Does the European fiscal framework play a pivotal role in shaping fiscal cyclicality of the revenue side of the budget balance?

Giovanni Carnazza, Federica Lanterna and Paolo Liberati

Economic Analysis and Policy, 2025, vol. 86, issue C, 2162-2179

Abstract: This paper explores the pro-cyclicality of discretionary tax revenues in the European Union (EU), focusing on the role of fiscal rules in shaping this outcome. Departing from the prevailing literature and building on a novel methodology that cyclically adjusts individual revenue components – adapting the European Commission’s framework – we highlight how standard approaches often obscure the true fiscal stance by relying solely on ex-post data. By contrasting ex-post and real-time output gap estimates, we demonstrate that real-time data more accurately capture the policy environment (and the fiscal outcomes) in which decisions are made. Our results reveal a consistent pro-cyclical pattern in tax policy across EU Member States, driven by the interaction between constrained discretionary space and rigid fiscal rules. Using two institutional indices and time-varying econometric techniques, we show that tightening fiscal constraints have amplified this pro-cyclicality over time. These findings raise important questions about the design of the new European fiscal framework and its ability to support macroeconomic stabilisation.

Keywords: European union; Cyclical adjustment; Fiscal (pro-)cyclicality; Tax revenues; Fiscal rules (search for similar items in EconPapers)
JEL-codes: E32 E62 H2 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:86:y:2025:i:c:p:2162-2179

DOI: 10.1016/j.eap.2025.05.047

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