Kicking the can down the road? A real-time data analysis of delayed fiscal consolidation

Why do some countries act swiftly when confronted with fiscal unsustainability, while others delay action? This study investigates the inertia in correcting unsound fiscal policy within the European Union (EU) from 2002 to 2019, using real-time data drawn from annual policy reports of the European Commission (EC). The results show that, on average, EU countries take three years to formulate adjustment plans after their fiscal policies are marked as unsustainable by the EC. Key drivers of the timing of fiscal consolidation plans include the domestic output gap, elections, cabinet size, and the activation of an Excessive Deficit Procedure (EDP). The analysis provides new evidence that the functioning of the EDP is heavily politicized: its influence tends to diminish during European election years, in countries with long-standing fiscal risks, in smaller EU countries, and where national governments lean more to the right relative to the European Parliament. Additional findings highlight that neglecting the need for fiscal consolidation may overlook key factors driving delays in such policies, potentially leading to misleading policy guidance.