The political economy of EDP fiscal forecasts: An empirical assessment

We analyse the budget balance forecasts prepared by 15 European countries in their Excessive Deficit Procedure reportings, studying the statistical properties of forecast errors and their politico-institutional determinants. Forecast errors are responsive to growth surprises, fiscal institutions and opportunistic motivations: upcoming elections induce over-optimism, most apparent when the opposition wins, whereas commitment or mixed forms of fiscal governance and numerical expenditure rules (unlike deficit and debt rules) are associated to greater prudence. The main findings hold when using forecasts from national draft budgets. Taking subsamples reveals that opportunistic and institutional effects are only significant under the Stability and Growth Pact.

Research highlights► We study the budget balance forecasts of 15 EU countries in their EDP reports. ► Forecast errors respond to fiscal institutions and opportunistic motivations. ► Upcoming elections, particularly when the opposition wins, induce over-optimism. ► The main findings hold when forecasts from national draft budgets are used. ► Opportunistic and institutional effects only become significant under the SGP.