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Unexpected changes in tax revenues and the stabilisation function of fiscal policy. Evidence for EU

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Author Info

  • Salvador Barrios
  • Pietro Rizza

Abstract

This paper analyzes the size and the determinants of unexpected changes in EU countries' tax revenues and their impact on the ability of EU governments to use fiscal policy as a macroeconomic stabilisation device. We make use of information taken from the Stability and Convergence Programmes (SCP) setting countries' medium-term fiscal plans and focus on the period preceding the 2008/2009 global financial crisis. Tax revenue surprises are found to have fluctuated widely, alternating periods of sizeable windfalls and periods of substantial shortfalls.When analysing this, we find that GDP growth surprises and, in some cases (i.e. Ireland, Spain the UK and Finland) asset prices fluctuations have exerted the most significant influence. In the sequel we provide evidence on the incidence of these unexpected changes in governments' tax revenues on the ability of governments to conduct counter-cyclical fiscal policies, which are desirable from a macroeconomic perspective.We find that countries that have experienced the largest tax revenue windfalls in the run-up to the 2008/2009 crisis have also tended to run more pro-cyclical fiscal policies although these results vary depending on the use of ex-post vs. real-time data and on the method used to calculate the cyclical position of the economy. Put differently, these results tend to indicate that while tax revenue windfalls may be good for the public purse during favourable times they may also (paradoxically) dwindle the ability of the countries concerned to run counter-cyclical fiscal policies when cyclical conditions revert.

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File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2010/pdf/ecp404_en.pdf
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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 404.

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Length: 32 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:euf:ecopap:0404

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Keywords: european union eu tax revenues windfalls shortfalls business cycles fiscal policy stabilisation barrios rizza;

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Cited by:
  1. Salvador Barrios & Diego Martínez, 2014. "Fiscal equalisation schemes and sub-central government borrowing," Working Papers 1401, Universidade de Vigo, GEN - Governance and Economics research Network.
  2. Jacopo Cimadomo, 2011. "Real-Time Data and Fiscal Policy Analysis: a Survey of the Literature," Working Papers 2011-20, CEPII research center.
  3. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers 24, Directorate General Taxation and Customs Union, European Commission.

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