Automatic Fiscal Stabilisers in the EU: Size and Effectiveness

This Economic Brief examines the size and effectiveness of automatic stabilisers in the European Union (EU). It shows that the tax and benefit system automatically, i.e. at unchanged polices, cushions a sizeable part of the cyclical fluctuations in the EU on average, namely around 35% of the households’ loss of disposable income and around 70% of their consumption loss. However, the degree of automatic stabilisation varies across Member States. Automatic stabilisers are somewhat smaller if behavioural and macroeconomic feedback effects are taken into account. Procyclical fiscal policy hampers the functioning of automatic stabilisers. Good economic times should, therefore, be used to build up fiscal buffers, in full compliance with the Stability and Growth Pact and in particular in highly indebted Member States, to let automatic stabilisers play fully in during downturns. There are several options to increase the efficiency of automatic stabilisers. Nevertheless, enhancing automatic stabilisers is not a panacea, since it can have a negative impact on the allocative efficiency. While automatic stabilisers are the first line of defence against economic fluctuations, they may not be sufficient to fully absorb economic shocks in severe recessions. A well-functioning single market including product and labour markets and further private cross-country risk sharing should contribute to a better capacity of economies to absorb shocks. Moreover, a fiscal stabilisation function at the EU level could complement the automatic stabilisers in case of large shocks.