A structural deficit is the financing gap in public budgets that remains after adjustment for business cycle and one-off factors.
The structural deficit is particularly important for a country’s economic policy since only the permanent portion of the budget deficit endangers the long-term stability of the economy. In contrast, deficits caused by cyclical factors, which arise, for example, because of revenue shortfalls and higher social spending in weak economic phases, are automatically balanced out in economic upturns. As such they usually pose no danger to economic stability.
A structural deficit is an indicator for the consolidation needs in a government’s budget – the amount by which the budget deficit must be reduced by improving revenues or reducing spending.
In Germany the structural deficit is considered to be a key factor in budget policies. The “debt brake” called for by the German Constitution (Art. 115 GG) [1] and the corresponding implementation laws [2] stipulate that the structural (or cyclically adjusted) deficit may only amount to a maximum of 0.35% of GDP. Additional structural deficits are allowed by a so-called control account. The sum of the financing deficits and surpluses calculated in this account may not, however, surpass a threshold of 1.5% of GDP in the long term. [3] At the beginning of the 2010, the structural deficit in Germany was estimated to be 4.5% of GDP. [4] The EU’s Stability and Growth Pact also uses the concept of structural deficits in part. For its economic forecast, the Ifo Institute estimated the structural deficit for Germany as a whole (federal, state and municipal governments as well as social insurance) to be 3.5% of GDP in 2010. [5] This positive change was likely due to the much improved economic situation.
To determine the structural deficit, the cyclical fluctuations must be removed from the calculation. Several methods for doing this are available.
One option is the so-called “disaggregated” procedure, which is used for example by the German Council of Economic Experts. In this procedure the various state revenues and expenditures are examined individually and the cyclical element of these items is determined. Then the government deficit is adjusted accordingly. For the various revenue and expenditure categories, economists use different reference values to determine the cyclical portion. For example, the deviation of current unemployment numbers from trend unemployment serves as a measurement for determining the cyclical portion of expenditures for unemployment assistance. For calculating the cyclical portion of the value added tax, recourse is made to the fluctuations of domestic demand. This approach is not only very involved but is also subject to criticism. Both the selection of government revenue and expenditures that are defined as cyclically dependent, as well as the determination of the reference values, have a major influence on the results.
The “aggregated” procedure calculates a cyclical component from the so-called output gap and from the budget sensitivity.[6] The output gap is the deviation of total economic output from the potentially possible GDP. Budget sensitivity indicates the extent to which the individual budget components react to a change in GDP. Both factors must also be estimated with the help of statistical methods. The aggregated procedure is still, however, less complex and easier to implement, which is why it is used by the European Commission and by the German debt rule.
The structural deficit is not an immediately observable factor but must be estimated. The methods for determining the structural deficit, however, are methodologically complicated and are controversial. Moreover, the validity of the determined variables is uncertain, especially the closer one comes to the present, where the determination of the long-term trend values in comparison to actual values is particularly difficult. The implementation of the debt rule in the German Constitution is thus a great challenge for politicians and scholars. Studies on the impact of automatic stabilisers (the cyclical budget reactions) are thus likely to attract growing attention.
[1] Article 115 II, German Constitution. [2] Article 2, Section 1 & 2 of the Implementation Law for Article 115 of the German Constitution [3] Article 7 of the Implementation Law for Article 115 of the German Constitution. [4] BMF (2010): German Stability Programme Update 2010, Accessed: 07.06.10. [5] Kai Carstensen et al., "ifo Konjunkturprognose 2010/2011: Auftriebskräfte verlagern sich nach Deutschland", ifo Schnelldienst 63 (12), 2010, 12-63. [6] Article 5 of the Implementation Law for Article 115 of the German Constitution.
Breuer, Christian and Thiess Büttner, „Auf Sand gebaut: Das strukturelle Defizit im Auf und Ab der Konjunktur“, ifo Schnelldienst 63(11), 2010, 28-31. (Abstract / Download)
Büttner, Thiess, Anita Dehne, Gebhard Flaig, Oliver Hülsewig and Peter Winkler, Berechnung der BIP-Elastizitäten öffentlicher Ausgaben und Einnahmen zu Prognosezwecken und Diskussion ihrer Volatilität, ifo Forschungsbericht Nr. 28, München, 2006.
Carstensen, Kai, et al., "ifo Konjunkturprognose 2010/2011: Auftriebskräfte verlagern sich nach Deutschland", ifo Schnelldienst 63 (12), 2010, 12-63. (Abstract / Download)
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, Staatsverschuldung wirksam begrenzen – Expertise im Auftrag des Bundesministers für Wirtschaft und Technologie, 2007, (Download).
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