Europe Through the Crisis: Discretionary Policy Changes and Automatic Stabilizers
| Date | 01 August 2020 |
| Published date | 01 August 2020 |
| Author | Alari Paulus,Iva Valentinova Tasseva |
| DOI | http://doi.org/10.1111/obes.12354 |
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©2020 TheAuthors. OxfordBulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
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OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 82, 4 (2020) 0305–9049
doi: 10.1111/obes.12354
Europe Through the Crisis: Discretionary Policy
Changes and Automatic Stabilizers*
Alari Paulus† and Iva Valentinova Tasseva†
†Institute for Social and Economic Research (ISER), University of Essex, Wivenhoe Park,
Colchester, CO4 3SQ, UK (e-mail: apaulus@essex.ac.uk; itasseva@essex.ac.uk)
Abstract
Tax-benefit policies affect changes in household incomes through two main channels:
discretionary policy changes and automatic stabilizers. We study their role in the EU
countries in 2007–14 using an extended decomposition approach. Our results show that
the two policy actions often reduced rather than increased inequality of net incomes, and
so helped offset the inequality-increasing impact of growing disparities in gross market
incomes. While inequality reductions were achieved mainly through benefits using both
routes, policy changes to and the automatic stabilization response of taxesand contributions
raised inequality in some countries and lowered it in others.
1. Introduction
The financial crisis of 2007–08 and the subsequent Great Recession posed serious eco-
nomic challenges to Europe. Substantial increases to unemployment, losses to wages and
self-employment income, increase in governments debt and fall in GDP put strain on
JEL Classification numbers: D31, H23, E63.
*This workwas supported by the Economic and Social Research Council (ESRC) through the Research Centre on
Micro-Social Change (MiSoC) at the University of Essex (grant number ES/L009153/1), the EU’s 7th Framework
Programme (grant number 290613, ImPRovE) and NORFACE ERA-NET Welfare State Futures Programme (grant
number 462-14-010). Wethank Mike Brewer, Mathias Dolls, Karina Doorley, Paul Fisher, Matteo Richiardi, Kitty
Stewart, HollySutherland and Philippe Van Kerm for their useful comments and gratefully acknowledgeall feedback
received from the participants of the EUROMOD 20th anniversary conference, IMA (Turin), IIPF (Glasgow) and
seminars in ISER, LISER, Bank of Estonia, VATT and the European Commission.We also thank Kostas Manios for
technical support. The results presented here are based on EUROMOD version H0.13. EUROMOD is maintained,
developed and managed by ISER at the University of Essex, in collaboration with national teams from the EU
member states. The process of extending and updating EUROMODis financially supported by the European Union
Programme for Employmentand Social Innovation ‘Easi’(2014–20). We makeuse of microdata from the EU Statistics
on Incomes and Living Conditions (EU-SILC) made available byEurostat (59/2013-EU-SILC-LFS); the EU-SILC
for Greece together with national variables provided by the national statistical office; the national EU-SILC PDB
data for Spain, Italy, Austria and Slovakia made available by respective national statistical offices; and the Family
Resources Survey for the UK made availableby the Department of Work and Pensions via the UK Data Service. The
results and their interpretation are our own responsibility.
Europe through the crisis 865
fiscal budgets and households finances.1In response to such economic challenges, tax-
benefit policies have important implications for household net incomes. They affect in-
comes through two main channels: discretionary policy changes and automatic stabilizers.
Automatic stabilizers characterize the policies’ in-built flexibility to absorb shocks to
earnings and people’s characteristics (Pechman, 1973). They reduce, ceteris paribus, the
need for discretionary policy actions which take time to design and implement and can be
particularly important if the scope for discretionary fiscal policies is limited, for example, in
the eurozone (Mabbett and Schelkle, 2007). They are viewed as a crucial tool for reducing
macroeconomic volatility (e.g. Blanchard, Dellariccia and Mauro, 2010). In particular,
income taxes and unemployment insurance benefits in the US, Canada and Europe have
received a great deal of attention in the micro- and macroeconomic literature as important
stabilizers of fluctuations in aggregate output as well as in disposableincome and household
consumption (e.g. Auerbach and Feenberg, 2000; Browning and Crossley, 2001; Kniesner
and Ziliak, 2002; Auerbach, 2009; Dolls, Fuest and Peichl,2012; Fern ´andez Salgado et al.,
2014; Di Maggio and Kermani, 2016; McKay and Reis, 2016; Hsu, Matsa and Melzer,
2018).
There is less consensus on the size and direction of impact of discretionary fiscal policies
on economic stability (e.g.Taylor, 2000; Feldstein,2002; Blanchard and Perotti, 2002; Fat´as
and Mihov, 2003; Auerbach and Gorodnichenko, 2012; Caggiano et al., 2015; Miyamoto,
Nguyen and Sergeyev,2018). But a large body of microeconomic literature has shown their
importance for the income distribution, for example, Clark and Leicester (2005); Sefton
and Sutherland (2005); Sutherland et al. (2008); Bargain (2012) for the UK; Decoster
et al. (2015) for Belgium; Matsaganis and Leventi (2014); DeAgostini, Paulus and Tasseva
(2016); Bargain et al. (2017); Hills et al. (2019); Paulus, Sutherland andTasseva (2019) for
selected EU countries. A decomposition approach combined with a tax-benefit calculator
and household micro-data has enabled researchers to identify the direct (non-behavioural)
impact of policy changes on the income distribution. The estimate for the policy effect
has often been compared with the contribution of ‘other’ factors, which encompass the
combined (net) effect of changes to market incomes and population characteristics, and
automatic stabilizers (e.g. Bargain and Callan, 2010; Bargain et al., 2015, 2017). For the
early crisis years (2007–11), the literature agrees that policy changes werebroadly poverty-
and inequality-reducing in nearly all EU countries but their redistributive effect became
more heterogeneous across countries between 2011 and 2014.
In contrast, there is little empirical evidence on the redistributive power of automatic
stabilizers. For several Southern EU countries and Ireland, Callan, Doorley and Savage
(2018) find that automatic stabilizers – mainly through benefits – reduced income inequality
between 2007 and 2013. For hypothetical earnings shocks, on the other hand, benefits and
taxes are shown to stabilize mostly the incomes of households at the bottom and top of
the distribution, respectively (European Commission, 2017); while Dolls, Fuest and Peichl
1Between 2007 and 2014, GDP fell in 10 EU countries although it increased in the EU-28 on average (+1.5%).
Government debt asa%ofGDPincreased in every EU member state and overall by a staggering 51%.The effect
on households was equally severe:the share of unemployed (asa%ofthepopulation) increased in all EU countries,
except Germany, and overall by 44%. Real wagesand salaries, the main source of household income, fell by 4.4%,
while income from self-employment dropped by nearly10% on average. See Eurostat database.
©2020 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and JohnWiley & Sons Ltd.
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