Creative Accounting and Fiscal Rules in EU Member States: An Analysis Based on Stock Flow Adjustments

Dominik Maltritz; Sebastian Wüste

doi:10.1515/roe-2024-0031

Article

Creative Accounting and Fiscal Rules in EU Member States: An Analysis Based on Stock Flow Adjustments

Dominik Maltritz and Sebastian Wüste

Published/Copyright: December 24, 2024

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From the journal Review of Economics Volume 75 Issue 2

Abstract

We study whether creative accounting for fiscal balances is a significant issue in EU countries and how it relates to fiscal rules. We especially consider internal fiscal rules and contrast them with external rules resulting from membership in the EMU or in the Eurozone. We regress stock-flow adjustments, which serve as an indicator for false reporting of public debt and deficit numbers, on several measures of fiscal rules in a panel framework comprising 27 EU countries. We complement the literature on creative accounting in the run-up to Eurozone membership by showing that joining leads to creative accounting not only in the initial period but also in later periods. We expand the literature by demonstrating that internal rules also induce creative accounting, regardless of whether the rules target public debt or budget deficits. Our findings hold for years before the Eurozone existed as well as for the Eurozone period.

Keywords: European Monetary Union; creative accounting; fiscal rules; stock-flow adjustments

JEL Classification: H60; H62; H63; H83

Corresponding author: Dominik Maltritz, Staatswissenschaftliche Fakulät, Universität Erfurt, Nordhäuser Straße 63, 99089 Erfurt, Freistaat Thüringen, Germany, E-mail: Dominik.Maltritz@uni-erfurt.de

Appendix

Table A-1:

Description of variables.

Variable	Definition	Source
SFA: stock-flow adjustments	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 in percent of total general government expenditures. (see Equation (2))	AMECO; own calculations
GDP: real GDP growth	Change of real GDP in percent.	IMF Economic Outlook Database
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
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;^a own calculations
Euro/EMU dummy variables: Euro-99 Euro-98/Euro-96/Euro-97 EMU-93 and Euro-93	Euro-99 is a dummy variable that takes the value 1 if a country was a member of the Eurozone in a given year and 0 otherwise. Euro-98 is additionally 1 for the year 1998 for early members and for the later members it is 1 in the year before the Euro became legal tender. Similarly, Euro-97 and Euro-96 are additionally 1 for two respectively three years before Eurozone membership. EMU-93 takes the value 1 if a country was a member of the EMU from 1993 onwards and 0 otherwise. For later members it is one starting with the year of membership. Euro-93 is constructed in the same way, but it is 0 for the opt-out-countries.	European Central Bank^b
Fiscal rule indices: Budget rules/debt rules	See Table A-2	EU Fiscal Rules Database;^c own calculations

^a http://ec.europa.eu/economy_finance/db_indicators/fiscal_governance/independent_institutions/index_en.htm. ^b http://www.ecb.int/euro/intro/html/map.en.html. ^c http://ec.europa.eu/economy_finance/db_indicators/fiscal_governance/fiscal_rules/index_en.htm.

Table A-2:

Criteria for constructing the fiscal rule indices.

Criterion 1: Statutory base of the rule
4	Constitutional base
3	The rule is based on a legal act (e.g. Public Finance Act, Fiscal Responsibility Law)
2	The rule is based on a coalition agreement or an amendment reached by different general government tiers (and not enshrined in a legal act)
1	Political commitment by a given authority
Criterion 2: Room for setting and revising objectives
3	There is no margin for adjusting objectives (they are encapsulated in the document underpinning the rule)
2	There is some but constrained margin in setting or adjusting objectives
1	There is complete freedom in setting or adjusting objectives (the statutory base of the rule merely contains broad principles or the obligation for the government or the relevant authority to set targets)
Criterion 3: Nature of body in charge of monitoring respect and enforcement of the rule
The score of this criterion index is constructed as a simple average of the two elements below:
Nature of the body in charge of monitoring respect of the rule
3	Monitoring by an independent authority (Fiscal Council, Court of Auditors or any other Court) or the national parliament
2	Monitoring by the ministry of finance or any other government body
1	No regular public monitoring of the rule (there is no report systematically assessing compliance)
The score of this sub-criterion is augmented by 1 if there is real time monitoring of compliance with the rule, i.e. if alert mechanisms of risk of non-respect exist.
Nature of the body in charge of enforcement of the rule
3	Enforcement by an independent authority (Fiscal Council or any Court) or the national parliament
2	Enforcement by the ministry of finance or any other government body
1	No specific body in charge of enforcement
Criterion 4: Enforcement of mechanisms of the rule
4	There are automatic correction and sanction mechanisms in case of non-compliance
3	There is an automatic correction mechanism in case of non-compliance and the possibility of imposing sanctions
2	The authority responsible is obliged to take corrective measures in case of non-compliance or is obliged to present corrective proposals to Parliament or the relevant authority
1	There is no exante defined actions in case of non-compliance
The score of this variable is augmented by 1 if escape clauses are foreseen and clearly specified.
Criterion 5: Media visibility of the rule
3	Observance of the rule is closely monitored by the media; non-compliance is likely to trigger public debate
2	High media interest in rule compliance, but non-compliance is unlikely to invoke public debate
1	No or modest interest of the media

Table A-3-a:

Estimation with alternative indicators for Eurozone membership as indicator for fiscal rules (EMU-93, Euro-96 and Euro-97).

Dependent variable: stock-flow-adjustments
Sample: 1991–2012
Periods included: 22
Cross-sections included: 27
Total panel (unbalanced) observations: 516

Variable	Results for EMU-93		Results for Euro-96		Results for Euro-97
Variable
	Coefficient	p-Value	Coefficient	p-Value	Coefficient	p-Value

CONSTANT	−0.953304	0.3084	0.648630	0.3690	0.537287	0.4491
GDP	0.113219	0.3086	0.088121	0.4194	0.097555	0.3714
ELECTION-DUMMY	0.169808	0.7870	0.276160	0.6648	0.322614	0.6114
FEDERAL-DUMMY	−0.485944	0.5489	−1.039406	0.2366	−1.166628	0.1843
POL. ORIENTATION	−0.013587	0.0642	−0.010744	0.1448	−0.010631	0.1481
FISCAL COUNCIL	−0.080410	0.6369	0.024936	0.8812	0.016076	0.9229
EMU-93	3.568144	0.0001
EURO-96			1.872759	0.0033
EURO-97					2.276064	0.0004

R-squared	0.129439		0.116056		0.123476
Adjusted R-squared	0.081273		0.067149		0.074980
F-statistic	2.687331		2.373006		0.123476
Prob (F-statistic)	0.000014		0.000156		0.074980

Table A-3-b:

Estimation with indicators for Eurozone/EMU membership as indicator for fiscal rules restricted period (1998–2012).

Dependent variable: stock-flow-adjustments
Sample: 1998–2012
Periods included: 15
Cross-sections included: 27
Total panel (unbalanced) observations: 401

Variable	Results for EMU-93		Results for Euro-93		Results for Euro-96		Results for Euro-97		Results for Euro-98		Results for Euro-99
Variable
	Coefficient	p-Value	Coefficient	p-Value	Coefficient	p-Value	Coefficient	p-Value	Coefficient	p-Value	Coefficient	p-Value

CONSTANT	−1.620538	0.1220	−0.095405	0.9180	0.504080	0.5290	0.355106	0.6536	0.212936	0.7911	0.597508	0.4565
GDP	0.164800	0.1603	0.107918	0.3424	0.128309	0.2659	0.140500	0.2230	0.150179	0.1977	0.143359	0.2257
ELECTION-DUMMY	−0.682167	0.3217	−0.606865	0.3850	−0.569618	0.4194	−0.494650	0.4801	−0.525288	0.4478	−0.648229	0.3519
FEDERAL-DUMMY	−0.949242	0.2752	−1.785654	0.0629	−1.816344	0.0591	−1.959842	0.0414	−2.144998	0.0271	−1.861826	0.0588
POL. ORIENTATION	−0.013199	0.0997	−0.008102	0.3042	−0.009372	0.2415	−0.008970	0.2605	−0.007939	0.3194	−0.007336	0.3599
FISCAL COUNCIL	−0.058361	0.7579	0.144571	0.4434	0.094456	0.6110	0.079959	0.6653	0.063001	0.7307	0.071673	0.6986
EMU-93	4.545664	0.0000
EURO-93			2.507043	0.0014
EURO-96					2.298247	0.0006
EMU-97							2.631079	0.0001
EURO-98									3.000299	0.0000
EURO-99											2.398122	0.0006

R-squared	0.156803		0.134427		0.135185		0.143897		0.152654		0.130189
Adjusted R-squared	0.112424		0.088870		0.089669		0.098839		0.108056		0.084410
F-statistic	3.533284		2.950771		2.970025		3.193596		3.422941		2.843833
Prob (F-statistic)	0.000001		0.000028		0.000025		0.000006		0.000001		0.000053

Table A-4:

Estimation with (internal) fiscal rule indicators for budget and debt for the restricted period (1998–2012).

Dependent variable: stock-flow-adjustments
Sample: 1998–2012
Periods included: 15
Cross-sections included: 27
Total panel (unbalanced) observations: 401

Variable	Coefficient	Std. error	t-Statistic	p-Value

CONSTANT	1.880926	0.793771	2.369609	0.0183
GDP	0.149224	0.117616	1.268735	0.2053
ELECTION-DUMMY	−0.729008	0.678289	−1.074774	0.2832
FEDERAL-DUMMY	−1.376874	0.909456	−1.513953	0.1309
POL. ORIENTATION	−0.007214	0.008162	−0.883773	0.3774
FISCAL COUNCIL	−0.216392	0.214722	−1.007778	0.3142
BUDGET RULES	0.438384	0.134884	3.250083	0.0013
DEBT RULES	−0.372396	0.151548	−2.457280	0.0144

R-squared	0.143304
Adjusted R-squared	0.095835
F-statistic	0.143304
Prob (F-statistic)	0.095835

Table A-5:

Joint estimation with internal and external rules for the restricted period (1998–2012).

Dependent variable: stock-flow-adjustments
Sample: 1998–2012
Periods included: 15
Cross-sections included: 27
Total panel (unbalanced) observations: 401

Variable	Results for Euro-98		Results for Euro-93
Variable	Coefficient	p-Value	Coefficient	p-Value

CONSTANT	0.059015	0.9494	−0.890651	0.4020
GDP	0.201252	0.0881	0.179009	0.1108
ELECTION-DUMMY	−0.522761	0.4286	−0.574750	0.3788
FEDERAL-DUMMY	−2.584381	0.0064	−2.656856	0.0042
POL. ORIENTATION	−0.009619	0.2299	−0.009362	0.2402
FISCAL COUNCIL	−0.237552	0.2331	−0.226192	0.2629
BUGET RULES	0.492072	0.0002	0.610557	0.0000
DEBT RULES	−0.231314	0.1220	−0.304895	0.0336
EURO-98	2.991607	0.0000
EURO-93			3.367302	0.0000

R-squared	0.186740		0.187266
Adjusted R-squared	0.139408		0.139965
F-statistic	3.945286		3.958958
Prob (F-statistic)	0.000000		0.000000

Table A-6:

Estimation for EU-15 countries for internal and external rules for the restricted period (1998–2012).

Dependent variable: stock-flow-adjustments
Sample: 1998–2012
Periods included: 15
Cross-sections included: 15
Total panel (unbalanced) observations: 224

Variable	Results for Euro-98		6Results for Euro-93
Variable	Coefficient	p-Value	Coefficient	p-Value

CONSTANT	1.824220	0.2821	1.954901	0.2880
GDP	0.679334	0.0033	0.680033	0.0032
ELECTION-DUMMY	−0.371484	0.5725	−0.357530	0.5878
FEDERAL-DUMMY	−1.188599	0.2495	−1.098579	0.3034
POL. ORIENTATION	−0.015636	0.0474	−0.016219	0.0410
FISCAL COUNCIL	−0.600897	0.0256	−0.606880	0.0246
BUGET RULES	0.455004	0.0334	0.448528	0.0479
DEBT RULES	−0.385577	0.1389	−0.379255	0.1448
EURO-98	1.633853	0.1607
EURO-93			1.496701	0.2437

R-squared	0.224445		0.222513
Adjusted R-squared	0.139558		0.137415
F-statistic	2.644053		2.614787
Prob (F-statistic)	0.000190		0.000225

Figure A-1:

Stock flow adjustments (in percent).

Figure A-2:

Internal fiscal rules indices for budget rules.

Figure A-3:

Internal fiscal rules indices for debt rules.

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Received: 2024-05-30

Accepted: 2024-05-31

Published Online: 2024-12-24

Published in Print: 2024-08-27

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Articles in the same Issue

https://doi.org/10.1515/roe-2024-0031

Keywords for this article

European Monetary Union; creative accounting; fiscal rules; stock-flow adjustments