Economic and policy determinants of public sector deficits

The purpose of this paper is to derive a framework for quantifying the contribution of the most important economic and policy variables to the public sector deficit. The method involves behavioral relations, identities for some key macroeconomic and sector variables and an accounting breakdown of the consolidated public sector deficit. This allows one to compare the direct effects of various foreign and domestic economic shocks on the deficit with those arising from changes in policy-controlled variables. The method is useful for decomposing historical time series of public deficits according to their main determinants - and for carrying out simulation or projection exercises for the level and structure of future deficits.