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

Author

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  • 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.

Suggested Citation

  • Salvador Barrios & Pietro Rizza, 2010. "Unexpected changes in tax revenues and the stabilisation function of fiscal policy. Evidence for EU," European Economy - Economic Papers 2008 - 2015 404, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0404
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    Cited by:

    1. Abel Bojar, 2016. "The Electoral Advantage of the Left in Times of Fiscal Adjustment," LEQS – LSE 'Europe in Question' Discussion Paper Series 103, European Institute, LSE.
    2. Jacopo Cimadomo, 2016. "Real-Time Data And Fiscal Policy Analysis: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 302-326, April.
    3. Salvador Barrios & Diego Martínez-López, 2017. "Fiscal equalization schemes and subcentral government borrowing," Chapters,in: Central and Local Government Relations in Asia, chapter 4, pages 130-160 Edward Elgar Publishing.
    4. Agustín Molina-Parra & Diego Martínez-López, 2015. "Do federal deficits motivate regional fiscal (im)balances? Evidence from the Spanish case," Working Papers. Collection A: Public economics, governance and decentralization 1503, Universidade de Vigo, GEN - Governance and Economics research Network.
    5. 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).
    6. 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.
    7. 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.

    More about this item

    Keywords

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

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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