Fiscal discretion, growth and output volatility in new EU member countries

This paper analyses the link between discretionary fiscal policy and output growth in ten CEE countries. Three aspects are considered: cyclical pattern in the fiscal discretion, contributions to GDP growth, and the link between policy aggressiveness and output volatility. Fiscal discretion is estimated from quarterly data over 2000q1 to 2014q1 using a SVAR model in GDP, net taxes and spending. Decomposition of the GDP suggests that fiscal discretion induced rather small contributions to economic growth. Correlation between fiscal policy aggressiveness and output volatility is weak to moderate positive, notwithstanding whether spending or balance is used as the underlying indicator. The cyclical pattern has identified a mix of pro- and counter-cyclical episodes in the years before the crisis, implying that governments might not have consistently used the good times to create buffers. Overall, this evidence supports the view that policy makers in the CEE countries should mainly rely on rule-based fiscal policy rather than (aggressive) fiscal discretion.