Measuring time-varying fiscal cyclicality of the revenue side with a new cyclically-adjusted methodology: Does the European fiscal framework play a pivotal role?

This study investigates the cyclicality of tax revenues in 27 European Union countries from 1995 to 2019, employing a novel methodology that adjusts each tax revenue item for the business cycle. We provide new insights into the cyclical nature of various revenue categories and introduce a unique methodological framework: using both expost and real-time approaches, our estimates show widespread pro-cyclicality. The use of a time-varying cyclicality coefficient model enables to determine that the progressive tightening of the European fiscal framework has played an important role in shaping fiscal pro-cyclicality on the revenue side, especially in the real-time approach. The latter captures the pro-cyclical bias that is otherwise corrected in ex-post estimation. The revised version of the Stability and Growth Pact appears to have preserved the core mechanisms of its predecessor. This suggests that the pro-cyclical challenges identified during the 1995–2019 period are likely to endure in the future.