Governments' Revenues Windfalls and the Stabilisation Function of Fiscal Policies

We analyse the size and potential determinants of governments' revenues windfall in the European Union. Using information about fiscal plans taken from the Stability and Convergence Programmes (SCP) submitted between 1998 and 2006, revenue windfalls are found to have represented on average 0.23% of GDP in the euro-area during the period 19992007, hiding substantial variations both across time (0.35% in 1999-2001, -0.22% in 20022004, 0.56% in 2005-2007) and across countries (0.67% on average per year in Finland, 0.65% in Ireland and an annual average shortfall of -0.37% for Greece). We further look at the potential determinants of these unexpected revenues outcomes such as GDP growth composition, variations in asset prices, oil prices or unexpected business cycle variations. Growth surprises are found to be the main determinant of revenue windfalls. In some cases also, oil prices and asset prices (including housing and equity) are found to exert a significant influence on revenue windfalls. In the sequel we provide some evidence on the incidence of these governments' revenues surprises on the ability of government to conduct countercyclical fiscal policies, which are desirable from a macroeconomic perspective. We find evidence suggesting that countries that have experienced the largest revenue windfalls have also tended to run more pro-cyclical fiscal policies. Preliminary, do not quote 1 The views expressed in this paper are not necessarily those of Banca d'Italia nor of the European Commission.