The distributional effects of austerity measures: A comparison of six EU countries

1. The distributional effects of austerity measures: A comparison of six EU countries Tim Callan+, Chrysa Leventi*, Horacio Levy**, Manos Matsaganis*, Alari Paulus** & Holly Sutherland** + ESRI, Dublin * Athens University of Economics and Business ** ISER, University of Essex European Meeting of the International Microsimulation Association 17 May 2012

2. Motivation • The Greek austerity packages of 2010 and the public reaction to them: the need for dispassionate numbers • Cross-country comparisons of size, composition and distributional effects • Who is bearing the cost of austerity? • A focus on the measures that: • are sharp instruments in terms of their distributional effects • have direct impact on household disposable income (and risk-of-poverty)

3. Scope of changes considered • Direct taxes and employee/self employed social contributions • Cash benefits • Public sector pay cuts (except UK) • Employer contributions and credited contributions (for fiscal consolidation analysis) • Increases in indirect taxes (separately) • Not • cuts in public sector employment • reductions in public services • other reductions in public expenditure • increases in other taxes that cannot be allocated to households • second order and macro-economic effects • Nor the other effects of the economic/financial crises

4. Challenges of a comparative study • Countries among those most affected: EE, IE, EL, PT, ES, UK • What policy changes happened (are happening)? Which policy changes were “austerity measures”? • In which period? What is the starting point? • What is the counterfactual? • (What can be simulated?) Our approach: • All measures related to fiscal austerity until (mid-)2011 • Counterfactual: continuing with pre-austerity policies (using statutory indexing rules)

5. Model, data and assumptions • EUROMOD – tax-benefit model for the EU (SWITCH for Ireland) • Population characteristics constant (referring to pre-crisis situation)

6. Fiscal consolidation, % of baseline DPI

7. Fiscal consolidation, % of total

8. Change as % disposable income

9. Change as % disposable income

10. Change in average disposable income, %

11. Change in average disposable income by hh types, %

12. Change in income and VAT (% of dpi)

13. Conclusions • Effects on income up to mid 2011 • Progressive in Greece (partly regressive tax cut, progressive pension and pay cuts); older people not protected • Progressive in UK (top decile only, due to top income tax increases) • U-shaped in Ireland (largest losses at top and bottom; progressive tax increases + pay cuts and regressive benefit cuts; pensions protected) • Flat/progressive in Spain (regressive benefit cuts, mildly progressive tax increases and pay cuts) • Flat/regressive in Estonia (regressive contribution increases, mildly progressive pay cuts); households with children pay more • Regressive in Portugal (benefit cuts at low incomes) • Adding increases to VAT reduces progressivity, especially in Greece and UK • Policy choices and priorities vary notably • Austerity is not over yet: more measures (e.g. UK, EL, IE)

14. Thank you!