Effects of austerity measures of six EU countries


We compare the distributional effects of austerity measures that have been introduced in 6 EU countries Estonia, Ireland, Greece, Spain, Portugal and the UK  in the period of large government budget deficits following the 2007-8 financial crisis and subsequent economic downturn.

The distributional effect of austerity measuresThe six countries have chosen different policy mixes to achieve varying degrees of fiscal consolidation.

Of the six countries analysed in this paper, three were running budget surpluses in 2007 and another two had budget deficits around the Stability and Growth Pact limit of 3% of GDP.

By 2009 only Estonia had a deficit below that limit. The other five had budget deficits much higher than the EU-27 average and around or above 10% of

Our analysis addresses the question of how reforms to direct personal taxes, cash benefits and public sector pay have been distributed across income groups and types of household, and how they have impacted on risk of poverty.

We also consider the incidence of changes to some employer costs (social contributions) and increases in VAT. across the household income distribution and discuss the challenge of measuring the incidence of cuts in in-kind benefits and public services.

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Which measures count as austerity measures?

While mostly involving tax increases and cuts in social benefits and public sector pay, they also include increases in some benefits or reductions in taxes for certain groups to compensate or alleviate the impact of other measures.

Which measures can be simulated?

In most countries austerity measures take the form of some combination of:

1)      reductions in cash benefits and public pensions:

2)      increases in direct taxes and contributions:

3)      increases in indirect taxes:

4)      reductions in public services that have an indirect impact on the welfare of households using them

5)      reductions in public expenditure that cannot be allocated to households (e.g. pure public goods like defence spending) and increases in taxes that are not straightforward to allocate to households:

6)      cuts in public sectorpay

7)      cuts in public sector employment.

Summary of policy changes in each country.


·         Increased social insurance contributions (employer, employee, self-employed)

·         The suspension of credited and employee contributions to the 2r"3 pension pillar11

·         Reductions in income tax deductions

·         Increase in the standard rate of vat Public sector pay cuts


In broad terms, these include the following.

·         Lowering income tax bands and reduction in tax credits

·         The introduction of a new income levy

·         Increased social insurance contributions (employee, self-employed)

·         Cuts in all means-tested and universal cash benefits and a freeze in contributory benefits

·         Public sector pay cuts


The main policy changes that are simulated in this paper are as follows:

·         Increase in top income tax rates (partly compensated by decreasing tax rates for lower bandsj. changes in tax credits and allowances and broadening of the income tax base

·         The introduction of a one-off additional tax on incomes and a special tax on pensions

·         Cuts in public pensions

·         Public sector pay cuts

·         Increases in the standard and reduced rates of VAT

Changes not captured in our simulations include increases in excise duties as well as (minor) reductions in tax credits.


The following policy changes have been simulated.

·         The introduction of additional income tax rates for top earners

·         Cuts in. and freezing of. cash benefits

·         Freezing of public pensions

·         Increase in the standard rate of vat

·         Public sector pay cuts

In addition there were the following measures that are not simulated: VAT reduced rates and excise duties were increased and some regional governments eliminated or scaled-down their benefits and tax credits.


·         Increase in income tax rates, introduction of an additional income tax rate for top
earners, and reduction of tax credits

·         Freezing of nearly all insurance benefits and pensions and reduction of means-tested unemployment assistance, family benefit and social assistance.

·         Increase in the standard rate of vat

·         Public sector pay cuts

In addition there were the following measures that are not simulated here: VAT reduced rates and exdse duties were increased.

United Kingdom

The main austerity measures introduced between 2009 and 2011 which are simulated are as follows:

·         Increased social insurance contributions (employee, self-employed, employer)

·         The introduction of an additional top income tax rate and withdrawal of the personal allowance at high incomes

·         Cuts in some cash benefits and tax credits and increases in others  Increase in the standard rate of vat

·         Freezing of local tax (Council Tax).

Other policy changes which could not be simulated include certain cuts in cash benefits.

The effects of austerity measures

Comparing across countries, we can see that the relative importance of the different types of measure varies greatly.

Pay cuts on public sector workers (net of taxes and contributions) are substantial:in Ireland, Greece and Spain, amounting to between 1 and 2 percent of total household disposable income and. in the case of Greece, more than half of the net overall effect shown in Figure 2.

Increases in social insurance contributions are important in Ireland (only on workers). Estonia and the UK (workers and employers).

Income tax increases considerably in all countries (except Greece), and particularly in Ireland. Portugal and Spain, where the increases are equivalent to more than 1 percent of total disposable income. In Greece income tax and employee contributions decrease after the austerity measures. This is to a small extent due to taxes and contributions collected from pensions which were reduced. But it Is mainly due to the fact that the reform of the income tax schedule, as part of the austerity package, itself lead to a reduction in tax revenue.

Overall, expenditure on benefits and pensions is reduced in all countries, particularly in Ireland. Greece and Portugal. Benefit and pension reductions are less important in aggregate in Estonia and the UK.

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Austerity measure, by income decile group

Figure 3 shows how the austerity measures are distributed by deciles of equivalised disposable income.

On this basis, in all countries, a larger proportion of the fiscal consolidation is assumed by higher income households than lower income households.

This is only to be expected since the richer households have a disproportionate share of total income in each country, so even if taxes were levied at a uniform rate, these households would pay more. In particular, we find that the richest 10% of the population accounts for between 24% (in Spain) and 54% (in the UK) of the overall increased burden including that due to employer and credited contributions. The share effectively paid by those in the upper half of the income distribution ranges from 70% in Portugal to 93% in Greece.

Nevertheless, the contribution of lower income households to the fiscal consolidation effort is not negligible. That is especially evident in Portugal, where the poorest three deciles each contribute about 6% of the overall burden.

Here we can see that in Greece, the effect of pay cuts is concentrated in the upper part of income distribution, while cuts in benefits (mainly pensions) are more equally spread. Most income groups actually benefit from the income tax changes and it is only in the top decile group that the tax burden rises.

In the UK. the effect of increases in contributions shows up for the upper half of the
distribution while the increase of income tax only affects the very top of the distribution. The reductions in the middle and bottom of the distribution are almost all due to benefit cuts.

In Spain. Portugal and Ireland, benefits and pensions have an effect at all points
across the distribution, while the effects of public wage cuts and the increase of income tax are larger for richer deciles (there are no changes to social insurance contributions in Spain).

In Estonia, where the main effect is from pay related elements: employer and
employee contribution increases, income tax and public wage cuts, a higher share of which comes from the top part of the distribution. The effect from benefit cuts is negligible.

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Distributional effects on household incomes

Although better off households pay a larger share, as noted above this Is only to be expected, and it does not signify that the burden of the measures in relation to their abiity to pay is also larger.

The share of the total cost of the measures paid by higher and lower income groups, therefore, tells us nothing about whether the distribution of the cost is equitable or not.

In order to account for the greater ability to pay of richer households Figure 4 shows the average proportional change in household disposable income by decile group caused by the austerity measures that have a direct bearing on household income. The effects of changes to employer and credited contributions are not included here.

The results show that the reduction in income due to the measures is relatively flat across the income distribution in Estonia and Spain (i.e. each decile groups pays roughly the same proportion of income).

In the UK the effect is also fairly uniform up to the 9" decile group, but much larger at the top. The distribution is more uneven in Ireland where the proportional reduction in income is larger at the bottom as well as. more especially, at the top. Pensioners, who are concentrated in the middle decile groups, have [lad their income relatively well protected.

Portugal is the only country with a clearly regressive distribution, with percentage losses that are considerably larger in the first and second decile groups than higher up the distribution.

The opposite is the case in Greece, where percentages losses are largest for the top decile groups and those at the bottom pay relatively little.

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Austerity measures by type of measure


Figure 5 distinguishes the proportional effect on household income in each decile group by the three main types of change: those in benefits and pensions, those in income taxes and contributions, and those in public sector pay.

Benefits and pensions

Cuts to benefits and pensions have a particularly large effect on households in the lower part of the income distribution in Portugal. Ireland and Spain.

Interestingly, results are different in the case of Greece, indicating that the pension cuts do not have much effect on the income of poorer households but are mainly concentrated in the upper middle part of the distribution.

The effect is relatively small and similar across the bottom two thirds of income distribution in Estonia and the UK.

Income taxes and contributions

The pattern of the distribution of tax and contribution changes is quite different.

In Ireland and to a lesser extent in Portugal the reductions in disposable income due to tax and contribution increases are larger in the upper part of the distribution.

The same applies in the UK but concentrated in the top decile group. (The reduction in tax in the bottom decile group is due to the freezing of local tax.)

While in Estonia, the reduction is larger in the first decile group and then relatively flat and declining in the top half of the distribution, in Spain it describes a U-shape with households in the upper middle part of the income distribution most affected.

In Greece, most people actually gain from the income tax changes, especially in the middle of the distribution, and it is only in the top decile group, that the tax burden rises.

Public sector pay cuts

Finally, public sector pay cuts have a larger effect in the upper part of the income distribution in all the countries where these apply, but the gradient varies, with the strongest effect in Ireland. (These are shown net of taxes and contributions on the reduction - i.e. they take account of the fact that the employees concerned pay less tax because they seam less - which probably explains why the effect is not stronger in the top income groups where taxes are higher.)!

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