Macro-fiscal volatility and the composition of public spending

Earlier empirical literature has examined some long- and medium-term aspects of macro-fiscal volatility while leaving its short-term fiscal impact unexplored. To help fill that gap, we examine the impact of macro-fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991—2007. Our results suggest that contemporaneous increases in the volatility of regularly collected revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc –type of taxes such as capital taxes tend to favour public consumption spending. A possible explanation to these differences concerns news about the underlying economic conditions embedded in short-term volatility changes: the policy maker may be more inclined to increase public investment in response to persistent changes in the economic conditions, while temporary changes may prompt a reaction on consumption spending.tax volatility; public investment; public consumption

Moving towards fairer regional minimum income schemes in Spain

Minimum income schemes aim at providing citizens with a minimum living standard. In some EU countries, their regulation and provision takes place at the subnational level. This is the case in Spain, where minimum income schemes are a heterogeneous and complex collection of regional benefits designed and implemented at the regional level, by the Autonomous Communities. In June 2020, a complementary nationwide minimum income scheme was implemented. In this context, we use the European microsimulation model EUROMOD, together with microdata from the European Union Statistics on Income and Living Conditions, to comprehensively assess the performance of the whole minimum income system. We simulate a sequence of theoretical scenarios, considering different degrees of coverage and adequacy of these benefits and show that extending the coverage of the regional schemes would significantly alleviate poverty. However, it would not be sufficient to eliminate it and further increases in the benefit amounts would also be required. Furthermore, the new nationwide minimum income can potentially reduce the shortfall in income from the poverty line, if cost-shifting practices from the regional to the national budgetary level are limited. We discuss the importance of this case study in light of the decentralization of minimum income policies and derive some general policy implications

Climate policy design, competitiveness and income distribution: A macro-micro assessment for 11 EU countries

Concerns about industry competitiveness and distributional impacts can deter ambitious climate policies. Typically, these issues are studied separately, without giving much attention to the interaction between the two. Here, we explore how carbon leakage reduction measures affect distributional outcomes across households within 11 European countries by combining an economy-wide computable general equilibrium model with a household-level microsimulation model. Quantitative simulations indicate that a free allocation of emission permits to safeguard the competitive position of energy-intensive trade-exposed industries leads to impacts that are slightly more regressive than under full auctioning. We identify three channels that contribute to this effect: higher capital and labour income; lower tax revenue for compensating low-income households; and stronger consumption price increases following from higher carbon prices needed to reach the same emissions target. While these findings suggest a competitiveness-equity trade-off, the results also show that redistributing the revenues from partial permit auctioning on an equal-per-household basis still ensures that climate policy is progressive, indicating that there is room for policy to reconcile competitiveness and equity concerns. Finally, we illustrate that indexing social benefits to consumer price changes mitigates pre-revenue-recycling impact regressivity, but is insufficient to compensate vulnerable households in the absence of other complementary measures

Inflation, fiscal policy and inequality: the distributional impact of fiscal measures to compensate for consumer inflation

En este documento se analiza el impacto distributivo de la elevada inflación experimentada por los consumidores en la eurozona y las medidas que los Gobiernos han implementado para compensar a los hogares en 2022. El estudio utiliza el modelo de microsimulación de impuestos y beneficios para la Unión Europea (EUROMOD) basado en microdatos —estadísticas de la Unión Europea sobre la renta y las condiciones de vida (EU-SILC) y encuestas de presupuestos familiares (HBS)— para cuantificar el impacto distributivo de la inflación, de las medidas de apoyo a la renta de los hogares y de las medidas destinadas a contener los precios. El análisis confirma que el poder adquisitivo y la métrica de bienestar se vieron más gravemente afectados por el aumento de la inflación de 2022 en los hogares de menores ingresos que en los hogares de mayores ingresos. Las medidas fiscales compensaron a los hogares en alrededor de un tercio de su pérdida de bienestar, aunque con diferencias significativas entre países. Al mismo tiempo, las medidas fiscales cerraron alrededor del 60 % de la brecha de desigualdad que había entre los hogares de menores ingresos y los de mayores ingresos. La mayoría de las medidas fiscales no estaban bien focalizadas en los hogares de bajos ingresos, lo que dio lugar a un coste fiscal superior al necesario para amortiguar el impacto distributivo del shock inflacionario.This paper analyses the distributional impact of high consumer inflation in the euro area and government measures to compensate households in 2022. The study uses the tax-benefit microsimulation model for the European Union (EUROMOD) with microdata as the input – EU statistics on income and living conditions (EU-SILC) and household budget surveys (HBS) – to quantify the distributional impact of inflation, income support measures and measures aimed at containing prices. The analysis confirms that purchasing power and welfare were more severely affected by the 2022 inflation surge among lower-income households than among higher-income households. Fiscal measures compensated households for about a third of their welfare loss, though with significant differences across countries. At the same time, fiscal measures reduced the inequality gap between lower and higher-income households by around 60%. Most fiscal measures were not particularly well targeted at low-income households, resulting in a higher than necessary fiscal burden to cushion the distributional impact of the inflationary shock

Moving towards fairer regional minimum income schemes in Spain

Minimum income schemes are set to provide citizens with a minimum living standard. In Spain, these schemes consist of a heterogeneous and complex collection of regional benefits designed and implemented by the Autonomous Communities. This generates important regional discrepancies among the poorest individuals, undermining equal access, adequate social assistance and ultimately the fairness of these last resort safety nets. Following the recent initiative by the central government to introduce a national minimum income scheme complementing the regional ones, a better understanding of the performance of the existing regional minimum income schemes, in terms of their coverage and adequacy, is of the essence. We assess the budgetary, distributional and poverty effects of the current Spanish regional minimum income schemes, as well as the impact of increasing both coverage rates and adequacy levels. Using the European microsimulation model EUROMOD together with microdata from the European Union Statistics on Income and Living Conditions, we simulate a sequence of theoretical scenarios with different combinations of coverage and adequacy levels using national and regional poverty lines as references. Our results suggest that increasing adequacy would have a higher impact on poverty rates than increasing coverage, but would be less effective to reduce poverty intensity. Importantly, all scenarios imply significant expenditure increases, the more so for larger decreases in poverty intensity, as would be expected. Noticeably, results greatly differ among regions, and are sensitive to measuring poverty under a national or a regional criterion, reflecting Spanish regional disparities in terms of poverty

Moving towards fairer regional minimum income schemes in Spain

Minimum income schemes are set to provide citizens with a minimum living standard. In Spain, these schemes consist of a heterogeneous and complex collection of regional benefits designed and implemented by the Autonomous Communities. This generates important regional discrepancies among the poorest individuals, undermining equal access, adequate social assistance and ultimately the fairness of these last resort safety nets. Following the recent initiative by the central government to introduce a national minimum income scheme complementing the regional ones, a better understanding of the performance of the existing regional minimum income schemes, in terms of their coverage and adequacy, is of the essence. We assess the budgetary, distributional and poverty effects of the current Spanish regional minimum income schemes, as well as the impact of increasing both coverage rates and adequacy levels. Using the European microsimulation model EUROMOD together with microdata from the European Union Statistics on Income and Living Conditions, we simulate a sequence of theoretical scenarios with different combinations of coverage and adequacy levels using national and regional poverty lines as references. Our results suggest that increasing adequacy would have a higher impact on poverty rates than increasing coverage, but would be less effective to reduce poverty intensity. Importantly, all scenarios imply significant expenditure increases, the more so for larger decreases in poverty intensity, as would be expected. Noticeably, results greatly differ among regions, and are sensitive to measuring poverty under a national or a regional criterion, reflecting Spanish regional disparities in terms of poverty

Macro-fiscal volatility and the composition of public spending

Earlier empirical literature has examined some long- and medium-term aspects of macro-fiscal volatility while leaving its short-term fiscal impact unexplored. To help fill that gap, we examine the impact of macro-fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991–2007. Our results suggest that increases in the volatility of regularly-collected and cyclical revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc taxes such as capital taxes tend to favour public consumption spending, albeit only a little. We interpret such volatility innovations as conveying news to the fiscal policymaker about the underlying economic conditions, with especially regularly-collected and cyclical taxes prompting short-term cyclical fine-tuning.JRC.J.3-Information Societ

Moment Condition Models in Empirical Economics

Defence date: 1 June 2012Examining Board: Professor Richard Spady, Johns Hopkins University (External Supervisor); Professor Peter Hansen, European University Institute; Professor Gianni Amisano, European Central Bank; Professor Christian Matthes, Universitat Pompeu Fabra.The third chapter of this dissertation is a joint research work developed during my internship in the European Investment Bank. It is a co-authored article with Juraj Stancik, from CERGE-EI, Charles University Prague, Academy of Sciences of the Czech Republic, and Timo Valila, from the European Investment Bank. Juraj helped me to assemble the dataset and Timo redacted the text. My contribution consisted in reviewing literature and performing all the econometric analysis.In the first chapter of this dissertation, we approach the estimation of dynamic stochastic general equilibrium models through a moments-based estimator, the empirical likelihood. We try to show that this inference process can be a valid alternative to maximum likelihood. The empirical likelihood estimator only requires knowledge about the moments of the data generating process of the model. In this context, we exploit the fact that these economies can be formulated as a set of moment conditions to infer on their parameters through this technique. For illustrational purposes, we consider the standard real business cycle model with a constant relative risk adverse utility function and indivisible labour, driven by a normal technology shock. In the second chapter, we explore further aspects of the estimation of dynamic stochastic general equilibrium models using the empirical likelihood family of estimators. In particular, we propose possible ways of tackling the main problems identified in the first chapter. These problems resume to: (i) the possible existence of dependence between the random variables; (ii) the definition of moment conditions in the dynamic stochastic general equilibrium models setup; (iii) the alternatives to the data generation process used in the first chapter. In the third chapter, we investigate the short run effects of macroeconomic and fiscal volatility on the decision of the policy maker on how much to consume and how much to invest. To that end, we analyse a panel of 10 EU countries during 1991-2007. Our results suggest that increases in the volatility of regularly collected and cyclical revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc -type of taxes such as capital taxes tend to favour public consumption spending, albeit only a little

The fiscal and equity impact of tax expenditures in the European Union

Tax expenditures are preferential tax treatments granted to specific individuals or categories of households which aim at achieving social and economic goals - poverty and inequality reduction, and employment promotion, among others. Tax expenditures are widely used by EU Member States. However, their fiscal and equity impacts are not always clear and their effectiveness and efficiency as a policy instrument needs to be carefully evaluated, especially in the present context of constrained public finances. Tax expenditures might in some cases distort economic incentives be it towards consumption or investment, in some case by favouring rent seeking behaviour and making tax systems less transparent and/or regressive from a social viewpoint. While policy recommendations often call for streamlining tax expenditures, in practice policy measures are often difficult to design in particular given the difficulty in measuring the fiscal and equity impact of tax expenditures. This paper quantifies the fiscal and equity effects of tax expenditures in 27 European countries making use of EUROMOD, the EU-wide microsimulation model. We focus on four specific categories of preferential tax treatments affecting personal income taxation related to housing, pension, education and health expenditures. One key feature of the microsimulation model EUROMOD is that it embeds the interaction between different tax instruments and benefits entitlement which, in EU tax systems, proves essentially to fully gauge the fiscal and equity impact of tax expenditures. In order to quantify the impact of tax expenditure on governments' tax revenues and on households' disposable income a benchmark tax system scenario is created where tax expenditures - in the form of allowances, deductions, exemptions, reliefs and credits - are explicitly considered. We find a variety of effects, in terms of sign and magnitude, across Member States, and within these, among types of households and across generations. Overall our findings suggest that the impact of tax expenditure on tax revenues and on income inequalities can be sizeable. The redistributive impact of removing tax expenditures can go both directions, either on the progressive or regressive side, depending on the country and the tax expenditure considered. This result points out to the importance of a careful country specific scrutiny, for each type of tax expenditures

Macro-fiscal volatility and the composition of public spending

Earlier empirical literature has examined some long- and medium-term aspects of macro-fiscal volatility while leaving its short-term fiscal impact unexplored. To help fill that gap, we examine the impact of macro-fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991-2007. Our results suggest that increases in the volatility of regularly-collected and cyclical revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc taxes such as capital taxes tend to favour public consumption spending, albeit only a little. We interpret such volatility innovations as conveying news to the fiscal policymaker about the underlying economic conditions, with especially regularly-collected and cyclical taxes prompting short-term cyclical fine-tuning