The design of fiscal consolidation measures in the European Union: distributional effects and implications for macro-economic recovery

Abstract

The financial and economic crisis which started in the late 2000s and the fiscal consolidation measures to counter the subsequent government budget deficits have an impact on household income distribution and macroeconomic recovery. We consider the austerity measures in relation to their distributional impact and the potential channels through which fiscal consolidation can affect economic growth. We find notable variation in the size, composition and effects of fiscal consolidation. Richer households tend to bear a greater burden in most countries but spending cuts are more likely to affect liquidity constrained households casting doubts over previous findings in the macro-economic literature about the effectiveness of such measures. This suggests the need to consider more disaggregated evidence to reach robust policy conclusions. We would also like to thank Andrea Brandolini, François Bourguignon, Herwig Immervoll as well as the participants of the 8th Winter School on Social Cohesion and Public Policy (Canazei, 2013), the IZA Workshop on the Future of Labor (Bonn, 2013), the 2013 LIS Summer Lecture (Luxembourg), the 5 th Meeting of ECINEQ (Bari, 2013), the ImPRovE Conference 'Improving poverty reduction in Europe' (Brussels, 2013) for their useful comments. We use EUROMOD version F6.0 and we acknowledge the contribution of all past and current members of the EUROMOD consortium. The process of extending and updating EUROMOD is financially supported by the Directorate General for Employment, Social Affairs and Inclusion of the European Commission [Progress grant no. VS/2011/0445]. This research has been partly funded by the European Commission through the Social Situation Observatory on Income Distribution and Living Conditions. The authors alone are responsible for the analysis and interpretation of the data reported here. It does not necessarily reflect the opinion or position of the European Commission. We use microdata from the 2008 EU Statistics on Incomes and Living Conditions (EU-SILC) made available by Eurostat under contract EU-SILC/2011/55 (for Latvia, Lithuania, Portugal and Romania) and the national 2008 SILC data made available by respective national statistical offices (for Estonia, Greece, Spain and Italy).