Fiscal Stimulus in the European Union to Stabilize the COVID Shock

Abstract

We document fiscal policies adopted in 2020 in five major European Union (EU) countries to deal with the COVID-19 pandemic. Then, we show the correlations between fiscal indicators and GDP growth. Economic stabilization was easier in countries where the budget deficit and the public debt were relatively small, with more room for maneuvers to conduct a counter-cyclical fiscal policy. Besides, the increase in public expenditure (cash transfers) did not always correlate with economic growth, whereas preserving government revenue was important in the case of tax cuts. More precisely, regarding the fiscal revenues of the EU member countries in 2020, reducing the weight on corporate income taxation, to sustain production supply and wealth creation by firms, was correlated with higher economic growth. Stylized facts show that the recession was weaker in countries where the relative weight of indirect taxation on household consumption increased, as in the Nordic countries.