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Structural Fiscal Balance Estimates for the Economy of Cyprus

Authors
Disciplines
  • Economics

Abstract

This paper provides estimates for the structural fiscal balance for the economy of Cyprus. The calculation of the structural fiscal balance is useful since it provides a clearer picture of the underlying fiscal situation in an economy by abstracting from the impact of the business cycle. As a result, it can be used to guide fiscal policy analysis. The entry of Cyprus into the European Union has increased the importance of knowing the structural fiscal balance figures as this can provide valuable information used in EU surveillance procedures such as the Stability and Growth Pact. The estimated values of the elasticities of the various categories of tax revenues with respect to the level of output, on which the calculation of the structural fiscal balance is based, are in agreement with what one would expect from economic theory and from the tax structure of Cyprus. The results indicate that the structural budget balance expressed as a percentage of the nominal GDP tends to follow a path similar to the corresponding year’s actual overall balance expressed as a percentage of the nominal GDP. As expected the structural fiscal balance figures fluctuate in a slightly narrower band than the current balance figures, with the ‘budget sensitivity’ for the economy of Cyprus being equal to 0.3.

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