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

Author(s): Salvador Barrios and Pietro Rizza

Unexpected changes in tax revenues and the stabilisation function of fiscal policy. Evidence for the European Union, 1999-2008pdf(447 kB) Choose translations of the previous link 

Summary for non-specialistspdf(92 kB) Choose translations of the previous link 

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.

(European Economy. Economic Papers 404. February 2010. Brussels. PDF. 32pp. Free.)

KC-AI-10-404-EN-N (online)
ISBN 978-92-79-14890-3 (online)
ISSN 1725-3187 (online)
doi: 10.2765/39517 (online)

JEL classification: E62, E63, E65, E32, H2, H6

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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