Page 522 - 2016 - Vol. 40

sustainability of public finances in overall government
expenditure.

Second, existing work analyzing separately different
government expenditure categories via the estimation of
dynamic equations does not find evidence of a strongly
different relation with economic activity across types of
expenditure (Kolluri, 2004).

The ratio of government expenditure to GDP is
adjusted for the cycle following the approach used by the
European Commission, i.e., by deducting a measure of
"cyclical" government expenditure consisting of a country-
specific expenditure "sensitivity" parameter multiplied by
the output gap. The sensitivity of expenditure to the cycle
captures the monetary change in expenditure associated
with a unit monetary change in the difference between
actual and potential output as a result of the operation of
existing legislation (automatic stabilizers).

Sensitivity parameters are constructed on the basis of
budgetary elastic ties estimated in Van den Noord (200 I),
unemployment subsidies is the only government
expenditure component assumed to react "automatically" to
the cycle. To get the cyclically adjusted expenditure net of

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