Does the European fiscal framework play a pivotal role in shaping fiscal cyclicality of the revenue side of the budget balance?

This paper explores the pro-cyclicality of discretionary tax revenues in the European Union (EU), focusing on the role of fiscal rules in shaping this outcome. Departing from the prevailing literature and building on a novel methodology that cyclically adjusts individual revenue components – adapting the European Commission’s framework – we highlight how standard approaches often obscure the true fiscal stance by relying solely on ex-post data. By contrasting ex-post and real-time output gap estimates, we demonstrate that real-time data more accurately capture the policy environment (and the fiscal outcomes) in which decisions are made. Our results reveal a consistent pro-cyclical pattern in tax policy across EU Member States, driven by the interaction between constrained discretionary space and rigid fiscal rules. Using two institutional indices and time-varying econometric techniques, we show that tightening fiscal constraints have amplified this pro-cyclicality over time. These findings raise important questions about the design of the new European fiscal framework and its ability to support macroeconomic stabilisation.