The cushioning effect of fiscal policy in the EU during the COVID-19 pandemic

This paper analyses the extent to which the tax-benefit systems of the EU Member States have protected household incomes during the COVID-19 pandemic. We makes use of EUROMOD, the EU tax-benefit microsimulation model based on 2018 EU-SILC data. Detailed aggregate labour market statistics combined with a novel approach to simulate transitions from work into monetary compensation schemes (short-time work schemes, as well as compensation schemes for self-employed) and into unemployment allows us to replicate the labour market conditions during the COVID-19 crisis in 2020 in the underlying EU-SILC data. Our analysis highlights that most of the countries analysed experienced a significant drop in market incomes, with poorer households hit the hardest. However, our findings also suggest that the tax-benefit systems of the EU Member States have been able to absorb a significant share of the COVID-19 shock, offsetting – or alleviating – its regressive nature on market incomes. Monetary compensation schemes implemented by EU Member States played a key role in cushioning against the fall in household income during the crisis.

Authors:

CHRISTL Michael, DE POLI Silvia, FIGARI Francesco, HUFKENS Tine, LEVENTI Chrysa, PAPINI Andrea, TUMINO Alberto