What Determines Fiscal Deficits in Europe? The Impact and Interaction of EMU Membership, Fiscal Rules, Fiscal Councils and Creative Accounting
-
Dominik Maltritz
and
Sebastian Wüste
Abstract
We search for drivers of fiscal deficits in Europe using a data panel containing annual data of 27 EU countries in the years 1991–2012. Our special focus is on the influence of fiscal rules as well as on fiscal councils, i. e. institutions that may help to reduce deficits and enforce fiscal rules by advising governments. We distinguish between internal fiscal rules and external rules that result from EMU membership. In addition, we consider the impact of “creative accounting”, i. e. measures that help to circumvent fiscal rules, which we approximate by so called stock-flow-adjustments. We especially analyze the interactive influence of the mentioned variables on the budget balance.
Appendix
Description of variables.
| Variable | Definition | Source |
|---|---|---|
| Primebal: Primary balance | Net lending (+) or net borrowing (-) excluding interest calculated as the difference between general government revenue and general government expenditures excluding interest | AMECO |
| GDP: Real GDP growth | Change of real GDP in percent | IMF Economic Outlook Database |
| Unemployment: Change in unemployment rate | AMECO; own calculations | |
| Debt | Gross government debt (financial liabilities) as a percentage of GDP | AMECO |
| Yield | Sovereign bond yield (10 year maturity) | Datastream |
| Inflation | Annual inflation rate | AMECO |
| GDP EU-Average | Population-weighted average of EU GDP growth rates (i. e. change of real GDP) | IMF Economic Outlook Database; own calculations |
| Pop-Share 65: Share of population over 65 | Inhabitants which are 65 year old or older divided by total population multiplied with 100 | AMECO; own calculations |
| Election-Dummy | Dummy variable which takes the value 1 if there was a legislative or executive election in a given country in a given year and 0 if otherwise | Beck et al. (2001); own calculations |
| Federalism | Federalism; coded: 0 = no; 1 = yes. | Armingeon et al. (2010); own calculations |
| Pol | Political Orientation of the government: Percentage share of government posts that were held by social democratic or other left parties whereby the percentage share is weighted by the number of days the government was in office in a given year | Armingeon et al. (2010); own calculations |
| Euro | Dummy variable which takes the value 1 if a country was a member of the Eurozone in a given year and 0 if otherwise | European Central Bank [5] |
| FRI (Fiscal Rule Index) | See Table A-2 | EU Fiscal Rules Database [6]; own calculations |
| FCI: Fiscal Council Index | Each fiscal council is scored as 1 respectively if it (1) provides analysis on fiscal policy developments without normative judgement, (2) provides independent macroeconomic and/or budgetary forecasts, (3) issues normative statements (involving judgement) on fiscal policy, or (4) issues recommendations (considering policy alternatives) in the area of fiscal policy. If one country posses more than one council in a given year, the councils are added, whereby the highest ranked council is weighted with 1, the second highest with 1/2, the third highest with 1/3 etc. Construction based on European Commission (2011, 117). | EU Fiscal Institutions Database [7]; own calculations |
| SFA: Stock-flow adjustments | Stock-flow adjustments in percent of total general government expenditures, whereby stock-flow adjustments are calculated as the sum of the general government budget balance and the difference of general government consolidated gross debt from year t and t-1 (see eq. 2) | AMECO; own calculations |
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