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Output Gaps Working Group

The GDP gap or the output gap is the difference between potential output and actual output. Potential output is the level of output that can be achieved when the economy operates at full capacity (and the factors of production are thus utilised at non-inflationary levels). Output gaps can either be positive or negative.

Scope

The Group is mandated to ensure technically robust and transparent potential output and output gap indicators and cyclically adjusted budget balances in the context of the Stability and Growth Pact. The group should as appropriate develop progressively the commonly agreed method for calculating output gaps. This is particularly important in view of the 2005 agreements on the Stability and Growth Pact.

Main tasks

Work in the Group should focus on:

  • ongoing work aimed at progressively improving the estimation of potential output e.g more regular updating of the demographic projections; ex-post evaluations of the methodologies for calculating specific components of the method; business sector measurement and disaggregation of the capital stock
  • the issue of time lags for government revenues in the cyclical-adjustment of the budget balance. The discussion will be based on the results of a numerical simulation.
  • further in-depth work on how to better track short-term variations of budgetary elasticities with respect to GDP over time. The 2006 EU review shows that short-term variations in the tax elasticities can prolong cyclical movements. It is therefore of key importance to be able to distinguish the structural from the cyclical part of the budget balance.

Participation

Membership of this group consists of experts on the concepts of potential output and output gaps. Participation could be varied according to the topics being examined, and will need to include experts on the assessment of tax revenues vis-à-vis macroeconomic developments. Experts from the OECD and the IMF also participate.

Interactions with the work carried out by other groups

The Group will work closely with the Ageing Working Group.

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