Real time uncertainty in fiscal planning and debt accumulation in the euro area

Maritta Paloviita

No 35/2012, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This study explores real time uncertainty in euro area fiscal policies since the late 1990s. Using real time data from the OECD Economic Outlook publications we investigate the impact of real time uncertainty on fiscal planning and debt accumulation separately for two country groups in the euro area: countries in geographical periphery (Greece, Ireland, Italy, Portugal and Spain) and other euro area countries (Austria, Belgium, Finland, France, Germany and the Netherlands). The results indicate that real time uncertainty substantially affects fiscal planning. Ex ante fiscal plans have generally been long-term oriented and counter-cyclical in the euro area, but in the periphery countries policies have been more sensitive to economic cycles and less long-term oriented than in the other countries. We find evidence that high indebtedness in the periphery countries cannot be explained by short-term pro-cyclical ex ante fiscal planning. Instead, high initial debt ratios, policy changes after the budget-planning stage and cumulated macroeconomic imbalances have contributed substantially to accumulated debt ratios. Overall, reliable statistics, balanced macroeconomic developments and longer-term policy orientation, which are central in the new EU fiscal framework, are crucial for sound and sustainable public finances.

Keywords: fiscal policy; debt accumulation; real time data; cyclical sensitivity; economic crisis (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2012_035

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