The distributional effects of fiscal consolidation in nine EU countries

Abstract

We compare the distributional effects of policy changes
presented as fiscal consolidation measures in nine EU countries that
experienced large budget deficits following the financial crisis of the late
2000s and subsequent economic downturn, using the EU microsimulation model
EUROMOD. The nine countries, Estonia, Greece, Spain, Italy, Latvia, Lithuania,
Portugal, Romania and the UK, chose different policy mixes to achieve varying
degrees of fiscal consolidation. We find that the burden of fiscal
consolidation brought about through the first round effects of increases in
personal taxes, cuts in spending on cash benefits and reductions in public
sector pay is shared differently across the income distribution in the nine
countries. In Greece, Spain, Italy, Latvia, Romania and the UK the better off
lose a higher proportion of their incomes than the poor. At the other extreme,
in Estonia, the poor lose a higher proportion than the rich. In Lithuania and
Portugal the burden of fiscal consolidation falls more heavily on the poor and
the rich than it does on those with middle incomes. Including increases in VAT
alters the comparative picture by making the policy packages appear more
regressive, to varying extents.