balance
(2) 6.0 Interest payments 5.1 Gross debt ratio (3) 93.6 (1)Figures in per cent of GDP.
With actual growth higher than potential this implied a slight loosening of the fiscal stance (as measured by the cyclically adjusted primary balance
) during 2005.