IMF Unveils Template for Computing Structural Fiscal Balances

New online template measures a country’s underlying budget position

Helps governments assess whether fiscal stance is “countercyclical”

Tool still evolving and IMF welcomes feedback

The innovation is now more relevant than ever as many advanced economies strive to bring debt down to sustainable levels. In the following interview, Abdelhak Senhadji (Assistant Director), Iva Petrova (Economist), and Marcos Poplawski-Ribeiro (Economist) of the IMF’s Fiscal Affairs Department talked about what the tool does and how it can help policymakers.

IMF Survey online: The IMF has been doing some interesting work on how to get a better picture of countries’ fiscal balances. What has been taking place?

Senhadji: For the past two years, we’ve been working on a tool that will help economists estimate a country’s underlying fiscal position. By removing cyclical and other transitory elements from revenues and expenditures, policymakers can get a clearer picture of their country’s actual fiscal situation—and, as a result, be able to derive more robust policy conclusions. This Excel-based template—which has just gone live on our website—helps them do this. Our work builds on a technical note on this same topic published last year by Fabian Bornhorst and other IMF staff.

From left: Marcos Poplawski-Ribeiro, Abdelhak Senhadji, and Iva Petrova, who created the template in the IMF’s Fiscal Affairs Department (photo: IMF)

IMF Survey online: How does this new method improve upon the existing way of computing the fiscal balance?

Petrova: Governments used to consider only the overall, or “headline,” fiscal balance, which can give a misleading picture of a country’s medium-term fiscal position. In the past five to ten years, economists have started looking at what we call the cyclically-adjusted fiscal balance—that is, the fiscal balance corrected for the business cycle. This correction is important because revenues tend to move in tandem with the business cycle. During the boom phase of the cycle, for example, revenue tends to be very strong. If policymakers were to make spending decisions based solely on those revenue numbers, they might overspend, because they would think that the fiscal balance was healthier than it actually is.

A weakness of the cyclically-adjusted fiscal balance is that it adjusts only for the business cycle and not for other transitory factors. Take, for instance, terms-of-trade shocks. If you’re a policymaker in a copper-exporting...