Factors influencing the public finance sector budget balance in European Union member states in 2004–2020

Abstract

Background: Many countries worldwide have faced high budget deficits over the past few decades, along with severe challenges in macroeconomic instability. An important economic policy challenge is to improve public finances. A key objective is to reduce the budget deficit. Persistent budget deficits lead to a build-up of public debt and negatively affect the economic situation. Ensuring long-term macroeconomic stability requires identifying the factors that influence the budget deficit.

Research purpose: This study aims to evaluate the factors influencing the budgetary balance in European Union countries. The following research hypotheses were verified: 1) the higher the economic growth, the higher the fiscal balance in the EU Member States, 2) as the inflation rate increases, the fiscal balance deteriorates, 3) population ageing and population decline affect the fiscal balance.

Methods: The analyses were carried out using a critical literature analysis and statistical and econometric methods of data analysis, in particular cluster analysis and regression analyses of panel data. The research concerns the EU countries and covers the period 2004–2020.

Conclusions: Economic growth was an essential factor influencing the budgetary outcome in EU countries. Public expenditure on social protection and public revenues from taxes and social contributions also significantly impacted the budget outcome. For some groups of EU countries, price increases also led to a rise in the budget deficit. The study’s results did not confirm that demographic factors such as an ageing population and a declining population significantly affect the deterioration of the budgetary outcome.