The Stabilising Effect of Social Policies in the Financial Crisis

Social policy measures and the social systems markedly mitigated the effects of the severe financial and economic crisis in 2009 and 2010. The largest contribution to the stabilisation resulted from the automatic stabilisers, whose effects vary between countries. On the revenue side they are determined by the tax system's progressivity and on the expenditure side they are determined by the size of transfer payments. Discretionary social policy measures also exerted stabilising effects both in the domestic economy and in those of the European trade partners. However, their impact on production and employment has remained limited due to the wide–spread uncertainty and the high share of tax cuts in the overall volume of the measures. The welfare state also exerts anti–cyclical effects via its positive effects on the expectations of private households. Although difficult to quantify, these effects are assumed to be important.