Free DP Download 17 May 2022 - Is the Road to Hell Paved with Good Intentions?

Tuesday, May 17, 2022

Roel Beetsma, Matthias Busse, Lorenzo Germinetti, Massimo Giuliodori, Martin Larch CEPR Discussion Paper No. 17154 | March 2022

We study the one-year-ahead budgetary projections from the Stability and Convergence Programmes of EU Member States since the start of the Economic and Monetary Union (EMU) until the start of the coronavirus crisis. We consider first budget-balance errors, which we then split into expenditure and revenue errors. Next, we split the latter two into "base", "growth" and "denominator" effects. The most important explanatory variable is the GDP growth error: more optimism in GDP growth projections produces more optimistic budgetary projections. This effect goes beyond a mechanical denominator effect on spending and revenues as shares of GDP; it also works through the numerator of these ratios. Our findings may call for delegating the construction of output projections to adequately equipped national independent fiscal institutions. Finally, we explore how independent fiscal institutions shape projection errors. Those with high media impact producing or assessing the macroeconomic forecast appear to lead to actual budgetary improvement relative to projections.

You can now watch a video where Roel Beetsma tells Tim Phillips about this research.