Bringing Macroeconomics Back into the Political Economy of Reform: the Lisbon Agenda and the ‘Fiscal Philosophy’ of EMU*

Abstract

The Lisbon Strategy supports reform of Member States' tax‐benefit systems while the ‘fiscal philosophy’ of the EMU postulates that governments should allow only automatic stabilizers, built into tax‐benefit systems, to smooth aggregate income. We ask whether these two pillars of EU economic governance are compatible. By exploring how structural reforms affect fiscal stabilization, we complement a political economy literature that asks whether fiscal consolidation fosters or hinders structural reforms. Using EUROMOD, a tax‐benefit model for the EU‐15, we identify the connections between specific tax and benefit reforms and the size of the stabilizers. We conclude that Lisbon‐type reforms may worsen the stabilizing capacity of tax‐benefit systems.

Automatic Stabilizers, Economic Crisis and Income Distribution in Europe

“…Auerbach and Feenberg (2000), Mabbett and Schelkle (2007)). In the light of the current economic crisis, there is much more interest in a downturn scenario.…”

“…The …rst shock is a proportional decline in household gross income by …ve per cent (income shock). This is the usual way of modeling shocks in simulation studies analyzing automatic stabilizers (Auerbach and Feenberg (2000), Mabbett and Schelkle (2007), Dolls et al (2009)). But economic downturns typically a¤ect households asymmetrically, with some households losing their jobs and su¤ering a sharp decline in income and other households being much less a¤ected, as wages are usually rigid in the short term.…”

Automatic stabilization and discretionary fiscal policy in the financial crisis

“…Girouard and André (2005)). Exceptions based on micro data are (Auerbach and Feenberg 2000) and (Knieser and Ziliak 2002a, b) for the US and (Mabbett and Schelkle 2007) for the EU-15. As it is common in this literature, we have to assume the full takeup of social benefits for our simulations which might overestimate the automatic stabilizer measures in countries where non-take-up is important.…”

Structural Reforms and Fiscal Discipline in Europe

“…Indeed, while potential output is boosted by reforms, actual economic activity may only adapt gradually (Saint-Paul 2002; Hughes Hallett et al 2004). This argument is strengthened by the claim that structural reforms, reducing tax progressivity and trimming welfare benefits, may lower the effectiveness of automatic stabilizers, thereby requiring discretionary fiscal policy to step in, in order avoid a sub-optimal degree of fiscal stabilization (Mabbett and Schelkle 2005). Finally, there are ''political economy'' considerations.…”