Fiscal Risk Analysis Tools at the Level of the European Union

Abstract

The fiscal balance is an indicator of the health of public finances and a result of the fiscal policy that differs from one state to another, even in similar macroeconomic conditions. Especially after the Covid-19 crisis which showed that governments need a more permissive fiscal space for adjustments and a good knowledge of the fiscal vulnerabilities to which they are exposed, budget deficit or surplus can be used as a tool to measure fiscal risk or fiscal security, respectively. Based on data from Eurostat and World Bank databases, our analysis concerns the current 27 European Union member states between 2000 and 2021. Our study demonstrates that general government debt, foreign direct investments, military and unemployment expenditures negatively impact the budget balance, while economic growth and pension expenditures are revealed as positive determinants of the budget balance. Considering the calculated coefficients, economic growth stands out as the most important source of competing fiscal risks and improving budget balance, proved by all the statistical methodologies employed in the study.