Revenue–Expenditure Consistency and the Sustainability of Public Finances in the Euro-Area Periphery: Evidence from Five Southern European Economies, 1999–2023

How the two sides of the government budget are causally linked bears directly on the design of fiscal consolidation. This paper examines the relationship between government revenue and expenditure in five Southern European economies over 1999–2023, applying three causality procedures, cointegration analysis and structural-break tests to identical quarterly data. The central finding is that the causal classifications are not robust: three of the five economies are classified differently depending on the procedure used, Portugal differently under each, and expressing both aggregates as shares of GDP alters the results again. Conclusions drawn from any single test are therefore unreliable. What does survive changes in specification is the direction of adjustment: revenue closes budgetary imbalances in Italy, and expenditure closes them in Spain, Portugal and Cyprus. Analysis of expenditure by function shows that consolidation did not reduce the size of these budgets but recomposed them, with public investment falling by between nine and forty per cent and not recovering. Fiscal rules should accordingly match the instrument to the adjusting side and protect capital expenditure explicitly.