Don't Blame the Government!? An Assessment of Debt Forecast Errors with a View to the Economic Governance Review

Hauptveranstaltung: WIFO Research Seminar
Veranstalter: Österreichisches Institut für Wirtschaftsforschung
Personen: Doris Prammer, Alena Bachleitner
Österreichisches Institut für Wirtschaftsforschung
Our original research paper offers insights into the topical issue of the revision of the EU economic governance framework, bridging the gap between academic research and policy. As public debt forecasts will be used as the central fiscal anchor of this revised framework, it is crucial to have a deeper understanding of their reliability. In our paper, we are the first to analyse whether EU governments have adhered to their own debt forecasts in the past and shed light on the factors driving these forecast errors. Moreover, we assess the quality of the European Commission's debt forecast, as it should serve as the independent benchmark in the new economic governance framework. Our findings highlight some issues in setting up a new governance framework based on projected debt paths: governments' debt forecasts have significant errors, particularly for high-debt countries and over longer projection horizons. The main drivers of the debt forecast errors seem to be partly outside direct government control: wrongly projected overall GDP developments and stock flow adjustments – a factor which has been neglected in the literature so far. Additionally, we found that the European Commission's debt-to-GDP forecasts are equally biased as those of governments.