Cyclical Asymmetry in Fiscal Variables in the EU

In this paper we present a stylised framework of fiscal policy determination that considers both structural targets and cyclical factors. We find significant cyclical asymmetry in the behaviour of fiscal variables in a sample of fourteen EU countries over 1970-2007, with budgetary balances (both overall and primary) deteriorating in contractions without correspondingly improving in expansions. Analysis of budget components reveals that cyclical asymmetry comes from expenditure. We find no evidence that fiscal rules introduced in 1992 with the Treaty of Maastricht affected the cyclical behaviour of fiscal variables. Numerical simulations show that cyclical asymmetry inflated average deficit levels, contributing significantly to debt accumulation.