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The cushioning effect of fiscal policy in the EU during the COVID-19 pandemic

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Abstract

This paper analyses the extent to which the tax-benefit systems of the EU Member States have protected household incomes during the COVID-19 pandemic. We makes use of EUROMOD, the EU tax-benefit microsimulation model based on 2018 EU-SILC data. Detailed aggregate labour market statistics combined with a novel approach to simulate transitions from work into monetary compensation schemes (short-time work schemes, as well as compensation schemes for self-employed) and into unemployment allows us to replicate the labour market conditions during the COVID-19 crisis in 2020 in the underlying EU-SILC data. Our analysis highlights that most of the countries analysed experienced a significant drop in market incomes, with poorer households hit the hardest. However, our findings also suggest that the tax-benefit systems of the EU Member States have been able to absorb a significant share of the COVID-19 shock, offsetting – or alleviating – its regressive nature on market incomes. Monetary compensation schemes implemented by EU Member States played a key role in cushioning against the fall in household income during the crisis.

Suggested Citation

  • Michael Christl & Silvia De Poli & Francesco Figari & Tine Hufkens & Chrysa Leventi & Andrea Papini & Alberto Tumino, 2021. "The cushioning effect of fiscal policy in the EU during the COVID-19 pandemic," JRC Working Papers on Taxation & Structural Reforms 2021-02, Joint Research Centre.
    • Handle: RePEc:ipt:taxref:202102
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    1. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
    2. Vanda Almeida & Salvador Barrios & Michael Christl & Silvia Poli & Alberto Tumino & Wouter Wielen, 2021. "The impact of COVID-19 on households´ income in the EU," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 19(3), pages 413-431, September.
    3. Mike Brewer & Iva Valentinova Tasseva, 2021. "Did the UK policy response to Covid-19 protect household incomes?," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 19(3), pages 433-458, September.
    4. Callan, Tim & Bercholz, Maxime & Doorley, Karina & Keane, Claire & Regan, Mark & Savage, Michael & Walsh, John, 2017. "Distributional Impact of Tax and Welfare Policies: Budget 2018," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    5. Doorley, Karina & Keane, Claire & McTague, Alyvia & O’Malley, Seamus & Regan, Mark & Roantree, Barra & Tuda, Dora, 2020. "Distributional Impact of Tax and Welfare Policies: COVID-related policies and Budget 2021," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    6. Olga Cantó Sánchez; & Francesco Figari; & Carlo Fiorio; & Sarah Kuypers; & Sarah Marchal; & Marina Romaguera dela Cruz; & Iva V. Tasseva; & Gerlinde Verbist;, 2021. "Welfare resilience at the onset of the COVID-19 pandemic in four European countries: Impact on public finance and household incomes," Working Papers 2107, Herman Deleeck Centre for Social Policy, University of Antwerp.
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    Cited by:

    1. Glenn Abela, 2022. "Assessing the impacts of the COVID-19 wage supplement scheme: A microsimulation study," CBM Working Papers WP/06/2022, Central Bank of Malta.
    2. Javier Ballesteros Muñoz & Jorge Onrubia, 2022. "Régimen de tenencia de la vivienda habitual y desigualdad de la renta de los hogares españoles," Studies on the Spanish Economy eee2022-26, FEDEA.
    3. Michael Christl & Silvia Poli & Tine Hufkens & Andreas Peichl & Mattia Ricci, 2023. "The role of short-time work and discretionary policy measures in mitigating the effects of the COVID-19 crisis in Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(4), pages 1107-1136, August.
    4. Michael Christl & Silvia De Poli & Dénes Kucsera & Hanno Lorenz, 2022. "COVID-19 and (gender) inequality in income: the impact of discretionary policy measures in Austria," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-17, December.
    5. Julio López Laborda & Carmen Marín González & Jorge Onrubia, 2022. "¿Cómo afectan los impuestos y las prestaciones públicas a los hogares en riesgo de pobreza?," Studies on the Spanish Economy eee2022-10, FEDEA.

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    More about this item

    Keywords

    COVID-19; EUROMOD; microsimulation; EU; automatic stabilisers; compensation schemes;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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