Preaching to the choir? A Comparison of Fiscal Forecasts by Governments, Fiscal Policy Councils and the European Commission in the European Semester Framework

Abstract

The high debt levels experienced in European Countries have lead to academic interest in the deficit bias - the tendency for governments to run budget deficits and accumulate debt. In part one of this thesis a survey of the economic literature on the origins and solutions to the deficit bias are conducted. The proposed institutional solution to the deficit bias in the form of Fiscal Policy Councils (FPC) are outlined and existing European FPCs presented. Based on the works of Calmfors and Wren-Lewis (2011) the European Commission (EC) is defined as an FPC. Based on this survey, two hypothesis are formulated: (1) the forecasts of future macro-economic events and fiscal performance will differ between the national FPCs and the national government. (2) The forecasts of macro-economic events and fiscal performance will differ between the EC and the national governments. Part two comprises of an empirical study to test the hypothesis. It assesses the fiscal forecasts provided by national governments in their stability/convergence programmes, EC recommendations and FPC documents. Fiscal forecast by national government are found to be broadly in line with forecasts by EC and FPCs. Based on these findings the hypothesis are discarded however remarks complicating these conclusions are presented.