Fiscal deficit forecasts in Europe: evidence for a double standard?

ABSTRACT

Fiscal forecasts produced by international institutions came under strong criticism after the Eurozone sovereign debt crisis due to excessive optimism. Presently, international organizations are also accused of applying a double standard. Their opponents claim they depict negative picture for populist governments. This paper evaluates forecasts provided by the IMF, European Commission and the OECD based on a panel of EU economies and selected large countries. Five years after the Sovereign debt crisis, we still find excessively optimistic forecasts for Portugal and Spain. Moreover, the EC and OECD are being indulgent to countries under the excessive deficit procedure. There is also a strong autocorrelation of forecast errors and cyclical biases – European Commission overestimates governments’ propensity to tighten fiscal policy during expansion and forecasts an overly pessimistic picture during a slowdown. However, we find no evidence suggesting that fiscal forecasts stigmatize the governments accused of populism.

KEYWORDS:

• Deficit forecasts
• Excessive deficit procedure
• Fiscal supervision
• Public finance

JEL classification codes:

• H62
• H68

Acknowledgements

The paper was prepared within the framework of research project No. 2018/29/N/HS4/00334. Analysis of international financial institutions fiscal forecasts consistency for European Union economies, financed by the National Science Center, Poland.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The theorem assumes a common and positive relationship between fiscal and current account deficits in the long term; e.g. an increase of government expenditures financed by debt increase should widen the external imbalance.

Additional information

Funding

This work was supported by Narodowe Centrum Nauki: [Grant Number 2018/29/N/HS4/00334].

Notes on contributors

Jakub Rybacki

Jakub Rybacki is a PhD student at the SGH Warsaw School of Economics, Economic Advisor at the Polish Economic Institute.