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Fiscal Consolidation and Automatic Stabilization: New Results

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  • Dolls, Mathias
  • Fuest, Clemens
  • Peichl, Andreas
  • Wittneben, Christian

Abstract

We analyze how the combined effect of automatic stabilizers and discretionary changes in tax-benefit systems have affected the cushioning of income shocks in the Euro zone and the EU-27 in the period 2007–2014. We propose a new summary measure of the combined effect of automatic stabilizers and discretionary policy changes based on micro data and counter-factual simulation. Discretionary fiscal policy supported the effects of automatic stabilizers in the years 2008 and 2009 but then became much more restrictive. For the Euro zone as a whole, the share of income shocks absorbed by the tax and transfer system declined from 48 percent in 2008 to 24 percent in 2011. For some of the countries most affected by the crisis, the stabilization effect was even negative in some years of the crisis, implying that the tax and transfer system amplified income shocks. We also compare our measure of stabilization to estimates based on macro data.

Suggested Citation

  • Dolls, Mathias & Fuest, Clemens & Peichl, Andreas & Wittneben, Christian, 2020. "Fiscal Consolidation and Automatic Stabilization: New Results," EUROMOD Working Papers EM19/20, EUROMOD at the Institute for Social and Economic Research.
    • Handle: RePEc:ese:emodwp:em19-20
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    2. Karina Doorley & Jan Gromadzki & Piotr Lewandowski & Dora Tuda & Philippe Van Kerm, 2023. "Automation and income inequality in Europe," IBS Working Papers 06/2023, Instytut Badan Strukturalnych.
    3. Andreas Peichl & Mathias Dolls, 2019. "Auf dem Weg zur Sozialunion?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 72(10), pages 08-11, May.
    4. Eichhorst, Werner & Marx, Paul & Brunner, Johannes & Kettenring, Jannis, 2020. "A Comparative Analysis of National Unemployment Benefit Schemes," IZA Research Reports 101, Institute of Labor Economics (IZA).
    5. Eichhorst, Werner & Marx, Paul & Brunner, Johannes & Kettenring, Jannis, 2020. "Vergleichende Analyse nationaler Arbeitslosenversicherungen," IZA Research Reports 100, Institute of Labor Economics (IZA).
    6. Denisa M. Sologon & Cathal O’Donoghue & Iryna Kyzyma & Jinjing Li & Jules Linden & Raymond Wagener, 2022. "The COVID-19 resilience of a continental welfare regime - nowcasting the distributional impact of the crisis," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(4), pages 777-809, December.
    7. Eichhorst, Werner & Bonin, Holger & Krause-Pilatus, Annabelle & Marx, Paul & Dolls, Mathias & Lay, Max, 2023. "Minimum Income Support Systems as Elements of Crisis Resilience in Europe," IZA Research Reports 137, Institute of Labor Economics (IZA).
    8. Dornean Adina & Oanea Dumitru-Cristian, 2022. "The Effectiveness of Fiscal-Budgetary Measures to Counteract the COVID-19 Crisis. Evidence from EU Countries," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 16(1), pages 137-151, January.
    9. Karina Doorley & Tim Callan & Michael Savage, 2021. "What drove income inequality in EU crisis countries during the Great Recession?," Fiscal Studies, John Wiley & Sons, vol. 42(2), pages 319-343, June.

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    More about this item

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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