Social protection budgets in the crisis in the EU

Social protection budgets in the
crisis in the EU
Working Paper 1/2013
Olivier Bontout &
Terezie Lokajickova
Social Europe
Social protection budgets in the crisis in the EU
This paper reviews social protection expenditure developments in the crisis, focusing on expenditure trends
in volumes following the peak of the crisis (2009), on changes in the distribution of incomes and, notably,
on the distributional impact of austerity packages.
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Luxembourg: Publications Office of the European Union, 2013
ISBN 978-92-79-29813-4
ISSN 1977-4125
doi: 10.2767/47052
© European Union, 2013
Reproduction is authorised provided the source is acknowledged.
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Table of Contents
Summary ........................................................................................................ 4
Introduction .................................................................................................... 5
1 – Social expenditure in the crisis...................................................................... 7
1.1 Social protection expenditure in Europe in international comparisons ............... 7
In the mid 2000s, EU accounted for 24% of the World GDP and 40% of public
social expenditure ....................................................................................... 7
Box 1 – Sources and measurement of social protection expenditure....................... 10
1.2 In Europe, social protection expenditure increased in 2009, nearly stabilised in
2010 and decreased afterwards ..................................................................... 13
1.3 Did social protection expenditure follow its trends in the current crisis? .......... 19
Box 2 – estimating the cyclical component of GDP and social protection expenditure 20
1.4 Decomposition of recent trends of unemployment expenditure...................... 22
2 – Distributional impact of the crisis and of austerity packages ............................ 25
2.1 – The impact of bad economic times on the distribution of incomes ............... 25
Box 3 - Nowcasting poverty ............................................................................. 29
2.2 Impact of austerity measures on the income distribution............................. 30
Conclusion..................................................................................................... 36
REFERENCES ................................................................................................. 37
ANNEXES – detailed tables. ............................................................................. 39
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Social protection budgets in the crisis in the EU
Summary
This paper reviews social protection expenditure developments in the crisis, focusing
on expenditure trends in volumes following the peak of the crisis (2009), on changes
in the distribution of incomes and, notably, on the distributional impact of austerity
packages.
The significant increase in social protection expenditure in the early phase of the crisis
appears to have been broadly in the line with the exceptional severity of this crisis
(though there may have been some over-adjustment). Social expenditure thereafter
stabilised in 2010, which also appears to be broadly in line with past trends and
afterwards declined (in real terms) in 2011 and 2012. The downward adjustment
observed since 2011 is significantly larger in comparison with past periods of economic
under-performance. It points to weakening of the economic automatic stabilisation
function of social protection systems in Europe and EMU, with signs that they were
actually pro-cyclical in 2012.
The crisis translated into very different changes in the distribution of incomes in
different Member States, broadly reflecting the combination of initial declines in
market incomes, automatic adjustments in benefits and taxes levels sustaining
households' incomes, and the impact of adjustments in tax-benefit systems since the
beginning of the crisis. In particular, the burden of austerity packages has been
shared differently across Member States, with varying impacts on the distribution of
incomes, reflecting the specific design and mix of measures taken in different Member
States.
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Social protection budgets in the crisis in the EU
Introduction
This paper reviews social protection expenditures developments in the crisis, focusing
on trends of social protection expenditure in volumes following the peak of the crisis
(2009), on changes in the distribution of incomes and, notably, on the distributional
impact of austerity packages. While social systems played a key role of automatic
stabilisation in early phase of the crisis, they actually showed signs of weakening over
time (European Commission 2013). This raises concern about current trends in social
protection systems, since it raises an issue of their ability to protect households'
incomes in case of adverse economic shocks and to contribute to the overall
stabilisation of the economic cycle.
In other words, this paper reviews some evidence on how the stabilisation (in the first
part) and protection (in the second part) functions of social protection systems have
been affected during this crisis. Following Musgrave's (1959) classical framework,
which defines the three main functions of public intervention in the economy as
stabilisation (aimed at smoothing the economic cycle, in terms of GDP but also of
employment and price levels), distribution (aimed at securing adjustments in the
distribution of income and wealth, not least an equitable distribution of incomes) and
resource allocation (aimed at securing adjustments in the allocation of resources and
in particular the efficient use of resources), social policies can indeed be considered
according to the three functions: social investment (primarily linked to the allocation
function), social protection (primarily linked to the distribution function, considered in
a very broad sense covering in particular distribution of incomes over the life course)
and stabilisation of the economy.
The paper focuses on how the (real) growth of social expenditures in this crisis
compares to past trends during similar periods of economic under-performance. It
should, however, be noted that by doing so, this paper does not fully reflect on the
overall sustainability of current developments of social protection expenditures, which
would ideally require confronting trends in social expenditures growth with estimates
of a possible drop in potential GDP and economic growth. Indeed, the 2010-11
recovery was relatively weak and the following years saw another episode of recession
in 2012, while 2013 is foreseen to remain a year of weak growth in EU and recession
in EA and overall recovery is expected only in 2014. In this context, output gap
estimates indicate that most of foregone growth since the beginning of the crisis may
not be recovered1 and it is debateable whether potential growth will be affected in the
medium or even long-term.
In this context of uncertainty about short and medium term GDP prospects, this paper
tries to identify possible under- or over-adjustment of social protection expenditure in
the current crisis (and some of its underlining factors) on the basis of past trends,
leaving aside the question to what extent the current trends may point in the direction
of a possible break in potential growth.
The paper is organised as follows. In the first section, changes in social protection
expenditure volumes in this crisis are compared with trends, during past periods of
economic under-performance, focusing on their path and composition and
characterising latest developments in a broader international context. In the second
section, it provides a synthesis of available information on the impact of the current
crisis on the distribution of incomes, focusing in particular on available now-casting
exercises (which provide information up to 2012) and on available assessments of the
1
For instance, in an economy reaching in 2012 the levels of GDP of 2008 and with former average economic growth of 2%
a year, foregone growth amounts to around 8% (accumulation of 4 years of overall stagnation). If the order of magnitude
of the output gap is around 3% of GDP, it suggests that 3% of GDP (out of 8%) or only nearly 1/3 of foregone growth could
be recovered by GDP catching up to potential.
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distributional impact of the austerity packages that have curbed public expenditure
growth in some Member States.
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1 – Social expenditure in the crisis
This section presents trends in social expenditure since the beginning of the crisis (for
an overview of what is meant by social expenditure in this paper see the Box on
sources and measurement of social protection expenditure which is below). It first
provides international comparisons of the levels and trends in social expenditure in
Europe. It then provides details on changes in social protection expenditure in Europe
during the period 2009-2012 and compares these changes to trends and changes in
past periods of below-par performance. It finally focuses on contributions to changes
in unemployment expenditure in 2009 and 2010.
1.1 Social protection
comparisons
expenditure
in
Europe
in
international
In the mid-2000s, EU accounted for 24% of the World GDP and 40% of public
social expenditure
In the mid-2000s, in the EU, public social expenditure (including health care)
accounted for around 25% of GDP, while it reached 19% in the OECD and around 15%
in the whole world (table 1). EU accounted for around 40% of the World's public social
protection expenditure.2
This is partly because the EU represents an important share of the World's GDP (24%)
and because per capita public social spending is higher than in the rest of the World,
including when compared to the OECD, a region with a similar level of GDP per capita.
On average, per capita public social spending is 15% lower in the OECD than in the
EU-27, and actually very similar in the USA. It can also be noted that the EU and the
OECD have similar levels of per capita spending on public health expenditure
(expressed in levels in PPS), actually reflecting much higher levels in the USA (which
also reflects higher GDP per capita).
2
This differs from the estimates presented in the World Bank (2012) showing that 58% of world public social protection
spending is performed by Europe. The difference has three reasons: 1) in this paper we look at the EU-27, while the WB
refers to Europe as a zone of 36 countries 2) in this paper we reflect on data for 175 countries for the world, while the WB
covers 96 countries 3) data sources might be different.
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Table 1 – Public social protection expenditure in Europe, the OECD and the world in the mid2000s
Social
Health
Total social protection
GDP
expenditures
expenditures
expenditures
(public)
(public)
Share in GDP
EU27
100%
17%
7%
24%
EUROZONE
100%
18%
7%
25%
USA
100%
9%
7%
16%
OECD
100%
12%
7%
19%
CHINA
100%
4%
2%
6%*
WORLD
100%
9%
5%
14%
Levels per capita (100 EU27)
EU27
100
100
100
100
EUROZONE
110
115
114
115
USA
156
80
161
102
OECD
106
77
105
85
CHINA
15
4
4
4
WORLD
32
17
23
19
Geographical repartition
EU27
24%
44%
33%
40%
EUROZONE
17%
33%
25%
30%
USA
22%
21%
32%
25%
OECD
60%
80%
83%
81%
CHINA
10%
4%
4%
4%
WORLD
100%
100%
100%
100%
Source – ILO and DG EMPL calculations.
Note: all levels are expressed in PPS (Purchasing Power Parity) which provide some correction for the different in relative
prices in the different zones (see calculations in a common currency in annex). Public social expenditures are provided in
gross terms, not reflecting differences in tax systems. For the world, 175 countries are reflected. (*) Latest estimates from
the OECD (2013) for 2011 show levels of 6.5% of GDP, excluding pensions from the public sector.
… accounting for total – public and private – social protection expenditure
reduces the OECD – EU gap in per capita social expenditure to around 3%
When accounting not only for public expenditures, but also for mandatory private
expenditures and voluntary ones (which refer mainly to health and old-age functions),
total per capita social protection expenditure in the OECD are only 3% lower than in
the EU27. This mainly reflects higher per capita health expenditure in the OECD than
in EU27 when accounting for private health expenditures, (higher by around 30%).
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Table 2 – Total – public and private – social expenditure in Europe and the OECD in 2005
Social
Health
Total social protection
GDP
expenditures
expenditures
expenditures
Share in GDP
100
EU27
%
18%
7%
25%
100
EUROZONE
%
20%
8%
28%
100
USA
%
13%
13%
26%
100
OECD
%
15%
9%
24%
Levels per capita (100 EU27)
EU27
100
100
100
100
EUROZONE
101
111
117
113
USA
145
85
268
149
OECD
102
85
130
97
Geographical repartition
EU27
41%
49%
32%
42% (50% for public only)
EUROZONE
27%
36%
24%
31% (37% for public only)
USA
35%
100
%
30%
51%
38% (31% for public only)
100%
100%
OECD
100%
Source – OECD, DG EMPL calculations. Note: information for CY, MT, BG, RO, LV and LT complemented from Eurostat. All
data in PPS (Purchasing Power Parity) which provide some correction for the different in relative prices in the different
zones. Social expenditures are provided in gross terms, not reflecting differences in tax systems. All social protection
expenditures accounted for, public and mandatory private as well as voluntary.
Public social protection expenditures increased more quickly in the OECD
than in the EU in the crisis and did not decline as much in the OECD as in
Europe until 2011
Recent trends in public social expenditures in volume can be derived from National
accounts. Compared to the OECD average, the increase in public social protection
expenditures in Europe and Eurozone has been relatively modest in the crisis
compared to pre-crisis levels (2007). In 2009 overall increases compared to 2007
ranged between 5% and 10% in the EU, while average increase exceeded 10% in the
OECD and reached 15% in the USA (see OECD 2012a).3 In 2010, social protection
expenditures increased at a much slower pace in EU27 and OECD, while they
stabilised in the Eurozone and increased much more dynamically in the USA. In 2011,
public social protection expenditures stabilised in the OECD and USA, while they began
declining in EU27 and the Eurozone.
Overall, in the period 2007-2011, public social expenditures have increased by around
20% in the USA, 12% in the OECD, 7% in the Eurozone and 8% in the EU27. It should
be noted that these differences result neither from significant differences of changes in
prices nor from GDP developments, since over the period 2007-11 changes in prices
are fairly similar (around +10% in the various zones) and GDP levels in 2011 are
comparable to 2007 in the various zones.
3
The rise in social protection expenditure in the USA was mainly driven by spending on health care, old age and
unemployment. However, the highest relative increase between 2007 and 2009 was seen in expenditure on unemployment
and on active labour market programmes.
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Social protection budgets in the crisis in the EU
Chart 1 – Public social expenditures and GDP in the EU, EA, OECD, Japan and the USA (2007-11;
indexed levels, 2007=100)
United States
Japan
130
OECD
130
130
120
120
120
110
110
110
100
100
100
90
90
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
2008
2009
2010
Real public social spending
Real public social spending
Real GDP
Real GDP
Real GDP
Consumer price index
EUROZONE
EU27
130.0
130.0
120.0
120.0
110.0
110.0
100.0
100.0
90.0
2007
2007
Real public social spending
2008
2009
2010
2011
2007
2008
2009
2011
Consumer price index
Consumer price index
90.0
90
2010
2011
Real public social spending
Real public social spending
Real GDP
Real GDP
Consumer price index
Consumer price index
Source: OECD (SOCX) and National accounts (Eurostat) for Eurozone and EU27.
These significant differences in the developments of public social expenditures in the
crisis between the EU and the OECD (and notably the USA) reflect different structural
composition effects (such as a higher share of unemployment benefits in public social
expenditures in the OECD and the USA), but also suggest that in 2010 and more
significantly in 2011, the growth of social protection expenditure has followed a
different path in Europe, with some decline in volumes, while the OECD saw a
stabilisation in a broadly similar economic context.
Box 1 – Sources and measurement of social protection expenditure
Social protection expenditure trends can be assessed in different ways, and are most
frequently looked at as a share of GDP or as a share of other public expenditures, or in
volumes (deflated by some price index, generally HICP) or expenditures per capita,
which allows taking into account of the size of countries. This paper focuses on trends
in volumes, since other measures actually reflect a number of other trends, such as
changes in GDP levels or changes in the levels of other public expenditures.
Four main data sources on social protection expenditures are used in this analysis, the
European System of Integrated Social Protection Statistics (ESSPROS until 2010), the
National Accounts (until 2012), SOCX (OECD) and ILO.
ESSPROS data on social protection expenditure are compiled by Eurostat in
accordance with the methodology of the European System of Integrated Social
Protection Statistics "ESSPROS Manual 2011". Social protection is defined as
encompassing "all interventions from public and private bodies intended to relieve
households and individuals of the burden of a defined set of risks or needs, provided
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Social protection budgets in the crisis in the EU
that there is neither a simultaneous reciprocal nor an individual arrangement
involved". As such, the field of observation of the ESSPROS goes beyond that of social
security (i.e. social protection provided by governments) to include benefits provided
by private social protection schemes, in so far as they have similar effects to social
security for the beneficiary. Social protection expenditure includes social benefits,
classified by function, and administrative and other costs incurred by social protection
schemes. These data are currently available for up until 2010 and in gross terms. An
exercise to provide net data as well has been the subject of pilot programmes and is
now in the regulation process. The eight policy areas covered in ESSPROS are the
following: sickness/health care, disability, old age, survivors, family/children,
unemployment, housing, social exclusion. ESSPROS also provides the information
whether given benefits are provided in cash or as services directly to citizens ("in
kind"), and also whether they are means-tested or not.
Data on social protection expenditure from National accounts are in accordance with
the European System of Accounts 1995 (ESA95) and cover "Social transfers in kind"
and "Social benefits other than social transfers in kind". Generally speaking the levels
for total expenditure on social protection is somewhat higher than in the ESSPROS.
The main differences are that:
- First, National Accounts also include the function of Education in social protection
expenditure. Due to this, developments in expenditure on social transfers in National
Accounts are influenced by developments in the Education function (unlike social
protection expenditure in ESSPROS). The order of magnitude of this effect on the level
of growth of total social transfers aggregate from the national accounts can however
be gauged based on the COFOG classification of the national accounts: it has been on
average around only 0.1 pp since 2000 for both EU-27 and EA-17 and in each year
has been lower than 0.5 pp. Therefore, it does not impact significantly on the changes
in social transfers growth described below for 2011 and 2012.
- Second, while the ESSPROS covers both current and capital transfers, National
accounts only cover current transfers.
- Third, the treatment of certain reductions on taxes and other obligatory levies
payable by households is accounted in a different way by the ESSPROS and National
Accounts.
- Fourth, while ESSPROS also includes benefits provided by private social protection
schemes (see above), data used from the National accounts only show benefits
provided by the general government.
For more details on the main differences compared with the European System of
Integrated Social Protection Statistics (ESSPROS) in the way social benefits in cash
and in kind are distinguished please refer to the Manual on sources and methods for
the compilation of COFOG Statistics, page 65-66, Eurostat.4 Data that were missing in
the National accounts (for Malta, Luxembourg, Bulgaria and Ireland) were
complemented by estimates available from the AMECO database of the European
Commission.
At the time of writing this paper, annual data were available until 2011 for most
Member States and quarterly data were available for a large selection of Member
States until the third quarter of 2012 (except for AT, BE, DE, IE, PL and RO). For
Member States where the first three quarters for 2012 were available, an estimation of
the 2012 annual growth rate was produced, reflecting the information available until
the 3rd quarter, that is estimating the level of growth reached in 2012 if no change
would be observed in the last quarter compared to 3rd quarter levels, the latest
available. For this quarterly data are de-seasonalised (based on average quarterly
4
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-RA-07-022/EN/KS-RA-07-022-EN.PDF
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Social protection budgets in the crisis in the EU
coefficients observed since 2000) and the level of the 4th Quarter is left at the level of
the 3rd quarter ; the estimation of the growth rate for 2012 is obtained based on the
de-seasonalised quarterly data for 2011 and 2012 (in other words this is an estimate
of the growth rate that has been attained in the 3rd quarter, neutralising the potential
impact of the 4th quarter, for which data are not yet available).
The SOCX database of the OECD was developed in the 1990s. The nine policy areas
covered by SOCX are the following: old-age, survivors, incapacity-related benefits,
health, family, active labour market policies, unemployment, housing and other social
policy areas. Given the inclusion of labour market policies in SOCX, its scope is larger
than that of ESSPROS. Compared to National accounts, the same holds with respect to
active labour market policies. Also, SOCX is not limited to public social protection
expenditure only, but includes mandatory private social expenditures and voluntary
private ones.
Data provided by the ILO are a combination of several different data sources
(ESSPROS, SOCX, data of the International Monetary Fund, the World Health
Organisation's Statistical Information System and also the ILO's Social Security
Inquiry).
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1.2 In Europe, social protection expenditure increased in 2009, nearly
stabilised in 2010 and decreased afterwards
Social protection expenditure provides automatic stabilisation of economies
in bad times
Social protection expenditure provides for automatic stabilisation of the economy in
bad economic times, since expenditure generally increases and thus partly
compensates for the initial decline in households' disposable income following the
decline in market income.
This stabilisation function of social protection systems is typically present for
unemployment benefits but is also for means tested benefits from various functions
(typically social exclusion, family or housing), as well as but to a lesser extent for
health or pension expenditures, since those generally continue to grow or remain
constant while market incomes decline.
Estimates of automatic stabilisers generally do not distinguish between various public
expenditures and taxes. However, Chart 2 shows that social protection systems
account for a key dimension of overall automatic stabilisation and in standard
recessions (translating into increases of unemployment) they represent the major
share of automatic stabilisation. This is clearly apparent in estimates of stabilisation in
case of an ‘unemployment shock’, like in Dolls et al. (2009) and this has been actually
observed since the onset of the crisis in Europe (see chart below). For instance,
estimates from European Commission (2013) based on the 1995-2009 period indicate
than when the output gap decreased by one percentage point, unemployment
expenditures increased on average by 6%, while social exclusion, family and housing
expenditures increase by 2% and pensions and health by around 1%-1.5%.
Chart 2 – Contributions of components to the growth of nominal gross disposable income of
households, EA 17 (2000-2012)
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Source: Eurostat/ECB. Note: annual percentage change and percentage point contributions. Labour income includes
compensation from employees and gross operating surplus and mixed income (compensation from self-employed).
In the rest of this section, the period 2001 – 2005 is used as reference for comparison
of growth rates of social protection expenditure in recent years. The choice of this
period stems from that this was a 5 years period of relatively modest GDP growth on
average in the EU (since the early 90s where information is available), with annual
economic growth of +1.5% for EA17 and +1.9% for EU27. In this respect, social
expenditure growth in 2010 and 2011 can be compared to a period with nearly similar
average growth conditions: in 2010 economic growth was of 2.1% in EU and 2% in
EA, and in 2011 respectively 1.5% and 1.4% (in 2012 it was respectively -0.3% and 0.6% according to the Winter 2013 European Economic Forecast).
An acceleration of social protection expenditure in 2009 and a stabilisation in
2010
In 2009, social protection expenditure increased by around 7% in EU27 and EA17, an
acceleration mainly driven by increases in unemployment expenditure, but also in
health and disability as well as in old age and survivors expenditure and to a lower
extent by an increase in family and social exclusion and housing expenditure (see
Chart 3). The increase in unemployment expenditure mainly reflected increases in the
number of unemployed (see below section 1.4).
In 2010, the increase was very modest, reflecting an overall stabilisation in
unemployment expenditure, but also very modest increases in health and disability,
and an increase in old age and survivors benefits. The growth in health and disability
expenditures in 2010 appears very modest in the EU, which mirrors very modest
changes observed in the OECD (see OECD 2012b). Changes in unemployment
expenditure were mainly driven by the number of unemployed, but also to a lower
extent by declines in average benefits (as measured by the average expenditure per
unemployed, see below section 1.4).
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Chart 3 – Contributions to real growth of social expenditures in EU27 and EA17 (2001- 2010)
Source: ESSPROS and DG EMPL calculations. Note for EU27, 2001-2005 actually refers to EU25 since EU27 not available. In
the period 2001 – 2005 the average annual growth rate is shown.
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Chart 4 – Growth in (real) total social expenditures in Europe 2001-2005, 2009 and 2010
Source: ESSPROS and DG EMPL calculations.
Expenditure on unemployment benefits increased in all countries in 2009, and in most
countries in 2010, when it started declining in a few countries, including those where
unemployment kept increasing (ES, EL, HU, SK and UK). In 2010, health and disability
expenditure showed on average very modest increases, with declines in real levels in
some countries (EE, EL, ES, HU, LT, LV, PT and UK). Old age and survivors
expenditure grew at a slow pace, also with declines in real terms in some Member
States (EE, EL, LT, RO and UK). In a few countries, family benefits expenditure (CZ,
EL, HU, IT, LT, LV, RO) and social exclusion and housing expenditure declined (EL,
HU).
Most recent trends show real declines in 2011 and 2012
Data for years 2011 and 2012 only allow to track developments in expenditure on
benefits in cash and in kind. In 2011, social expenditures declined on average in
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Europe and in 2012 in most countries.5 In 2011, declines affected both in-kind and
cash benefits. In 2012, in a degraded economic context, most Member States showed
declines of in-kind expenditure, but relatively stable cash expenditure. While declines
in cash benefits are reflected in the gross households' disposable income, those of inkind benefits are not. However, falling in-kind benefits are likely to have a negative
impact on the population (e.g. when provision of health care services or child care are
affected).
Chart 5 – Annual growth in real public social expenditures 2001-2011, EU27 and EA17
Source: NA and DG EMPL calculations. Note: No averages for 2012 since quarterly data used to establish national estimates
are not available in some Member States (AT, BE, DE, IE, PL and RO).
In 2011, the declines affected most Member States and both in-kind and cash
benefits. Declines were particularly significant (around 5% or more) in EL, LV, PT and
RO and were below 1% in most other Member States (AT, CZ, DE, DK, EE, ES, HU, IE,
IT, LT, PL, SK, UK).
In 2012, the rates of decline were in general less pronounced, but still very significant
in a few Member States (EL, HU, LT, PT) and were still below -1% in some other ones
(CY, CZ, ES, IT, LV, SI). Cash benefits recorded real increases in some Member States
(BG, CY, DK, FI, FR, IE, LU, SE and UK).
5
For 2012, the annual growth rate reflects an estimate based on 3 first quarters (see Box 1).
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Chart 6 – Annual growth in real public social expenditures 2001-2005 and 2009-2012
Source: NA and DG EMPL calculations. Note: (*) for not available.
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1.3 Did social protection expenditure follow its trends in the current
crisis?
These developments can be further analysed by confronting deviations from trends in
social protection expenditure and output gaps, as observed since 2009. The Box on
estimating the cyclical component of GDP and social protection expenditures (see
below) provides more detail about how cyclical components of social protection
expenditure and GDP are obtained.
In 2009 and to a lesser extent in 2010, social expenditure showed a strong positive
deviation from its trend, in a context of adverse economic situation as reflected by the
negative values in output gaps.
Chart 7 – Deviations from trend of real growth in social expenditure and GDP in 2009 and 2010
Source : Eurostat, National accounts, DG EMPL calculations.
In 2011 and 2012, while output gaps remained negative (and generally worsened in
2012), the deviation of social protection expenditure from the trend declined and
became negative on average in Europe.
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Chart 8 – Deviations from trend of real growth in social expenditure and GDP in 2011 and 2012
Source: Eurostat, National accounts, DG EMPL calculations.
Box 2 – estimating the cyclical component of GDP and social protection
expenditure
The cyclical component of social protection expenditure has been estimated as the gap
between actual levels and the trend in social protection expenditure, and expressed as
a percentage of the trend of social protection expenditure. The trend of social
protection expenditure is estimated using the Hodrick-Prescott filter, which is a
standard method used for identifying trends and cycles in time series. It is based on
the following formula, with y the initial series and τ the estimated trend (the standard
value of λ for annual data has been used, i.e. 100):
T
T −1
1
2
min ∑ ( yt − τ t ) 2 + λ ∑[(τ t +1 − τ t ) − (τ t − τ t −1 )]2 .
The cyclical component of GDP corresponds to the European Commission estimates, as
provided in AMECO (AVGDGP, or the gap between actual GDP and potential GDP,
percentage of potential GDP). In this methodology, the potential GDP is estimated
based on a Cobb-Douglas production function and not through a statistical method.
Years labeled as "periods of below-par performance" are defined as those years when
the cyclical component of GDP (or output gap) was negative, i.e. when actual GDP was
below its potential.
The deviation from trends in social protection expenditure following the initial
recession (2008-2009) and following years of recovery (2010) and slow (2011) or
negative growth and (2012) can be compared with episodes of below-par performance
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Social protection budgets in the crisis in the EU
in the 1990s and 2000s. It can be noted that, as compared with previous periods of
below-par performance, the one started in 2008-2009 and triggered by the financial
crisis was not followed by a sustained recovery, but often by a second recession
notably in countries characterised by fiscal and current account crises.
Compared to the initial years of past periods of below-par performance, the economic
performance was much worse in this crisis (year N, 2009 in most countries), as
reflected by more negative output gaps on average (around -4%, depicted by pink
columns) and relatively high positive deviation of social expenditure from trends
(around +5%, depicted by the red line). In past periods of below-par performance
where information is available (see annex), the negative output gap was milder (1%1.5%, depicted by blue columns) and the positive deviation from trend social
expenditure was lower (around 1%, depicted by the blue line). This suggests that
social expenditure reacted in the first year of this crisis slightly more strongly to the
economic cycle than in the past.
The year after the start of the recent crisis (N+1, 2010 in most countries) showed a
relatively quicker decrease in the output gap than in past periods of below-par
performance and a parallel decline in the positive deviation from the trend social
protection expenditure. These developments seem broadly in line with past trends
with an improvement in the output gap and a reduction in the deviation of social
expenditure from its trend.
Two years after the start of the recent crisis (N+2, 2011 in most countries) showed a
steady improvement of the output gap which, however, stayed negative. In this
context, the deviation from the trend social protection expenditure declined more
significantly than in the preceding year (N+1) and even became negative on average.
These developments seem to be diverging from the past since, in former periods of
below-par periods, the adjustment of the social expenditure relative to its trend
slowed down in N+2, while in this crisis the downward adjustment pace has been
constant or accelerating.
Three years after start of the recent crisis (N+3, 2012 in most countries) showed a
worsening of the output gap. However, in this context, the negative deviation of social
protection expenditure from its trend kept decreasing at broadly the same pace as in
preceding years. These developments also seem to be diverging from past trends,
since a deterioration in the output gap was usually accompanied by an upwards
deviation of social protection expenditure from its trend, while in this crisis it
continued adjusting downwards at a comparable pace as in former years. This profile
of social protection expenditure in year N+3 provides an indication that social
protection expenditures have been pro-cyclical in 2012 (it should be noted that figures
for 2012 used in this paper are provisional, see box 1).
As a result, in year N+3, while the output gap stands at around -2%, the deviation of
social expenditure from its trend stands at around -5%. This significant downwards
correction can be seen as a correction in the cycle of social protection expenditure in
this crisis, but can also partly reflect a permanent adjustment in social expenditure
growth during this crisis. It also partly reflects the exceptional scale of the fiscal
adjustment needed in the context of the euro crisis, as reflected notably by a more
persistent contraction of GDP and a context of reduced fiscal space.
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Social protection budgets in the crisis in the EU
Chart 9 – Deviation from trend of public social expenditures and GDP in current crisis and past
periods of below-par performance in EU27 and EA17
Source : Eurostat, National Accounts, DG EMPL calculations. Note: 2012 data are estimated based on quarterly data from
the first 3 quarters. In the current crisis, N is year 2009 in most countries. Reading notes: in the initial year of below-par
performance in the current crisis, social expenditures were around 5% above their trend in Europe, while the GDP was
about 4% below its potential (output gap of -4%). Averages are unweighted country averages (since countries do not
always experience a negative output gap the same year).
1.4 Decomposition of recent trends of unemployment expenditure
The development in unemployment expenditure in the crisis can be decomposed into
effects of, on the one hand, changes in the numbers of potential beneficiaries (here
proxied by the change in the number of unemployed people) and, on the other hand,
changes in average benefits (here proxied by the change in the average expenditure
per unemployed person.
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Social protection budgets in the crisis in the EU
Chart 10 – Contributions to the annual change in real unemployment expenditure (2004-10)
Source : Eurostat, ESSPROS, DG EMPL calculations. Reading note: this graph shows the annual change in real expenditure
on unemployment benefits (in %) and the main factors that influence it: the average expenditure per unemployed and the
number of short-term (ST) and long-term (LT) unemployed. The contributions of these factors are expressed in percentage
points.
In 2009, in Europe, the increase in unemployment expenditure was driven nearly
exclusively by changes in the number of unemployed, probably also reflecting shifts in
the structure of the unemployed and associated impact on the average expenditure
per unemployed (with increases in the number of short term unemployed with higher
benefits and increases in the number of long term unemployed with lower benefits). In
2010, the decline in volumes reflects two opposite effects with still overall increases in
the number of unemployed (increases in the number of long term unemployed and
decline of the number of short term unemployed) and a decrease in the average
expenditure per unemployed. This decline in the average benefit per unemployed can
reflect both a composition effect (since long term unemployed have on average lower
benefits) and some changes in the calculation rules of benefits leading to lower benefit
levels.
Differences in developments across Member States can be seen in the chart below.
Unlike in the EU on average, in some countries in 2009 the change in the average
unemployment expenditure per unemployed had a significant role (such as BG, CY,
EE, LT, RO, SK) and in 2010 there were a few countries where its influence was
positive or nearly negligible (such as AT, DE, IT, LU, RO, SE).
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Chart 11 – Contributions to the annual change in real unemployment expenditures (2009 and
2010)
Source : Eurostat, ESSPROS, DG EMPL calculations. Reading note: this graph shows the annual change in real expenditure
on unemployment benefits (in %) and the main factors that influence it: the average benefit per unemployed and the
number of short-term (ST) and long-term (LT) unemployed. The contributions of these factors are expressed in percentage
points.
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Social protection budgets in the crisis in the EU
2 – Distributional impact of the crisis and of austerity packages
The recession of 2008-2009, the following recovery of 2010-11 and further recession
episode of 2012 translated into significant changes in the income distribution,
reflecting sharp changes in market incomes, which were offset to different degrees by
automatic changes in taxes and benefits levels, but also discretionary changes in taxes
and benefits, such as through austerity packages.
This section reviews evidence on the main changes in the distribution of incomes since
the offset of the crisis, including through now-casting methods and reviews available
evidence of the impact of austerity packages for a selection of Member States.
2.1 – The impact of bad economic times on the distribution of incomes
Gross Household Disposable Income developments 2007-2011
In the initial phase of the crisis (2007-2009), in most Member States, market income
contributed negatively to gross household disposable income (GHDI) development
(except in SI, BE, CY, SK, LU, PL, RO and BG), with taxes and social transfers playing
their role of automatic stabilisation by sustaining households' incomes (see Chart 12).
Chart 12 – Contributions to GHDI development 2007-09 and 2009-11
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Social protection budgets in the crisis in the EU
Source: National accounts.
Note: GHDI development is expressed as percentage change.
In the second phase (2009-11), the decline in market incomes was in general less
important (EE, HU, IT, NL, IE, DK, AT, UK, CZ ) and sometimes recovered to positive
values (LV, LT, DE, FR, FI, SE), with significant exceptions of acceleration in declines
(EL, PT, ES ) or move towards negative values (SI, BE, CY, PL, RO), BG and SK being
the sole two countries with positive developments in the two periods.
However, the contribution of social transfers tended to erode in the second period (see
Chart 13), with in particular some Member States compounding a decline in real
market incomes by a negative contribution of social benefits to households incomes
(EE, EL, AT, UK, CZ, PL) and more generally, less significant positive contributions of
taxes and benefits to household incomes when market incomes declined.
Chart 13 – weakening of the stabilisation impact of social transfers 2007-09 and 2009-11
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Social protection budgets in the crisis in the EU
Source: National accounts.
Overall impact of the crisis on the income distribution 2007-2010
The impact of the crisis on the overall income distribution can be gauged by
comparing real income growth at different levels of the income distribution. Both in
the initial phase of the crisis (2007-09) and the subsequent recovery in 2010, the
pattern of changes of disposable income over the whole income distribution varies
substantially among Member States (see Chart 14).
In the first part of the crisis, income inequalities increased in more than half of
Member States (with most significant increases in ES, IE, SK and LT) and slightly
decreased in some Member States (more significantly in BG and RO). In most
countries, the decrease in inequalities was due to a decline of incomes in the 9th decile
of the income distribution. Incomes in the lowest decile decline in particular
significantly (more than 5% a year on average on both years) in ES, IE, LT, DK and
LV.
In 2010, a year of partial recovery for most countries, income trends were progressive
in a majority of Member States, notably in DE, SK, LV, MT and LT, often reflecting
substantial declines in the level of the 9th decile. A few countries did not experience
much developments in inequalities, though average declines in real disposable
incomes were particularly sharp at all levels of the income distribution (such as EL and
ES).In a third of Member States regressive trends in income distribution were driven
by decreases in real incomes in the lower end of the income distribution (BG, HU, IT
and EE), in some cases associated with significant increases at the higher end (BG,
HU, DK, AT, MT).
The developments reflect three contributions: the initial changes in primary incomes
from households (labour income but also capital income), but also the stabilising
impact of the tax benefit models and the potential impact of fiscal consolidation
measures. For instance, Ozdemir and Ward (2012) estimate that the deterioration of
the labour market in the crisis (as reflected by changes in the work intensity of
households) has translated into an increase of the poverty rate of the 25-64 age group
of around one point in Europe between 2007 and 2009, with sharp increases in some
Member States (EE, LV, LT around 3 points ES, IE and BG around 2 points) and that
the deterioration of the labour market situation has been particularly harmful to
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poverty in Greece in 2010 and to a lesser extent Portugal (with some improvement in
EE, LT and LV). These results assume that there is no change in the stabilisation
function of the tax-benefit system, which allows compensating for a large share of the
decline in labour incomes. For instance, Dolls et al. (2009) estimates range around
50% of income stabilisation in Europe in case of unemployment shocks (against 33%
in the USA), with levels ranging from around 20% in EE, 30% in ES and PL, 40% in IT,
EL, SI, IE, UK towards 60% or more in FR, PT, DE, BE, AT, SE and DK.
Chart 14 – Yearly growth of real incomes at different points of the disposable income distribution
(2007-09) and 2010
Source: EU-SILC. Note: countries on the left side show lower increases of disposable incomes in the lower part of the
income distribution (regressive trends), while countries on the right side show higher increases of disposable incomes in the
lower part of the income distribution.
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Nowcasting poverty 2010-12
Nowcasts of the poverty rate (and related income measures) are estimates based on
micro-simulation models that take into account policy and economic/labour market
changes, and are available in year N for income year N. More detailed information on
this matter is provided in the Box 3 on now-casting poverty. These methods provide
information on the latest changes in the distribution of incomes, while actual
information from EU-SILC surveys is currently available until 2010, nowcasting allows
analysing trends up to 2012.
These estimates essentially assume that cross section relations between variables are
constant over time and built on the main changes observed in the labour market (from
the LFS) which are incorporated in EU-SILC and by adjusting for changes in the design
of the tax-benefit systems (as reflected in EUROMOD). The main limitation arises from
possible changes in other incomes than labour market ones as well as to possible
changes in the labour market or possible changes in the link between employment
situation taken into account and related incomes.
The example below presents results for a selection of Member States for the period
2010-12. They highlight an increase in median incomes in EE, LT and LV, linked to the
improvement of the labour market conditions, as well as an overall stability in ES, IT,
PT and RO and a sharp decline in EL. In EE, LV and LT, the increase in medium
incomes tends to translate into an increase in the poverty rate, since poor people
would not benefit to the same extent of increases in incomes. In EL, the sharp decline
in incomes would translate into an increase of poverty, with more modest incomes
being relatively more affected. At the same time, an increase in the risk of poverty
among children and the elderly also reflects measures taken to adjust (either freeze or
reduce) some benefits (such as child benefits and minimum pensions) with in
particular significant increases of poverty among children in EL, ES and PT and among
older people (EE, LV and LT).
Table 3 - Nowcasting the income distribution 2010-2012 (change since latest available SILC
wave)
Estonia
Greece
Spain
Italy
Latvia
Lithuania
Portugal
Romania
Period
(income
years)
2010-12
2010-12
2010-12
2010-12
2010-12
2010-12
2010-12
2010-12
Median
(%)
+14%
-20%
-3%
+2%
+16%
+10%
-3%
+2%
Gini
(ppts)
-0.4
+0.4
+0.5
+0.2
+0.5
-0.4
-1.4
-0.6
AROP
(all)
(ppts)
+0.8
+0.8
+0.4
-0.3
+0.1
+1.8
-0.6
0.0
AROP
(18-)
(ppts)
-2
+3.7
+1.5
-0.2
-0.8
+4.2
+0.7
+0.1
AROP
(65+)
(ppts)
+10.3
-10.2
-2.8
-0.5
+4.2
+2.4
-3.6
-0.4
Source: Euromod estimates on the basis of SILC 2008 data (2007 incomes), Navicke and alii (2013). AROP: at-risk-ofpoverty rate (60 % of the median).
Box 3 - Nowcasting poverty
The method uses the micro-simulation model Euromod to adjust market incomes with
available information about their developments (wages, prices, etc.) and simulates the
effects of changes to the design of the tax and benefit system until 2012 (level of
benefit, duration, conditionality, etc.). Further data adjustments are made to account
for specific labour market developments between 20076 and 2012 (e.g. increase in
6
The EUROMOD model is currently being updated to refer to the latest SILC data available
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unemployment), but no account is made of demographic and other compositional
changes (see Navicke and alii 2013).
This methodology makes it possible to provide an estimate of changes in the
distribution of incomes and accordingly of the potential increase in the risk of poverty
and other income variables (including the poverty threshold) for the total population
and for specific sub-groups. Testing the method on past developments where SILC
data are available (income years 2007-2010) shows that the method allows identifying
nearly all inflexions in the changes of the median incomes and provides estimates of
changes of poverty rates within the confidence intervals of the SILC survey. This
methodology also allows providing estimates of the contribution of different factors to
the overall change, e.g. worsening labour market conditions or changes in the tax and
benefit system.
2.2 Impact of austerity measures on the income distribution
The economic crisis and the austerity measures to counter the subsequent
government budget deficits are inevitably affecting income poverty and inequality.
Until detailed data become available, it is very difficult to establish the scale of this
effect across countries and even then, it will be difficult to distinguish the direct effect
of the crisis from that of the policy responses to it. However, updated results from the
EUROMOD micro-simulation model allow illustrating the impact of some austerity
measures on households’ incomes in nine countries (Avram et al. 2012).
Evidence from past consolidation episodes
A recent IMF assessment indicates that based on observed fiscal consolidation
episodes in the past (over the period 1980–2010 in some OECD countries) a 1
percentage point of GDP consolidation is associated with an increase of about 0.6 % in
inequality of disposable income (as measured by the Gini coefficient) in the following
year, also suggesting that the cumulative impact peaks after five to six years and
fades after the tenth year (IMF 2012). Ahren et al. (2011) provide evidence that the
distributional impact of financial crisis and fiscal consolidation varies depending on
institutional setting and in particular is smoothed by a more progressive the tax
system, a more developed welfare system and notably higher EPL and levels of
unemployment benefits.
Bastagli et al. (2012) highlight that the mix of tax and spending measures during past
consolidation episodes in advanced economies (based on available literature) has been
an important determinant of the impact of consolidation on income inequality, and in
particular protecting the most progressive benefits. In this respect they identify three
levers: greater reliance on more progressive measures (which can obviate the need
for large cuts in social transfers), removing opportunities for tax avoidance and
broadening the scope for expenditures reform (including in particular military spending
and subsidies including tax expenditures and public sector wages). Rawdanowicz et al.
(2013) also underline that there is scope to balance current consolidation efforts in
favour of more equity with only limited adverse impact on potential growth, such as
through reducing tax expenditures, raising taxes on immovable property, increases in
the retirement age or raising efficiency in education and health-care.
Size of austerity packages modelled and overall effects of the crisis on
household income
The economic and financial crisis and subsequent fiscal consolidation measures have
translated into an overall stagnation of real gross household disposable income since
2008 on average in the EU, with very significant declines in a number of Member
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States and increases in only a few ones. The latest results from EUROMOD (Avram et
al. 2012) enable an assessment of the contribution of austerity packages to changes
in household income in some Member States where it declined particularly sharply (EL,
LV, LT, RO, ES, PT, EE and IT) but also in the UK where it slightly increased over the
period (see Chart).
EUROMOD results focus on the specific impact of fiscal consolidation measures
implemented after the 2008 economic downturn and up to mid-2012. Avram et al.
(2012) provide for some estimate of a set of measures introduced with explicit budget
consolidation, which mainly identify measures that would have been taken anyway
(such as typically changes in indexation of benefits). This also implies that the removal
of temporary fiscal stimulus packages from the early phase of the crisis is not
considered as part of the consolidation package if these measures were presented as
temporary. Furthermore, they do not take into account the distributional impact of
the reduction of output and related increase in unemployment associated to the fiscal
consolidation, but focus on the direct impact associated with the level and composition
of consolidation packages (see for instance Bastagli et al. (2012) for a discussion of
these two effects).
The impact of austerity measures on household incomes was particularly strong in EL,
LV, ES, PT and EE and was less pronounced in LT, the UK and IT. The composition of
the austerity measures taken into account varies significantly (Chart 15), with large
contributions from cuts in pensions, increases in income taxes and reduced benefits,
as well as declines in public sector wages. Cuts in public pensions have been
particularly significant in RO and PT, and to a lesser extent in EE and EL. Increases in
income tax were important in EL and ES, and in terms of the share of the total, also in
IT and the UK. Cuts in non-means-tested benefits were relatively large in LT and LV,
while there were also cuts in means-tested benefits in PT and the UK.7 Pay cuts for
public sector workers (net of taxes and contributions) represent a large share of the
consolidation effort in EL, LV and PT and a somewhat smaller share in RO and ES while
increases in social contributions are important in EE and LV and, in terms of share, in
the UK.8
It should, however, be noted that this only partly reflects the scale of the fiscal
consolidation efforts. In some countries, measures with no direct impact on household
income may have played a large role — such as those affecting employers or cuts in
public services. Furthermore, some measures may have already expired during the
period considered (by mid-2012), e.g. in EE, EL, LV and LT, while some countries may
have planned further adjustments after mid-2012 (e.g. the UK).
7
In PT and the UK, the negative effect shown reflects both the effect of cuts in entitlements and the effect
of increases in the numbers of beneficiaries resulting from cuts in other incomes.
8
There are interactions between pension and benefit cuts and income tax (and in some countries, social
contributions) payable on these benefits. The figures for income tax increases are net of reductions due to
the decreased tax base in these respects. The net effect is positive in RO where there were no
consolidation-related changes to income tax.
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Chart 15 — Change in real GHDI 2008-2012 and contribution of austerity packages to change in
households incomes
Sources: AMECO (2012 is a forecast and 2011 provisional, ** available until 2010 and * until 2011) and Avram and alii
(2012) (cumulated impact of austerity measures on households disposable incomes). Notes: On the left graph, Member
States covered in Avram and alii (2012) are represented with darker bars; the right chart shows the effects of simulated
household income-based fiscal consolidation measures in place from 2008 to 2012 as a percentage of total household
disposable income, by type of policy (excluding VAT). The field of GHDI from national accounts and household incomes
from EUROMOD micro-simulation models may differ so that direct comparisons are to be treated with caution.
Effects of changes to direct tax, cash benefits and public sector pay
The analysis of the effects of the austerity packages introduced in nine of the
countries where attempts to reduce budgets deficit have been greatest shows that
they have had very different distributional implications (see Chart 16). There are
significant differences among Member States as regards the change in income across
the distribution resulting from each of the different types of policy measures that have
a direct effect on household disposable income and hence income inequality (direct
taxes and social contributions, cash benefits and pensions, and public sector pay).
Even for the same type of policy measure, the distributional impact can vary,
depending on the specific changes introduced and the underlying income distribution.
In Spain, Latvia and Romania, the better-off lose a slightly higher proportion of their
incomes than the poor as a result of the consolidation measures modelled (additional
information from Callan et alii (2012), indicates that similar results are observed in
Ireland for the period 2008-2012, including a regressive impact of 2012 changes). In
PT and EL, the burden of fiscal consolidation falls more heavily on the poor and the
rich than it does on those on middle incomes, showing some inverted U-shape pattern.
The UK and IT show more mildly progressive and nearly proportional changes of
incomes over the income distribution. While the effect of consolidation measures can
be labelled progressive, a proportional income drop may actually affect the living
standards of those already in lower income brackets more severely. At the other
extreme, in EE and LT, fiscal consolidation measures have had a regressive impact.
The overall progressive effect shown for EL, LV, RO and to a lesser extent IT is
primarily due to the design of the cuts in public-sector pay focused on the higher end.
In ES and UK it is mainly driven by progressive tax changes, which are also significant
in EL. It can be noted that additional elements on the changes in the UK announced up
to 2015 (rather than 2012 as in this analysis) shows a more regressive picture than
indicated here.9
9
Brewer M., Browne J. and Joyce R. (2011), "Child and working-age poverty from 2010 to 2020", IFS Commentary C121.
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Chart 16 - Percentage change in household disposable income by income level
0
0
-2
-2
-4
-6
-4
-8
-6
-10
1
2
3
4
5
EE
6
7
8
9
1
10
2
3
4
5
6
UK
LT
0
7
8
9
10
7
8
9
10
IT
0
-2
-2
-4
-4
-6
-6
-8
-10
-8
-12
-10
-14
-16
-12
-18
-14
-20
1
2
3
4
5
PT
6
EL
7
8
9
10
-16
1
2
3
4
5
RO
6
ES
LV
Source: EUROMOD. Note the field covered here includes changes in pension and non-pension benefits, changes in SICs and
income taxes and changes in public sector wages (net of taxes and SICs) and changes in VAT. Changes in VAT are also
included though they do not impact directly incomes but indirectly through changes in price levels.
… the same types of tools can have different distributional impacts
depending on their design
The overall progressive effect shown for LV, ES and RO reflects different types of
effects, while the regressive pattern observed in EE reflects mainly changes introduced
in the indexation of pension benefits, and the one observed in Lithuania reflects
mainly changes in VAT.
The overall progressiveness of the effects has been mainly achieved by changes in the
design of non-means-tested benefits and of public pensions, as well as cuts in public
wages. Changes in the design of non-pension benefits were generally progressive,
notably in LV and RO, while they were regressive in PT (resulting from the freeze of
means-tested benefits) and the UK. The design of changes in public pensions was
progressive in EL and PT (where downwards changes have been limited for lower
levels of pensions) and regressive in EE and to a lesser extent in Latvia (reflecting
changes in indexation of benefits) and ES. Changes in public wages were generally
progressive due to their design generally targeting higher incomes.
Changes in SICs (Social insurance contributions) and income taxes were generally
merely proportional over the income distribution with more progressive patterns in the
UK, ES and EL, reflecting the differences in income tax changes over the income
distribution and the level and ceilings associated to changes of social contributions.
Increases in VAT generally had regressive effects. Changes in the main VAT rate as
part of the consolidation packages ranged from 1 pps (IT) to 5 pps (ES and RO) and
the distributional effect appears to be regressive (see Chart 17). The differences
across countries are linked to differences in the structure of VAT, consumption
patterns and savings rates (which generally increases along the income distribution),
as well as differences in increases in the standard rate of VAT. In several countries
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Social protection budgets in the crisis in the EU
(such as ES, LT, RO and the UK) the effects on household incomes are of a similar
magnitude to the other fiscal consolidation measures.
Chart 17 – Contribution by type of measures to change in household disposable income by
income deciles
Source: EUROMOD. Note the field covered here includes changes in pension and non-pension benefits, changes in SICs and
income taxes and changes in public sector wages (net of taxes and SICs). Changes in VAT are presented in a different
pattern since they do not impact directly incomes but price levels.
The overall regressive impact in EE was actually driven by the reforms in public
pensions (following a change in the indexation formula which allows lower indexation
in case of wages declines, while the increase of means-tested social assistance
compensates partly the effect for the first decile), while in LT, it mainly reflects
changes in VAT.
In EL, the U shape pattern reflects a combination of progressive changes in public
pensions, as well as in taxes (though not for the first decile) and public sector wages
and regressive changes in VAT. In PT, the U shape reflects mainly progressive changes
in pensions and public wages, but regressive changes in non-pension benefits.
In the UK the slightly progressive pattern reflects regressive changes in non-pension
benefits and VAT and progressive changes in taxes. It can be noted that changes
announced up to 2015 (rather than 2012 as in this analysis) show a more regressive
picture.10 In IT, the slightly progressive pattern reflects slightly regressive changes in
taxes and VAT and progressive changes in public pensions and public sector wages.
In ES, the progressive overall change is mainly driven by progressive tax cuts and to a
lesser extent progressive cuts in public sector wages, while changes in public pensions
were regressive. In LV, it reflects progressive changes in non-pension benefits and
public sector wages, while changes in public pensions and VAT were regressive. In RO,
10
Brewer M., Browne J. and Joyce R. (2011), "Child and working-age poverty from 2010 to 2020", IFS Commentary C121.
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the progressive pattern reflects mainly progressive changes in public pensions, while
changes in taxes and VAT were regressive.
Chart 18 – Contribution of benefits and of other measures to change in household disposable
income by income deciles
Source: EUROMOD. Note the field covered here includes changes in pension and non-pension benefits, changes in SICs and
income taxes and changes in public sector wages (net of taxes and SICs). Changes in VAT are presented in a different
pattern since they do not impact directly incomes but price levels.
Impact of fiscal consolidation packages can also be different across age
groups
The burden of fiscal consolidation can also be shared differently across different types
of household. Across countries the effects are generally similar for children and older
people, with two main exceptions: households with children are more affected in LT
and less in RO. At low income levels, families with children (in ES, UK) or families with
elderly people (in EL, PT) are better protected. This partly reflects changes in tax and
benefits, notably for children or elderly people, such as changes in child tax credits or
pensions. They are also partly driven by the composition of households across the
income distributions.
These results also help to shed some light on changes introduced between mid-2011
and mid-2012. In EE, these measures tended to have a regressive impact notably due
to impacts on income support payments and pensions.11 In PT and EL they appear to
have had a progressive impact (to some extent even reversing the initial regressive
pattern that was appearing from former available assessments for PT and a stronger
progressive impact for EL), while in ES these changes appear to have a mostly neutral
impact on the income distribution.
11
Callan T. Keane C., Savage, M. and Walsh J. (2012), "Distributional impact of tax, welfare and public sector pay policies:
2009-2012", special article in Quarterly Economic Commentary, Winter 2011/Spring 2012, ESRI.
May 2013 I
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Social Europe
Social protection budgets in the crisis in the EU
Conclusion
The paper highlights that while social spending played a prominent role in
compensating households' income losses in the early phase of the crisis (until 2009),
and helped stabilise the economy, this impact has been weakening since 2010. After
an initial increase in the first year of the crisis, social expenditure levelled off in 2010
and declined in 2011 and 2012, sometimes in countries where unemployment kept
rising. This reduction of social spending was much stronger than in past periods of
below-par performance, partly reflecting the exceptional need for fiscal consolidation
in the context of the euro crisis. It neutralised the economic stabilisation function of
social protection systems in many Member States.
Changes to the tax and benefits systems and cuts in public sector wages have led to
significant reductions in the level of real household incomes, sometimes putting a
heavy strain on the living standards of low income households. The analysis shows
that spending cuts and tax hikes impacted differently on high and low income
households depending on the design of measures and that a careful design is crucial
to avoid that the more modest households and the poorest are more affected, as has
been the case in a few countries.
May 2013 I
36
Social Europe
Social protection budgets in the crisis in the EU
REFERENCES
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Loses (and Gains) from Macroeconomic Shocks”, OECD Economics Department
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Publishing.
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org/10.1787/5kg2d2d4pbf0-en
Bastagli, F., Coady D., Gupta S. (2012), "Income inequality and fiscal policy", IMF
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Brewer M., Browne J. and Joyce R. (2011), "Child and working-age poverty from 2010
to 2020", IFS Commentary C121.
Callan T. Keane C., Savage, M. and Walsh J. (2012), "Distributional impact of tax,
welfare and public sector pay policies: 2009-2012", special article in Quarterly
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Rossi A. (2010), The production function methodology for calculating potential growth
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Dolls, M., C. Fuest and A. Peichl (2009), ‘Automatic Stabilizers and Economic Crisis:
US vs. Europe’, IZA DP n° 4310. http://ftp.iza.org/dp4310.pdf
European Commission (2013), Employment and Social Developments in Europe, 2012.
ILO (2010), World Social Security Report 2010/11.
IMF (2012), Fiscal Monitor October 2012, Taking Stock, A progress report on fiscal
adjustment.
Eurostat (2007), Manual on sources and methods for the compilation of COFOG
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Musgrave, R. A. (1959) The Theory of Public Finance: A Study in Public Economy.
Navicke J., Rastrigina O., Sutherland H. (2013), "Using Euromod to "nowcast" poverty
risk in the European Union", Eurostat, forthcoming.
OECD (2012a), Social spending after the crisis, social expenditure SOCX) data update
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OECD (2012b), Health at a Glance: Europe 2012.
http://www.oecd.org/els/health-systems/HealthAtAGlanceEurope2012.pdf
OECD (2013), OECD Economic surveys China.
Ozdemir E. and Ward T. (2012), " The social effects of labour market developments in
the EU in the crisis", Research note 07/2012, Social Situation Observatory.
May 2013 I
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Social protection budgets in the crisis in the EU
Rawdanowicz L., Wurzel E., Chistensen K. (2013), The equity implications of fiscal
consolidation, OECD, Economics department working paper, n°1013.
World Bank (2012), Golden Growth report.
May 2013 I
38
Social Europe
Social protection budgets in the crisis in the EU
ANNEXES – detailed tables.
Table A1 – Public social protection expenditures in Europe, the OECD and the world in the mid
2000s
Social
Health
Total social protection
GDP
expenditures
expenditures
expenditures
CC
PPS
CC
PPS
CC
PPS
CC
PPS
Share in GDP
EU27
EUROZONE
OECD
WORLD
-
-
18%
18%
13%
11%
17%
18%
12%
9%
7%
7%
7%
6%
7%
7%
6%
5%
25%
25%
19%
16%
24%
25%
19%
14%
100
110
106
32
100
133
78
16
100
115
76
17
100
135
108
22
100
114
101
23
100
133
86
18
100
115
83
19
Levels per capita (100 EU27)
EU27
EUROZONE
OECD
WORLD
100
132
113
28
Geographical repartition
EU27
28%
24%
47%
44%
34%
33%
42%
40%
EUROZONE
24%
17%
41%
33%
30%
25%
37%
30%
OECD
74%
100
%
60%
100
%
87%
79%
88%
81%
87%
79%
100%
100%
100%
100%
100%
100%
WORLD
Source – ILO. DG EMPL calculations. Note : CC for common currency (which can be for instance either $ or €) ; PPS for
Purchasing Power Parity which provide some correction for the different in relative prices in the different zones. Public social
expenditures are provided in gross terms, not reflecting differences in tax systems. Calculations reflect 175 countries for
the world for PPS and 170 for CC.
May 2013 I
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Social Europe
Social protection budgets in the crisis in the EU
Table A2 – deviation from trend of social protection expenditures – past recessions
country
year of
recession
(N)
N-2
N-1
N
N+1
N+2
N+3
AT
1993
-2.53%
-0.98%
2.68%
3.03%
3.74%
2.59%
AT
2003
-1.11%
-0.50%
0.10%
-1.06%
-1.58%
-0.67%
BE
1993
-0.61%
1.32%
0.25%
0.64%
0.74%
BE
1998
0.74%
-0.44%
1.36%
0.41%
-0.73%
-2.05%
-1.89%
BE
2003
-1.89%
-0.26%
0.89%
1.01%
-0.01%
-1.15%
CY
2003
-5.47%
-3.08%
1.68%
2.66%
1.32%
DE
1993
-4.39%
-0.89%
2.44%
1.23%
-0.16%
1.44%
3.17%
DE
1996
-2.33%
0.57%
-0.39%
-0.53%
1.03%
DE
2003
0.41%
2.06%
3.27%
1.25%
0.29%
-1.05%
DK
2003
-1.50%
-0.88%
1.49%
0.28%
-0.86%
EL
2002
-2.48%
-3.16%
0.12%
4.68%
1.19%
0.73%
3.06%
1.39%
-1.00%
-2.87%
-1.46%
1.32%
FI
1991
NA
-5.08%
3.96%
1.11%
1.28%
2.05%
FI
2002
-3.80%
-3.53%
-1.06%
0.66%
1.08%
FR
1993
-0.47%
0.86%
0.41%
0.77%
IE
2004
0.96%
IT
1993
LU
0.94%
1.70%
0.83%
0.82%
-0.45%
-1.45%
1.76%
0.92%
-0.74%
0.00%
3.35%
1.62%
3.51%
1.41%
0.10%
-4.71%
-2.92%
2003
-1.66%
0.41%
2.49%
1.40%
1.01%
-1.46%
LV
1999
-4.87%
1.39%
0.41%
-4.85%
-3.76%
MT
2001
0.74%
0.66%
8.71%
2.34%
-0.04%
-1.21%
-1.56%
NL
1993
0.31%
3.05%
NL
2002
-1.54%
PL
2001
PT
1.67%
0.14%
-1.97%
-1.19%
4.21%
0.27%
0.51%
-1.54%
-4.05%
2.64%
-1.14%
0.16%
-1.46%
-0.60%
-2.98%
1993
2.44%
0.37%
0.58%
1.42%
-3.17%
-3.98%
PT
2003
0.65%
0.44%
1.41%
1.78%
3.68%
RO
1999
3.83%
-5.18%
4.76%
-8.92%
-5.63%
0.76%
13.01%
May 2013 I
N+4
1.77%
0.81%
0.44%
0.26%
0.92%
3.35%
3.44%
0.01%
2.28%
4.07%
2.71%
1.94%
0.95%
2.62%
3.65%
1.15%
8.19%
40
Social Europe
Social protection budgets in the crisis in the EU
SE
2002
-3.04%
-1.03%
1.08%
2.65%
1.41%
1.44%
SK
1999
14.86%
16.95%
4.52%
-3.45%
-3.20%
0.80%
2.18%
9.72%
UK
1991
-4.55%
1.27%
5.07%
4.16%
2.82%
1.07%
Source: National accounts DG EMPL calculations. NA for not available. / for not applicable. Note: National accounts data not
available for SE 1991, ES 1992, EL, LU and IE 1993, MT 1995, BG and PL 1996, the recession of 2012 has not been taken
into account since 2012 data are not available. For DE 1993, GDP deflator was used instead of HICP.
Table A3 – deviation from trend of social protection expenditures – current recession
year of
recession (N)
N-2
N-1
N
N+1
N+2
N+3
AT
2009
-0.81%
-0.67%
2.29%
2.01%
-1.37%
NA
BE
2009
-0.92%
-0.96%
2.67%
0.82%
-0.26%
NA
BG
2009
-4.43%
-1.96%
1.01%
2.89%
-0.58%
-1.04%
CZ
2009
3.88%
-0.30%
4.10%
1.71%
-1.04%
-5.06%
DE
2009
-3.06%
-3.73%
1.32%
1.84%
-0.32%
NA
DK
2009
-1.39%
-2.19%
2.26%
3.15%
-0.05%
-1.64%
EE
2009
5.70%
10.73%
12.08%
1.87%
-4.76%
-7.54%
EL
2009
6.32%
10.79%
13.67%
2.09%
-5.83%
-13.66%
ES
2009
0.04%
2.10%
8.66%
5.32%
-0.89%
-6.91%
FI
2009
-0.27%
-0.74%
1.97%
1.76%
0.25%
-1.10%
FR
2009
0.47%
-1.16%
1.53%
1.13%
-0.17%
-1.26%
HU
2009
4.62%
6.32%
2.31%
-3.14%
-5.73%
-9.27%
IE
2009
3.35%
3.44%
7.22%
-0.02%
-6.22%
NA
IT
2009
1.18%
0.55%
2.59%
1.88%
-1.23%
-4.14%
LT
2009
5.58%
17.53%
16.41%
1.50%
-5.44%
-11.47%
LU
2009
-2.28%
-1.95%
4.00%
2.21%
-1.24%
-0.92%
LV
2009
6.06%
11.73%
7.90%
0.66%
-4.81%
-7.88%
MT
2009
-1.51%
0.63%
1.18%
2.24%
1.13%
NA
NL
2009
0.77%
0.50%
3.38%
3.25%
0.70%
-2.71%
PT
2009
-1.15%
-1.72%
6.13%
-2.35%
-8.34%
RO
2010
16.85%
15.35%
4.92%
5.24%
11.73%
NA
NA
SE
2009
1.47%
0.22%
0.62%
-0.84%
-1.48%
-0.70%
SI
2009
-2.14%
-0.25%
2.99%
2.55%
1.26%
-4.10%
SK
2009
0.23%
1.88%
6.88%
8.78%
0.40%
-3.38%
UK
2009
1.29%
1.29%
4.69%
2.22%
-2.22%
-3.81%
country
Source : National accounts, DG EMPL calculations. NA for not available. Note: for PL, the recession of 2012 has not been
taken into account since 2012 data are not available.
May 2013 I
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Social Europe
Social protection budgets in the crisis in the EU
KE-EW-13-001-EN-N
European Commission
Social protection budgets in the crisis in the EU – DG EMPL Working Paper
01/2013
Luxembourg: Publications Office of the European Union, 2013
2013 — 42 pp. — 21 × 29.7 cm
ISBN 978-92-79-29813-4
ISSN 1977-4125
doi: 10.2767/47052
This publication is available in electronic format in English.
May 2013 I
42