Crisis, Austerity and Automatic Stabilization


We analyze how reforms of tax-benefit systems in the period 2007-2015 have affected the automatic stabilization capacity in the EU-27 based on harmonized European micro data. Factors like unemployment benefits or income taxes can stabilize individual and aggregate income and smooth consumption demand in case of shocks. Our analysis allows to disentangle automatic changes in net government intervention from those that take place after explicit government legislature (discretionary changes), as well as changes in actual incomes and behavioral responses. We find automatic stabilizers to be generally heterogeneous across countries—both in levels and in terms of policy changes over the crisis. Stabilization coefficients vary from less than 25% in Eastern European countries to almost 60% in Belgium, Germany, and Denmark. We discuss the implications of our results for post-crisis recovery.