Yet Another Fiscal Indicator

The paper presents a fiscal indicator that uses the fiscal situation of the previous year as a benchmark. Different revenue and expenditure items have their own of rules by which the cyclical and discretionary changes are determined. An important step in constructing the new indicator is the estimation of the tax elasticities and the elasticity of social benefits with respect to unemployment. Linking different taxes to different tax bases, and not directly to GDP, seems to be a crucial contributing factor in understanding the developments in the early 1990s in Finland. The relevant tax bases for the main taxes responded with lag both when the recession started and when the boom started. The results obtained with the new indicator are compared with analogous results given by the OECD methodology. While the two indicators give a rather similar picture of the tightness of the fiscal policy in the 1980s, large differences occur especially in 1991 and 1993.