5 Concluding Remarks
An indicator of fiscal impulse attempts to measure whether the government’s overall fiscal policy decisions are adding to, or subtracting from, aggregate demand pressures in the economy. This paper has outlined the conceptual issues in measuring fiscal impulse and developed indicators for New Zealand. Although the general approach of governments has been to allow automatic fiscal stabilisers to operate, for macroeconomic stability reasons government may be interested in the effects of changes in fiscal policies on aggregate demand. It is useful to have an indicator of fiscal impulse as a first round approximation of these effects.
There is no generally accepted indicator of fiscal impulse. This paper has outlined some key decisions that need to be made in calculating an indicator and made some judgements on these decisions.
Indicators of fiscal impulse can enhance the ex post interpretation of fiscal policy as well as help to identify relatively large ex ante forecast changes. The base indicator calculated in this paper reflects intuitive judgements about changes in discretionary fiscal policy over the last decade and looking forward. Using an alternative method of isolating the discretionary component of fiscal policy, but one that still relies on potential output generates fiscal impulses similar to the base indicator. However, the use of the Blanchard fiscal impulse method, which does not use potential output, creates some differences in both the sign and magnitude of fiscal impulses. The broad similarity of alternative discretionary decomposition techniques over the forecast horizon reflects the small economic cycle and stable unemployment rates in the 2002 Budget forecasts. In addition, the fiscal indicators are based on ex ante spending intentions. Delays in the implementation of spending plans, especially on the capital side will mean a change in the timing of the actual demand impact. On the capital side, a broader definition of capital presents a somewhat different picture of fiscal impulses. This suggests future refinements in terms of defining the definition of the government sector.
As with any indicator, the indicator of fiscal impulse has limitations. At best it provides only an indication of the first round impact of fiscal policy on aggregate demand. There are other factors that need to be taken into account when assessing the full impact of changes in fiscal policy on the economy, for example, the composition of the change in fiscal policy. Analysis based on a full-scale macroeconomic model, perhaps complemented with time series analysis can help provide a complete assessment of the impact of fiscal policy on the economy.
