Stock-Flow Adjustments and Fiscal Sustainability in the European Union: A Measurement Reassessment

José Alves, Laura Mendes and Frederico Silva Leal

No 2026/0423, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: Public debt rises through two channels: the recorded deficit and a residual, the stock-flow adjustment (SFA), that reconciles the deficit with the actual change in debt. A growing literature interprets recurrent SFAs as hidden fiscal risk, yet this conclusion may reflect how the SFA is constructed rather than genuine fiscal dynamics. We show that commonly used measures mechanically embed the fiscal balance, generating strong but spurious correlations even when no true relationship exists. Using Monte Carlo simulations and a newly reconstructed Eurostat-consistent SFA series for the EU-27 (1995–2024), we show that these correlations largely disappear once the accounting identity is respected. The corrected SFA series displays much smaller values, no economically meaningful predictive power for future primary balances, and weakens previous instrumental-variable evidence. Our findings suggest that much of the evidence linking SFAs to fiscal risk reflects measurement error rather than underlying fiscal behaviour, and point to the need for accounting-consistent measures in both research and fiscal surveillance.

Keywords: stock-flow adjustments; fiscal sustainability; measurement; below-the-line operations; fiscal surveillance; European Union. (search for similar items in EconPapers)
JEL-codes: C18 E62 H63 H68 H83 (search for similar items in EconPapers)
Date: 2026-07
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