Is the Road to Hell Paved with Good Intentions? An Empirical Analysis of Budgetary Follow-Up in the EU

38 Pages Posted: 27 Apr 2022

See all articles by Massimo Giuliodori

Massimo Giuliodori

University of Amsterdam - Faculty of Economics & Econometrics (FEE); Tinbergen Institute

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Matthias Busse

European Union - European Commission

Lorenzo Germinetti

Queen Mary University of London

Martin Larch

European Fiscal Board

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Abstract

We study the one-year-ahead budgetary projections from the Stability and Convergence Programmes of EU Member States since the start of the Economic and Monetary Union (EMU) until the start of the coronavirus crisis. We consider first budget-balance errors, which we then split into expenditure and revenue errors. Next, we split the latter two into “base”, “growth” and “denominator” effects. The most important explanatory variable is the GDP growth error: more optimism in GDP growth projections produces more optimistic budgetary projections. This effect goes beyond a mechanical denominator effect on spending and revenues as shares of GDP; it also works through the numerator of these ratios. Our findings may call for delegating the construction of output projections to adequately equipped national independent fiscal institutions. Finally, we explore how independent fiscal institutions shape projection errors. Those with high media impact producing or assessing the macroeconomic forecast appear to lead to actual budgetary improvement relative to projections.

Keywords: budgetary follow-up, first-release error, budget balance, revenues, expenditures.

Suggested Citation

Giuliodori, Massimo and Beetsma, Roel M. W. J. and Busse, Matthias and Germinetti, Lorenzo and Larch, Martin, Is the Road to Hell Paved with Good Intentions? An Empirical Analysis of Budgetary Follow-Up in the EU. Available at SSRN: https://ssrn.com/abstract=4095059 or http://dx.doi.org/10.2139/ssrn.4095059

Massimo Giuliodori (Contact Author)

University of Amsterdam - Faculty of Economics & Econometrics (FEE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
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Tinbergen Institute ( email )

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Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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European Commission ( email )

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Centre for Economic Policy Research (CEPR)

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CESifo (Center for Economic Studies and Ifo Institute)

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Tinbergen Institute ( email )

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Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
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Matthias Busse

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Lorenzo Germinetti

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Martin Larch

European Fiscal Board ( email )

Belgium
0032 2 2969244 (Phone)

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