Cover of EconPol Working Paper 39

Fiscal Consolidation and Automatic Stabilization: New Results

Mathias Dolls (EconPol Europe, ifo Institute, CESifo), Clemens Fuest (EconPol Europe, University of Munich, CESifo, ifo Institute), Andreas Peichl (EconPol Europe, University of Munich, CESifo, ifo Institute), Christian Wittneben (EconPol Europe, ifo Institute)

The share of income shocks absorbed by the tax and transfer system in the Eurozone 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. In this EconPol working paper, Mathias Dolls (EconPol Europe, ifo Institute, CESifo), Clemens Fuest (EconPol Europe, University of Munich, CESifo, ifo Institute), Andreas Peichl (EconPol Europe, University of Munich, CESifo, ifo Institute) and Christian Wittneben (EconPol Europe, ifo Institute) analyze how the combined effect of automatic stabilizers and discretionary changes in tax-benefit systems affected the cushioning of income shocks. They propose a new summary measure of the combined effect of automatic stabilizers and discretionary policy changes based on micro data and counter-factual simulation. 

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.

Citation

Mathias Dolls, Clemens Fuest, Andreas Peichl, Christian Wittneben: Fiscal Consolidation and Automatic Stabilization: New Results, EconPol Working Paper 39, January 2020