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A decomposition of structural revenue developments for euro area member states

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  • Morris, Richard
  • Reiss, Lukas

Abstract

This paper presents a framework for analysing the evolution of the structural government deficit estimated using the official EU methodology relevant for the Stability and Growth Pact. The focus of our framework lies in the analysis of the main driving forces of changes in estimated structural government revenue, including the impact of changes to tax legislation, fiscal drag (caused e.g. by the non-indexation of income tax brackets), the composition of economic growth, and a residual. This approach allows us to scrutinise estimates of discretionary revenue measures and fiscal elasticities, both of which play a crucial role in the current EU fiscal governance framework. Between 2010 and 2018, Germany's structural revenue ratio increased substantially even though the estimated impact of changes to tax legislation was close to zero. In most other larger euro area countries, by contrast, structural revenue performed worse than could have been expected based on the estimated impact of discretionary revenue measures. Our approach shows that the composition of economic growth was unfavorable for generating revenue in all analysed countries over this time span. Moreover, in most countries actual revenue grew by less than what could have been expected in view of the discretionary measures taken and developments in the macroeconomic aggregates used to approximate tax bases. JEL Classification: H3, H6, E32, E62

Suggested Citation

  • Morris, Richard & Reiss, Lukas, 2020. "A decomposition of structural revenue developments for euro area member states," Working Paper Series 2455, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20202455
    Note: 646140
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    References listed on IDEAS

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    1. Robert Price & Thai-Thanh Dang & Yvan Guillemette, 2014. "New Tax and Expenditure Elasticity Estimates for EU Budget Surveillance," OECD Economics Department Working Papers 1174, OECD Publishing.
    2. Bouthevillain, C. & Van Den Dool, G. & Langenus, G. & Mohr, M. & Momigliano, S. & Tujula, M. & De Cos, P.H. & Cour-Thimann, Philippine, 2001. "Cyclically Adjusted Budget Balances: an Alternative Approach," Papers 77, Quebec a Montreal - Recherche en gestion.
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    4. Kremer, Jana & Braz, Cláudia Rodrigues & Brosens, Teunis & Langenus, Geert & Momigliano, Sandro & Spolander, Mikko, 2006. "A disaggregated framework for the analysis of structural developments in public finances," Discussion Paper Series 1: Economic Studies 2006,05, Deutsche Bundesbank.
    5. Jana Kremer & Karsten Wendorff, 2004. "Germany after Qualification for EMU: A Disaggregated Approach to the Analysis of Structural Public Finance Developments," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 73(3), pages 358-370.
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    1. Bańkowski, Krzysztof & Checherita-Westphal, Cristina & Jesionek, Julia & Muggenthaler, Philip & Frutos, Mario Alloza & Avgousti, Aristoklis & Briodeau, Clémence & Brusbārde, Baiba & Caprioli, Francesc, 2023. "The effects of high inflation on public finances in the euro area," Occasional Paper Series 332, European Central Bank.

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    More about this item

    Keywords

    cyclical adjustment; fiscal policy; revenue windfalls;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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