European Commission report uses EUROMOD to highlight role of fiscal policy in stabilising household incomes during Great Recession

The European Commission has published its annual Report on Public Finance in European Monetary Union. This report presents a review of key policy developments and analytical findings in the area of public finances. This year’s publication presents analyses on the impact of fiscal policy on income distribution and the influence of institutional factors on public investment in the EU.

Researchers used EUROMOD, the tax benefit microsimulation model developed at the University of Essex, to assess the impact of fiscal policies in reducing income inequality and stabilising households’ income in the EU during the period 2004-2014.

The Commission’s researchers created a “decomposition framework to isolate the impact of policy changes from changes in market incomes and population characteristics using the EUROMOD microsimulation model. Importantly the use of EUROMOD ensures that this approach is applied consistently across European countries allowing cross-country analysis.”

The study found that: “The degree of direct automatic stabilisation is fairly high in the EU in 2014 according to new simulations based on EUROMOD.

“Around 33% of disposable income is absorbed in the EU on average by the tax and benefit system following a shock to market income, ranging from 20% in Bulgaria to 45% in Austria. Consumption is absorbed by even 70% in the EU on average due to the tax and benefit system and the saving behaviour, ranging from 64% in Bulgaria to 75% in Ireland.

“The more progressive the tax and benefits system, the higher its stabilisation effect.”

European Economy Institutional Papers are important reports analysing the economic situation and economic developments prepared by the European Commission’s Directorate-General for Economic and Financial Affairs, which serve to underpin economic policy-making by the European Commission, the Council of the European Union and the European Parliament.

Download Report on Public Finance in European Monetary Union 2017 here.