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Explaining government revenue windfalls and shortfalls: an analysis for selected EU countries

Author

Listed:
  • Morris, Richard
  • de Castro Fernández, Francisco
  • Jonk, Steven
  • Kremer, Jana
  • Linehan, Suzanne
  • Marino, Maria Rosaria
  • Schalck, Christophe
  • Tkačevs, Olegs

Abstract

In recent years, government revenues in many EU countries experienced significant and erratic changes, which, a priori, could not be fully explained by macroeconomic developments or by discretionary fiscal policy measures. We investigate this issue by estimating “unexplained” changes in tax and social contribution revenues, based on proxies for tax revenue bases and elasticities commonly used for forecasting or cyclically adjusting government revenues and taking into account estimates of the impact of legislation changes. This is done for a selection of EU countries, including the “big five” euro area countries (Germany, Spain, France, Italy and the Netherlands) together with Ireland, Latvia and Portugal. We also undertake the same exercise using alternative tax base proxies, either taken from forecasting models or on the basis of our knowledge of the tax system in each country. The results show that, in the aggregate, revenue windfalls and shortfalls have exhibited a broadly cyclical pattern, driven mainly by developments in profit-related taxes and, to a somewhat lesser extent, VAT. Other, more structural factors also play a role, such as declining consumption of fuel and tobacco, as well as factors specific to individual countries, such as developments in property markets. The estimated revenue windfalls and shortfalls can explain a substantial proportion of changes in the euro area cyclically adjusted budget balance over the period 1999-2007. Since these unexplained revenue changes have exhibited a largely cyclical character and might therefore be viewed as partly temporary, this highlights the importance of a careful interpretation of fiscal indicators adjusted for the economic cycle. Except in a small number of cases, the results do not change significantly when alternative tax base proxies are used, suggesting that the potential for improving existing indicators by a better matching of taxes to their bases is likely to be limited. JEL Classification: H20, H68, E62

Suggested Citation

  • Morris, Richard & de Castro Fernández, Francisco & Jonk, Steven & Kremer, Jana & Linehan, Suzanne & Marino, Maria Rosaria & Schalck, Christophe & Tkačevs, Olegs, 2009. "Explaining government revenue windfalls and shortfalls: an analysis for selected EU countries," Working Paper Series 1114, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20091114
    Note: 646140
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    References listed on IDEAS

    as
    1. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
    2. Morris, Richard & Schuknecht, Ludger, 2007. "Structural balances and revenue windfalls: the role of asset prices revisited," Working Paper Series 737, European Central Bank.
    3. Bouthevillain, Carine & Cour-Thimann, Philippine & van de Dool, Gerrit & Hernández de Cos, Pablo & Langenus, Geert & Mohr, Matthias & Momigliano, Sandro & Tujula, Mika, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 77, European Central Bank.
    4. Cláudia Braz, 2006. "The Calculation of Cyclically Adjusted Balances at Banco de Portugal: An update," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
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    Cited by:

    1. Gilles Mourre & Aurélien Poissonnier, 2019. "What Drives the Responsiveness of the Budget Balance to the Business Cycle in EU Countries?," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 54(4), pages 237-249, July.
    2. Cláudia Braz & Nicolas Carnot, 2019. "Euro Area Fiscal Policy Changes: Stylised Features of the Past Two Decades," European Economy - Discussion Papers 109, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Pilar Poncela & Eva Senra & Daniel Sotelsek & Guido Zack, 2014. "Some New Results on the Estimation of Structural Budget Balance for Spain," Hacienda Pública Española / Review of Public Economics, IEF, vol. 210(3), pages 11-31, September.
    4. Leon Bettendorf & Duncan van Limbergen, 2013. "The stability of tax elasticities in The Netherlands," CPB Discussion Paper 256.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Klaus Vondra, 2013. "Austria Withstands Recession: Return to Positive Growth in Early 2013," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 6-11.
    6. van Riet, Ad, 2010. "Euro area fiscal policies and the crisis," Occasional Paper Series 109, European Central Bank.
    7. Paredes, Joan & Pedregal, Diego J. & Pérez, Javier J., 2009. "A quarterly fiscal database for the euro area based on intra-annual fiscal information," Working Paper Series 1132, European Central Bank.
    8. Nicolas Carnot & Francisco de Castro, 2015. "The Discretionary Fiscal Effort: An Assessment of Fiscal Policy and Its Output Effect," Hacienda Pública Española / Review of Public Economics, IEF, vol. 215(4), pages 63-94, December.
    9. Francisco de Castro & Laura Fernández, 2013. "The Effects Of Fiscal Shocks On The Exchange Rate In Spain," The Economic and Social Review, Economic and Social Studies, vol. 44(2), pages 151-180.
    10. Nihal Bayraktar & Tuan Minh Le & Blanca Moreno-Dodson, 2012. "Tax Capacity and Tax Effort: Extended Cross-Country Analysis from 1994 to 2009," EcoMod2012 3858, EcoMod.
    11. Karlis Vilerts & Olegs Tkacevs, 2016. "The Impact of Sovereign Bond Yields on Fiscal Discipline," Working Papers 2016/05, Latvijas Banka.
    12. Cláudia Braz & Nicolas Carnot, 2019. "Euro area fiscal policy changes: stylised features of the past two decades," Working Papers w201910, Banco de Portugal, Economics and Research Department.
    13. Philip Lane, 2010. "Some Lessons for Fiscal Policy from the Financial Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp334, IIIS.
    14. Gábor P. Kiss, 2020. "Aggregate Fiscal Stabilisation Policy: Panacea or Scapegoat?," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(2), pages 55-87.
    15. Paredes, Joan & Pedregal, Diego J. & Pérez, Javier J., 2014. "Fiscal policy analysis in the euro area: Expanding the toolkit," Journal of Policy Modeling, Elsevier, vol. 36(5), pages 800-823.
    16. Andersen, Torben M., 2013. "Fiscal policy targeting under imperfect information," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 114-130.
    17. Le, Tuan Minh & Moreno-Dodson, Blanca & Bayraktar, Nihal, 2012. "Tax capacity and tax effort : extended cross-country analysis from 1994 to 2009," Policy Research Working Paper Series 6252, The World Bank.
    18. Francisco de Castro & Francisco Martí & Antonio Montesinos & Javier J. Pérez & Antonio Jesús Sánchez Fuentes, 2018. "A Quarterly Fiscal Database Fit for Macroeconomic Analysis," Hacienda Pública Española / Review of Public Economics, IEF, vol. 224(1), pages 139-155, March.
    19. Andrew Hannon & Eimear Leahy & Róisín O'Sullivan, 2016. "An Analysis of Tax Forecasting Errors in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 47(3), pages 391-423.
    20. McQuinn, Kieran & Addison-Smyth, Diarmaid, 2015. "Assessing the Sustainable Nature of Housing-Related Taxation Receipts: The Case of Ireland," Papers WP503, Economic and Social Research Institute (ESRI).
    21. Johannes Holler & Lukas Reiss, 2011. "What to Expect from the Latest Reform of the Stability and Growth Pact," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 85-98.
    22. Francisco de Castro & Francisco Martí & Antonio Montesinos & Javier J. Pérez & A. Jesús Sánchez-Fuentes, 2014. "Fiscal policies in Spain: Main stylises facts revisited," Working Papers 1408, Banco de España.
    23. Ludovit Ódor & Gábor P. Kiss, 2014. "Back to basics – good indicators for good fiscal institutions!," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 13(4), pages 125-151.

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    More about this item

    Keywords

    cyclical adjustment; Fiscal forecasting; tax revenues;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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