Fiscal stabilisers in Europe: The macroeconomic impact of tax and benefit systems

Tax and benefit systems generate aggregate intertemporal effects in addition to their interpersonal redistributive effects. These intertemporal effects appear in the cyclical fluctuations in the government’s fiscal position yielded by the ‘automatic stabilisers’. Using EUROMOD, it is possible to produce estimates of the automatic stabilisers which focus on the stabilisation of household income rather than the budgetary effects of cyclical changes in taxes and benefits. These estimates are used to explore theoretical propositions about the role of the tax and benefit system in providing temporary income insurance to households, and to identify some of the possible effects of taxes and benefits on the speed of labour market adjustment over the cycle. The results show that the size of the stabilisers varies widely across the states participating in European Monetary Union (and the other EU-15 states). However, more analysis of the crosscutting effects of private insurance and access to credit is needed to determine the implications for stabilisation policy.