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
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-ofpoverty)
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
Challenges of a comparative study


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
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)
Model, data and assumptions

EUROMOD – tax-benefit model for the EU (SWITCH for Ireland)
Country Data source
Austerity
measures
Counterfactual
Estonia
2008 nat SILC 2009
2008 policies (no indexation, except
pensions)
Ireland
2008 nat SILC 2009-11
2008 policies (no indexation)
Greece
2007 nat SILC 2010
2009 policies (no indexation)
Spain
2007 nat SILC 2010-11
2009 policies (no indexation, except
pensions)
Portugal
2007 EU-SILC 2009-11
2008 (indexation of most components
by CPI)
UK
2008/9 FRS
2008 policies (official indexation)

2009-11
Population characteristics constant (referring to pre-crisis situation)
Fiscal consolidation, % of baseline DPI
9
8.1
8
% of disposable income
7
6.2
6
5
4
2.2
3
2.7
3.0
1.9
2
1
0
-1
EE
IE
EL
ES
PT
UK
Public sector pay (net)
Worker SIC
Income taxes
Benefits and pensions
Employer SIC
Credited SICs
% of total fiscal consolidation
Fiscal consolidation, % of total
80
70
60
50
40
30
20
10
0
-10
EE
IE
EL
ES
PT
-20
Employer SIC
(Self)-employee SIC
Income taxes
Benefits
Public sector pay (net)
Credited SICs
UK
Change as % disposable income
Changes to income tax and SICs
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
EE
IE
EL
ES
PT
UK
poorest
2
3
4
5
6
7
8
9
richest
Change as % disposable income
Changes to benefits and pensions
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
EE
IE
EL
ES
PT
UK
poorest
2
3
4
5
6
7
8
9
richest
Change in average disposable income, %
0
-2
%
-4
-6
-8
-10
-12
income decile
EE
IE
EL
ES
PT
UK
Change in average disposable income by hh
types, %
0
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-11
-12
-13
Estonia
-1
-2
-3
-4
-5
-6
poorest 2
3
4
0
5
6
7
8
-1
-2
500.0%
-3
0.0%
-4
poorest 2
3
4
5
-1
-2
-3
-4
-5
3
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
Spain
6
7
8
9 richest
Greece
0
poorest 2
9 richest
1
Ireland
4
5
6
7
8
9 richest
poorest 2
3
4
1
Portugal
5
6
7
8
9 richest
6
7
8
9 richest
UK
0
-1
-2
UK
-3
-4
poorest 2
3
4
5
6
7
8
9 richest
poorest 2
3
4
5
-500.0%
All
With children
With elderly people
Source: EUROMOD
Change in income and VAT (% of dpi)
0%
0%
Estonia
1%
0%
Ireland
1%
2%
2%
3%
Greece
2%
4%
3%
4%
6%
5%
4%
6%
8%
7%
5%
10%
8%
9%
6%
12%
poorest
2
3
0.0%
4
richest
7%
poorest
2
0%
Spain
0.5%
3
4
richest
2.5%
4%
4
richest
4
richest
UK
1.0%
2%
3%
3
0.5%
1.0%
2.0%
2
0.0%
Portugal
1%
1.5%
poorest
1.5%
2.0%
3.0%
2.5%
5%
3.0%
3.5%
6%
4.0%
4.5%
3.5%
7%
poorest
2
3
4
richest
fall in disposable income
4.0%
poorest
2
3
4
richest
fall in disposable income + VAT
poorest
2
fiscal saving incl. VAT
3
Conclusions

Effects on income up to mid 2011






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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)
Thank you!