Appendix
1. The structural fiscal balance
The structural fiscal balance provides an estimate of what the fiscal balance would be if the economy were at potential output. The Treasury’s approach to estimating the structural fiscal balance is outlined in more detail in Tam and Kirkham (2001). The approach utilises the estimated output gap and the sensitivity of tax receipts and unemployment expenditures to output.[19] The output gap is measured as:
(1.1) 
where Yt is actual real GDP in year t andYt* is potential real GDP in year t. A positive (negative) value for gapt indicates that actual real GDP is above (below) potential real GDP. For the calculation of the structural balance, the Treasury estimates the output gap using the Hodrick-Prescott (HP) filter.[20] The structural balance is calculated using cyclically adjusted receipts, cyclically adjusted unemployment expenditure, and other operating expenditures.
The responsiveness of receipts to output depends on two effects, the responsiveness of the tax type to a change in its base (eT,B) and the responsiveness of the tax base to a change in output (eB,Y). Cyclically-adjusted receipts are calculated as:
(1.2) 
where: Ri,t* = cyclically adjusted nominal receipts item i in year t
Ri,t = actual nominal receipt item i in year t
gapt = output gap in year t
ei,T,Y = ei,T,Bx ei,B,Y for each receipts item i.
The elasticities for the different receipt items, with respect to output, are as follows:
| Receipt item | Elasticity |
| Individual income tax | 1.12 |
| Company tax | 1.10 |
| Withholding tax/Other direct tax | 1.10 |
| GST | 1.10 |
| Excise duties | 1.00 |
| Other indirect tax | 1.00 |
| Interest, profits and dividends | 0.00 |
| Other receipts | 1.00 |
Source: The Treasury
The cyclically adjusted unemployment rate is derived using the output gap and an Okun coefficient β, which is assumed to be 0.5.[21]
(1.3) 
where Ut is the actual unemployment rate in year t and Ut* is benchmark unemployment rate in year t. Cyclically adjusted unemployment expenditure is assumed to move proportionally to the ratio of unemployment to benchmark unemployment.
(1.4) 
where: UEt
= cyclically adjusted nominal unemployment expenditure in year t
average.benefitt = average weekly benefit in year t
beneficiariest= number of unemployment beneficiaries in year t.
Notes
- [19]When the approach is applied to cash measures, as is the case for the indicators in this paper, receipts and expenditure are the appropriate terms.
- [20]Tam and Kirkham (2001) use a structural time series model (STAMP) to estimate potential output. They examine the sensitivity of the estimated structural balance to alternative methods of calculating potential output.
- [21]See Tam and Kirkham (2001) for details.
