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

Figures & data

Figure 1. IMF deficit forecast for Italy – World Economic Outlook (WEO) October Editions. Each line represents forecasts available in different years. The 2018 edition (black solid line) provides up to date estimate of 2017 government deficit and forecast from 2018 to 2023. Source: IMF WEO database.

Figure 2. EC deficit forecast for Poland – Winter Editions. Source: EC forecast – statistical annex.

Table 1. Countries used in the panel by the international institution from which the data were sourced.

International Monetary Fund (IMF)	Organization for Economic Cooperation and Development (OECD)	European Commission (EC)
Australia	Australia	Belgium
Austria	Austria	Germany
Brazil	Belgium	Estonia
Bulgaria	Canada	Spain
China	Czech Republic	France
Croatia	Denmark	Italy
Czech Republic	Estonia	Latvia
Denmark	Finland	Lithuania
Estonia	France	Luxembourg
Finland	Germany	Malta
France	Hungary	Netherlands
Germany	Israel	Austria
Hungary	Italy	Portugal
India	Japan	Slovakia
Indonesia	Korea	Finland
Italy	Latvia	Bulgaria
Japan	Luxembourg	Czech Republic
Korea	Netherlands	Denmark
Latvia	New Zealand	Croatia
Lithuania	Norway	Hungary
Netherlands	Poland	Poland
New Zealand	Portugal	Romania
Norway	Spain	Sweden
Poland	Sweden	U.S.A.
Portugal	Switzerland	Japan
Romania	U.S.A.
Russia
Slovak Republic
South Africa
Spain
Sweden
Switzerland
United Kingdom
U.S.A.

Table 2. International Monetary Fund (IMF) forecast errors – estimated models.

	T0	T1	T2	T3
Fiscal forecast error (previous report)	0.47*** (0.06,7.83)	0.51*** (0.04,12.51)	0.54*** (0.05,11.77)	0.49*** (0.05,9.72)
GDP – forecast error	0.27*** (0.05,4.92)	0.25*** (0.06,4.24)	0.15** (0.06,2.3)	0.21*** (0.08,2.66)
GDP – forecast error (^3)			0.01** (0.00,2.5)	0.00* (0,1.77)
Constant	0.1** (0.04,2.54)	0.17*** (0.04,3.83)	0.07 (0.05,1.51)	−0.01 (0.06, −0.16)
Hungarian reform of retirement system - dummy	−8.93*** (0.44, −20.42)
Basic diagnostics
Cross-sections/Periods	34/22	34/20	34/15	34/13
Observations	640	572	416	350
R^2/Adjusted R^2	0.42/0.36	0.62/0.59	0.57/0.52	0.68/0.64
Redundant fixed effects tests - Statistic (p-value)
Cross-section F	1.57 (0.02)	1.35 (0.10)	1.91 (0.00)	2.68 (0.00)
Cross-section Chi-square	54.7 (0.01)	47.39 (0.05)	66.48 (0.00)	90.55 (0.00)
Period F	1.34 (0.15)	6.32 (0.00)	0.9 (0.55)	2.23 (0.01)
Period Chi-square	28.75 (0.09)	113.89 (0.00)	13.21 (0.43)	27.51 (0.00)
Cross-Section/Period F	1.52 (0.01)	3.34 (0.00)	1.63 (0.01)	2.62 (0.00)
Cross-Section/Period Chi-square	83.17 (0.01)	163.14 (0.00)	77.8 (0.00)	113.89 (0.00)

Note: The estimated model indicates no significance of control variables related to institutional quality or certain governments. However, IMF deficit nowcasts and one year ahead forecasts are systematically biased – the constant is statistically significant and greater than zero. The forecast errors are not randomly distributed as well – a parameter corresponding to the previous iteration error is significant and positive. Therefore, autocorrelation of errors occurs.

The relationship between macroeconomic surprises and deficits are positive, in line with the intuition. However, the cross-section fixed effects tend to be statistically significant in the case of nearly every time horizon. Detailed discussion about their values is presented in Table 5.

*** denotes significance at α = 0.01, ** denotes significance at α = 0.05, * denotes significance at α = 0.1.

Table 3. European Commission (EC) forecast errors – estimated models.

	T0	T1	T2
Fiscal forecast error (previous report)	0.32*** (0.07,4.34)	0.47*** (0.05,8.78)	0.22*** (0.07,3.05)
Private Consumption – forecast error	0.14** (0.06,2.50)	0.15*** (0.05,2.81)	0.46*** (0.15,3.03)
Private Consumption – forecast error^3	0.00*** (0.00, −2.90)	0.00** (0.00, −2.24)	−0.02** (0.01, −2.6)
Gross Fixed Capital Formation – forecast error	0.02* (0.01,1.90)
GFCF – forecast error^3	0.00*** (0.00, −2.75)
Public Consumption – forecast error^3	0.00*** (0.00, −3.53)
Wages – forecast error		−0.08** (0.03, −2.59)
GDP deflator forecast error		0.18*** (0.05,3.66)
Constant	0.27*** (0.07,3.89)	0.48*** (0.05,8.86)	0.47** (0.2,2.32)
Polish reform of retirement system – dummy	−9.64*** (0.34, −28.31)
Polish reform of retirement system – dummy 2		−8.89*** (0.31, −29.06)
Hungarian reform of retirement system – dummy	−6.24*** (0.36, −17.56)
Hungarian reform of retirement system – dummy 2	−6.53*** (0.64, −10.22)
EDP	−0.29* (0.15, −1.86)		0.73* (0.43,1.72)
Basic diagnostics
Cross-sections/Periods	26/18	26/18	26/8
Observations	468	468	208
R^2/Adjusted R^2	0.62/0.57	0.59/0.55	0.59/0.55
Redundant fixed effects test-statistics (p-value)
Cross-section F	1.95 (0.00)	6.34 (0.00)	1.34 (0.14)
Cross-section Chi-square	51.91 (0.00)	150.6 (0.00)	37.4 (0.05)
Period F	2.1 (0.01)	13.51 (0.00)	4.52 (0.00)
Period Chi-square	38.7 (0.00)	215.33 (0.00)	35.47 (0.00)
Cross-Section/Period F	1.94 (0.00)	9.34 (0.00)	2.67 (0.00)
Cross-Section/Period Chi-square	83.95 (0.00)	317.68 (0.00)	84.72 (0.00)

Note: There is no evidence that the EC tends to stigmatize populist governments or those with lower institutional quality. However, weak evidence of indulgence for countries under EDP is visible (negative beta in the case of nowcast).

Similar to the case of the IMF, both constants and parameters corresponding to the deficit forecast error in the previous report are positive and statistically significant. The latter confirms autocorrelation of forecast errors. The cross-country fixed effects are non-redundant as well.

Additionally, parameters corresponding to wages in the one year ahead equation and to the third power of consumption in the two-year horizon are negative. As a result, in case of stronger positive macroeconomic surprises, we do not observe an adequate deficit reduction. The problem is likely a result of overestimating governments’ propensity to reduce deficits during an economic expansion.

*** denotes significance at α = 0.01, ** denotes significance at α = 0.05, * denotes significance at α = 0.1.

Table 4. Organization for Economic Cooperation and Development (OECD) forecast errors – estimated models.

	T0	T1	T2
Fiscal forecast error (previous report)	0.29*** (0.08,3.52)	0.47*** (0.07,6.52)	0.22*** (0.08,2.86)
GDP – forecast error			0.28*** (0.1,2.86)
Private Consumption – forecast error		0.14** (0.07,2.16)
Private Consumption – forecast error^3	0.05** (0.02,2.17)
Gross Fixed Capital Formation – forecast error	0.04*** (0.01,3.01)
GFCF – forecast error^3	0.00*** (0.00, −3.11)
Constant	0.32*** (0.06,5)	0.16*** (0.06,2.92)	0.56*** (0.12,4.73)
Polish reform of retirement system – dummy	−9.87*** (0.32, −30.71)
Polish reform of retirement system – dummy 2		−8.4*** (0.4, −20.95)
Hungarian reform of retirement system – dummy	−7.96*** (0.31, −25.88)
Hungarian reform of retirement system – dummy 2	−7.44*** (0.82, −9.09)
EDP	−0.51*** (0.16, −3.23)		−0.88** (0.38, −2.31)
Basic diagnostics
Cross-sections/Periods	28/17	28/15	28/6
Observations	448	392	155
R^2/Adjusted R^2	0.69/0.65	0.67/0.63	0.67/0.63
Redundant fixed effects tests - Statistic (Prob)
Cross-section F	2.46 (0.00)	2.39 (0.00)	1.47 (0.08)
Cross-section Chi-square	69.45 (0.00)	66.94 (0.00)	44.68 (0.02)
Period F	1.66 (0.05)	2.42 (0.00)	0.5 (0.78)
Period Chi-square	29.08 (0.02)	36.61 (0.00)	3.2 (0.67)
Cross-Section/Period F	2.22 (0.00)	2.56 (0.00)	1.31 (0.15)
Cross-Section/Period Chi-square	96.75 (0.00)	103.84 (0.00)	46.87 (0.04)

Note: There is no evidence that the OECD tends to stigmatize populist governments or those with lower institutional quality. However, there are similar problems with OECD forecasts, like those of the other institutions; i.e. we found systematic bias, autocorrelation of forecasts, and existence of statistically significant country effects.

Additionally, this institution put too much confidence in the corrective arm of EDP. Countries under EC supervision are projected to consolidate their budget deficits at a rate which is later not achieved.

*** denotes significance at α = 0.01, ** denotes significance at α = 0.05, * denotes significance at α = 0.1.

Table 5. Cross-country fixed effects – a summary.

	European Commission			Organization for Economic Cooperation and Development			International Monetary Fund
Forecast horizon	T0	T1	T2	T0	T1	T2	T0	T1	T2	T3
Australia				−0.12	−0.13	−0.42	−0.33	−0.59	−0.59	−1.67
Austria	−0.02	−0.07	−0.01	−0.04	0.00	−0.24	−0.01	0.12	0.08	0.57
Belgium	−0.11	−0.06	−0.06	−0.18	−0.24	−0.29
Brazil							−0.30	−0.45	−0.41	−3.22
Bulgaria	−0.15	0.05	−0.23				0.11	0.05	−0.13	0.47
Canada				0.51	0.47	0.51
China							0.06	−0.32	−0.79	−1.57
Croatia	−0.16	−0.09	−0.06				0.05	0.70	0.96	1.58
Czech Republic	0.27	0.42	0.95	0.10	0.29	0.98	0.30	0.65	0.89	2.78
Denmark	0.69	0.72	1.01	0.55	0.72	1.25	0.56	0.60	0.81	1.69
Estonia	0.21	0.11	0.09	−0.09	−0.12	−0.47	−0.13	−0.01	−0.08	0.48
Finland	−0.21	−0.39	−0.35	−0.20	−0.43	−0.49	0.09	0.01	−0.18	−0.57
France	0.11	−0.04	−0.31	0.07	−0.21	0.15	−0.05	−0.07	−0.19	−1.24
Germany	0.02	0.11	0.47	−0.11	0.08	−0.08	0.08	0.29	0.44	1.18
Hungary	−0.06	−0.44	−0.67	0.03	−0.05	−0.69	−0.09	0.31	0.16	1.08
India							−0.09	0.03	−0.03	0.58
Indonesia							0.02	0.00	−0.02	−0.18
Israel				0.36	0.22	0.53
Italy	−0.17	−0.33	−0.74	−0.25	−0.39	−0.75	0.00	−0.07	−0.20	−0.39
Japan	0.01	0.14	0.42	0.71	0.86	1.13	0.36	0.11	0.23	1.21
Korea				0.02	0.19	0.28	0.04	0.16	−0.09	−0.16
Latvia	0.07	0.44	1.15	0.08	−0.54	−1.01	−0.06	−0.16	0.03	0.12
Lithuania	−0.08	0.14	0.30				−0.19	0.66	0.84	2.66
Luxembourg	0.56	0.55	1.33	0.16	0.37	0.58
Malta	0.53	0.22	0.50
Netherlands	0.05	0.05	0.15	0.14	0.02	0.48	−0.02	0.17	0.65	1.82
New Zealand				0.29	0.17	−0.33	0.16	−0.02	0.02	0.27
Norway				−0.25	−0.27	1.14	−0.10	−0.37	−1.07	−2.71
Poland	0.23	0.30	−0.08	0.35	0.33	−0.03	−0.01	−0.01	−0.07	−0.14
Portugal	−1.07	−0.97	−1.60	−0.73	−0.72	−0.55	−0.88	−0.53	−0.14	−1.46
Romania	−0.07	−0.08	−0.05				−0.22	−0.23	−0.51	−0.71
Russia							0.13	0.39	0.39	1.23
Slovakia	−0.05	0.12	0.19	−0.07	0.06	−0.43	0.02	0.18	0.39	1.30
South Africa							−0.08	−0.01	−0.01	−0.44
Spain	−0.56	−0.57	−1.80	−0.48	−0.89	−0.42	−0.51	−0.48	−0.25	−1.28
Sweden	0.11	−0.12	−0.07	−0.15	−0.07	−0.07	0.30	0.23	0.03	−0.29
Switzerland				−0.32	−0.05	−0.52	0.04	−0.05	−0.14	0.06
United Kingdom	0.16	0.13	0.01	−0.10	0.02	0.09	0.22	0.22	−0.23	0.01
U.S.A.	−0.30	−0.35	−0.56	−0.57	−0.94	−1.12	0.38	0.07	0.11	0.86

Note: The values of the fixed effects for Portugal and Spain are lower compared with those for the other countries. The discrepancy between their values and cross-country means frequently exceeds two standard deviations for different institutions and different horizons. Blank cells indicate that the country was not part of a data panel.

Table 6. Pooled regressions – forecast errors for the IMF.

Forecast Horizon	T0	T1	T2	T3
Fiscal forecast error (previous report)	0.53*** (0.05, 0.00)	0.50*** (0.04, 0.00)	0.71*** (0.03, 0.00)	0.75*** (0.03, 0.00)
Populist governments	−0.03 (0.20, 0.90)	−0.12 (0.26, 0.63)	−0.33** (0.14, 0.01)	−0.45* (0.24, 0.06)
Mediterranean economies	−0.35*** (0.12, 0.00)	−0.34** (0.15, 0.03)	−0.15 (0.15, 0.32)	−0.30* (0.17, 0.07)
GDP – forecast error	0.26*** (0.05, 0.00)	0.39*** (0.05, 0.00)	0.26*** (0.05, 0.00)	0.26*** (0.06, 0.00)
Constant	0.14*** (0.04, 0.00)	0.24*** (0.05, 0.00)	0.10** (0.05, 0.04)	0.08 (0.06, 0.20)
Basic diagnostics
R^2	0.52	0.61	0.69	0.72
Observations	640	572	416	350

***denotes significance at α = 0.01, ** denotes significance at α = 0.05, * denotes significance at α = 0.1.

Dummies corresponding to Hungarian and Polish retirement system reform were present in the model and intentionally removed from the output. The model confirms conclusions presented in Table 2.

Table 7. Pooled regressions – forecast errors for the European Commission.

Forecast Horizon	T0	T1	T2	T3
Fiscal forecast error (previous report)	0.39*** (0.07, 0.00)	0.36*** (0.05, 0.00)	0.13** (0.06, 0.04)
EDP	−0.44*** (0.12, 0.00)	0.18 (0.13, 0.17)	0.73*** (0.27, 0.01)
Populist governments	−0.10 (0.16, 0.54)	−0.45*** (0.15, 0.00)	−0.51 (0.43, 0.23)
Mediterranean economies	−0.37** (0.14, 0.01)	−0.78*** (0.16, 0.00)	−1.36*** (0.33, 0.00)
Private Consumption – forecast error	0.16*** (0.05, 0.00)	0.18*** (0.05, 0.00)	0.36*** (0.12, 0.00)
Gross Fixed Capital Formation – forecast error	0.02* (0.01, 0.05)	0.00*** (0.00, 0.00)	0.04** (0.02, 0.03)
GDP deflator forecast error		0.14** (0.06, 0.01)
Constant	0.37*** (0.07, 0.00)	0.58*** (0.08, 0.00)	0.77*** (0.15, 0.00)
Basic diagnostics
R^2	0.55	0.44	0.21
Observations	468	468	208

*** denotes significance at α = 0.01, ** denotes significance at α = 0.05, * denotes significance at α = 0.1.

Dummies corresponding to Hungarian and Polish retirement system reform were present in the model and intentionally removed from the output. The model confirms conclusions presented in Table 3.

Table 8. Pooled regressions – forecast errors for the OECD.

Forecast Horizon	T0	T1	T2	T3
Fiscal forecast error (previous report)	0.40*** (0.09, 0.00)	0.57*** (0.06, 0.00)	0.24** (0.12, 0.04)
EDP	−0.42*** (0.12, 0.00)	−0.09 (0.15, 0.54)	−0.70*** (0.26, 0.01)
Populist governments	−0.03 (0.15, 0.86)	−0.06 (0.18, 0.75)	−0.47 (0.36, 0.20)
Mediterranean economies	−0.35** (0.15, 0.02)	−0.40** (0.17, 0.02)	−0.44* (0.23, 0.05)
GDP – forecast error			0.45** (0.21, 0.03)
Private Consumption – forecast error	0.18** (0.07, 0.01)	0.24*** (0.06, 0.00)
Constant	0.34*** (0.07, 0.00)	0.19*** (0.06, 0.00)	0.55*** (0.14, 0.00)
Basic diagnostics
R^2	0.62	0.57	0.29
Observations	448	392	155

*** denotes significance at α = 0.01, ** denotes significance at α = 0.05, * denotes significance at α = 0.1.

Dummies corresponding to Hungarian and Polish retirement system reform were present in the model and intentionally removed from the output. The model confirms conclusions presented in Table 4.