Explaining Government Revenue Windfalls and Shortfalls: An Analysis for Selected EU Countries

65 Pages Posted: 7 Dec 2009

See all articles by Richard Morris

Richard Morris

European Central Bank (ECB)

Cláudia Rodrigues Braz

Bank of Portugal

Francisco de Castro

Banco de España

Steven Jonk

De Nederlandsche Bank

Jana Kremer

Deutsche Bundesbank

Suzanne Linehan

Central Bank and Financial Services Authority of Ireland

Maria Rosaria Marino

Bank of Italy

Christophe Schalck

Banque de France

Olegs Tkacevs

Latvijas Banka

Date Written: November 30, 2009

Abstract

In recent years, government revenues in many EU countries experienced significant and erratic changes, which, a priori, could not be fully explained by macroeconomic developments or by discretionary fiscal policy measures. We investigate this issue by estimating “unexplained” changes in tax and social contribution revenues, based on proxies for tax revenue bases and elasticities commonly used for forecasting or cyclically adjusting government revenues and taking into account estimates of the impact of legislation changes. This is done for a selection of EU countries, including the “big five” euro area countries (Germany, Spain, France, Italy and the Netherlands) together with Ireland, Latvia and Portugal. We also undertake the same exercise using alternative tax base proxies, either taken from forecasting models or on the basis of our knowledge of the tax system in each country. The results show that, in the aggregate, revenue windfalls and shortfalls have exhibited a broadly cyclical pattern, driven mainly by developments in profit-related taxes and, to a somewhat lesser extent, VAT. Other, more structural factors also play a role, such as declining consumption of fuel and tobacco, as well as factors specific to individual countries, such as developments in property markets. The estimated revenue windfalls and shortfalls can explain a substantial proportion of changes in the euro area cyclically adjusted budget balance over the period 1999-2007. Since these unexplained revenue changes have exhibited a largely cyclical character and might therefore be viewed as partly temporary, this highlights the importance of a careful interpretation of fiscal indicators adjusted for the economic cycle. Except in a small number of cases, the results do not change significantly when alternative tax base proxies are used, suggesting that the potential for improving existing indicators by a better matching of taxes to their bases is likely to be limited.

Keywords: tax revenues, fiscal forecasting, cyclical adjustment

JEL Classification: H2, H68, E62

Suggested Citation

Morris, Richard and Rodrigues Braz, Cláudia and Castro, Francisco de and Jonk, Steven and Kremer, Jana and Linehan, Suzanne and Marino, Maria Rosaria and Schalck, Christophe and Tkacevs, Olegs, Explaining Government Revenue Windfalls and Shortfalls: An Analysis for Selected EU Countries (November 30, 2009). ECB Working Paper No. 1114. Available at SSRN: https://ssrn.com/abstract=1502683

Richard Morris (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Cláudia Rodrigues Braz

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Francisco de Castro

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Steven Jonk

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Jana Kremer

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Suzanne Linehan

Central Bank and Financial Services Authority of Ireland ( email )

P.O. 559 Dame Street
Dublin 2, D2
Ireland

Maria Rosaria Marino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39 06 47924134 (Phone)
+39 06 47922324 (Fax)

Christophe Schalck

Banque de France ( email )

Paris
France

Olegs Tkacevs

Latvijas Banka ( email )

K. Valdemara iela 2a
Riga LV-1050
Latvia

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