Fiscal policy in the European Union: Tax and spend, spend and tax, fiscal synchronisation or institutional separation?

In: Journal of economic studies, Volume 33, Issue 2, p. 108-120

Abstract

PurposeThe purpose of this paper is to investigate the revenue‐expenditure nexus in the case of the 15 members of the European Union.Design/methodology/approachThe paper uses a VECM framework to determine the causal ordering between these two macroeconomic aggregates.FindingsThe empirical tests have yielded mixed results. The fiscal synchronisation hypothesis is supported for Denmark, Greece, Ireland, The Netherlands, Portugal and Sweden while, in the case of Austria, Belgium and Germany, the results point to the institutional separation hypothesis. Unidirectional causality from revenue to expenditure appears to be the case for Italy and Spain while the reverse causal ordering is found for Luxembourg. The findings also suggest the presence of the Buchanan‐Wagner hypothesis for Finland, France and the UK.Originality/valueThe determination of the causal ordering between these two macroeconomic aggregates has important implications for fiscal policy and the concomitant determination of budgetary balances. This is particularly true for the countries that participate in the eurozone and thus fall under the provisions of the stability and growth pact.