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Database FISCAL STIMULUS – STABILIZATION OF ECONOMIC ACTIVITY IN THE EU 2.9 percent of annual GDP for 2009 and 2010 (compared to 2008). All in all the fiscal stimulus measures have been nearly evenly split across the two years with 1.5 percent of GDP in 2009 and 1.4 percent of GDP in 2010 (European Commission 2010). In response to the current crises, the European Economic Recovery Plan (EERP) was launched by the European Commission in December 2008. The strategic aims of the EERP have been: “to help Europe to prepare to take advantage when growth returns; speed up the shift towards a low carbon economy; lessen the human cost of the economic downturn and its impact on the most vulnerable” (European Commission 2009, 16). To reach these aims, the EERP is based on two key pillars which are countercyclical macroeconomic responses to the crises (European Commission 2008): In the EERP the European Commission has made proposals for choosing the instruments for fiscal stimulus from a range of options depending on country-specific circumstances. One of these proposals is that the fiscal stimulus should mix revenue and expenditure instruments. Because of the different situations of member states the EERP have taken the following measures into account: • Support to household’s purchasing power. Reduction in taxes and social security contributions and direct aid aimed at households, such as income support for households, lowering taxes for households (incl. energy subsidies), supporting housing or property markets and decreasing VAT. • Increased spending on labour market policies, such as wage subsidies and intensifying active labour market policies. • Reduction of taxes, social security contributions and other measures directly aimed at business, such as tax breaks, earlier payment of VAT returns, facilitating company financing, state aid and stepping up export promotion. • Increased public investment, such as public investment in infrastructure, supporting investment aimed at greening the economy and/or improving energy efficiency. 1. The first pillar is a major injection of purchasing power into the economy, to boost demand and stimulate confidence. The EERP have thus called for a timely, targeted and temporary fiscal stimulus of around EUR 200 billion or 1.5 percent of EU GDP, within both national budgets (around EUR 170 billion, 1.2 percent of GDP) and EU and European Investment Bank budgets (around EUR 30 billion, 0.3 percent of GDP). 2. The second pillar is grounded in the Lisbon strategy and based on the need to direct short-term action towards implementing structural reforms aimed at raising potential growth, promoting resilience, and reinforcing Europe’s competitiveness in the long term. Table 1 and 2 summarize the fiscal stimulus measures adopted by the EU member states in 2009. The actual budgetary stimulus packages introduced varied across member states, in part due to the fiscal space available. While some countries were in a position to provide substantial support to their economies as they entered the recession with a strong fiscal position, others were and are in a more difficult situation because of less determined consolidation efforts in the past (European Commission 2010). At the same time, the EERP acknowledged that not all member states are in the same position. The fiscal room for manoeuvre differed – some countries have more leeway than others; in particular external and internal imbalances exerted more pressure on some countries than others. In this respect, the EERP clearly indicated that for those member states that are facing significant external and internal imbalances, budgetary policy should essentially aim at correcting these imbalances (European Commission 2009). As the tables indicate the great majority of member states have adopted increases in social expenditure. Only three countries (namely Hungary, Ireland and Poland) have actually reduced social expenditure. Other countries tried to stimulate their economies by reducing the VAT rate – and many sought to offset the costs of a stimulus elsewhere by increasing the rate. Many other countries have also reduced income taxes and other taxes on individuals. The fiscal stimulus was introduced as an additional measure, over and above the important role automatic stabilizers play in the EU, to provide public support to the financial sector. Overall, in gross terms (before taking into account fiscal consolidation measures implemented in various countries at the same time) the fiscal stimulus measures, taken or planned, by member states amount to a total of 61 CESifo DICE Report 3/2010 Database 2010, 89). However, once economic growth resumes on a durable basis, such measures if left in place would add up according to the European Commission (2010) to an intolerable burden for public finances. Fiscal stimulus measures could also hinder adjustment processes within and across sectors by subsidizing existing firms and specific productions. As regards to the European Commission (2010) the fiscal stimulus measures are planned to expire by 2011. Similar considerations apply to business investments. But in general, in setting fiscal stimulus packages, the governments of the member states appear to have targeted personal consumption more than business investment. While 17 countries did make reforms to business taxation, only 10 of these represented a cut, while 7 actually increased their tax taken from business (EEAG Report 2010, 84). Furthermore, many countries increased public investment or provided additional support for infrastructure spending and research. Overall, the tables suggest that there is no consensus among the EU member states on the appropriate fiscal response to the current financial crises. A. R. References CESifo Group Munich (2010), EEAG Report of the European Economy 2010. European Commission (2008), Communication from the Commission to the European Council: A European Economic Recovery Plan. In summary, these temporary measures seem to have had positive effects on employment and economic activity during the crisis, by supporting private demand and maintaining fundamentally sound activities and jobs that could otherwise have been lost (European Commission 2010, 19; EEAG Report European Commission (2009), Public Finances in EMU 2009, European Commission Directorate-General for Economic and Financial Affairs. European Commission (2010), Public Finances in EMU 2010, European Commission Directorate-General for Economic and Financial Affairs. Table 1 Fiscal stimulus measures in Europe, 2009 – tax revenue measures Personal income tax, including social contributions, capital gains tax and dividends taxes Austria Corporate income tax and other business taxes Income tax reduction (–0.7% of GDP); VAT and other indirect taxes Reduction of VAT on pharmaceuticals (–0.1% of GDP) Increased tax allowances for children (–0.1% of GDP); Other taxes Repeal of university fees (–0.1% of GDP) Tax exemptions (–0.1% of GDP); Reduction in unemployment insurance contributions (–0.1% of GDP) Belgium Flemish reduction of personal income taxes (–0.2% of GDP); VAT reduction for residential construction (–0.1% of GDP) Federal measures to reduce personal income taxes (–0.1% of GDP) Bulgaria Increase in the mandatory minimum insured income thresholds (0.7% of GDP); Reduction in the pension social contribution rate by 4% (–0.9% of GDP) Cyprus CESifo DICE Report 3/2010 Application of the reduced VAT rate on hotel accommodation (<0.1% of GDP); Reduction of the corporate tax rate for semigovernmental organizaNo dividend income from semi- tions from 25% to 10% to harmonize it with the governmental organizations one applied to private (–0.5% of GDP); enterprises (–0.2% of GDP) 62 Increase in excise rates on kerosene, coal, electricity for economic and administrative needs and cigarettes (0.3% of GDP) Increase of the health care contribution rate by 2% (0.5% of GDP); Increase of the excise duty on petrol, due to the expiration of the transitional period granted upon EU accession (0.15% of GDP) Reduction of airport landing fees levied on airline companies and cancellation of overnight stay fees levied by local authorities on hoteliers (–0.12% of GDP) Increase in property valuations for local property taxes (0.3% of GDP) Database Table 1 (continued) Personal income tax, including social contributions, capital gains tax and dividends taxes Corporate income tax and other business taxes Czech Republic Reduced social security contribution (–0.5% of GDP) Write-down of capital goods (–0.2% of GDP) Denmark Income tax cuts (–0,3% of GDP) Tax credit for companies (–0.1% of GDP) Estonia Increase in unemployment insurance contribution rate (0.3% of GDP) VAT and other indirect taxes Other taxes Increase in social tax minimum contribution basis (0.5% of GDP); Suspension of state contributions to the mandatory funded pension scheme (0.6% of GDP) Finland Increase of alcohol and tobacco excises (0.05% of GDP) Income tax cuts (–0.7% of GDP); Reduced tax on pension income (–0.1% of GDP); Increase in various tax deductibles (–0.1% of GDP) France New tax on capital gains (0.1% of GDP); Acceleration of government payments to Change in the dividend taxation corporations (–0.3% of GDP); (0.1% of GDP) Fiscal package (–0.1% of GDP) Increase of the tax on the turnover of complementary insurance and on pharmaceutical companies (0.1% of GDP) Germany Income support, incl. lower income tax (0.2% of GDP); Re-introduction of computer allowance (–0.1% of GDP); Support for private investment, incl. more favourable depreciation rules (–0.1% of GDP) Reduction of social contributions rates (–0.3% of GDP) Greece One-off supplementary tax contribution on taxpayers with annual income above EUR 60,000 (>0.1% of GDP); Increase in the advanced payment rate for enterprises to 80% from 65% (0.15% of GDP) Increase in the Tax settlement excise duties of (0.5% of GDP) tobacco and alcohol (0.15% of GDP) Introduction of a new tax on stock options, in line with rules pertaining to wage income (< 0.1% of GDP); Introduction of a tax rate of 10% on dividends; the same rate holds for capital gains from selling stocks (<0.1% of GDP) Temporary 8% tax (surcharge) on the profits of energy companies (0.1% of GDP) Hungary Ireland Introduction of a duty-free limit of succession of HUF 20 million (~EUR 70,000; 0.04% of GDP) Widening of standard rate tax band (–0.1% of GDP); Stricter rules for interest Increase in standard Introduction of related tax relief (0.1% VAT rate (0.1% of healthy levy, change of GDP); GDP); in pay related social Introduction of income levy insurance (0.5% of (0.7% of GDP); Advancing corporation Increase in excise GDP); and capital gains tax duties (0.3% of Stricter rules for interest repayment dates (0.3% of GDP) Transfer of pension lated tax relief (0.1% of GDP); fund assets (0.3% of GDP) Increase in capital gains tax GDP); rate (0.1% of GDP) Reduction of stamp duty top rate (–0.1% of GDP) 63 CESifo DICE Report 3/2010 Database Table 1 (continued) Personal income tax, including social contributions, capital gains tax and dividends taxes Corporate income tax and other business taxes VAT and other indirect taxes Corporate income tax relief (–0.1% of GDP); Italy Other taxes Intensified fighting of tax evasion/avoidance (0.1% of GDP) One-off tax on revaluation of company assets (0.2% of GDP); Taxes on energy/banking/ insurance sectors (0.3% of GDP) Latvia Increase of excise taxes on alcohol, tobacco, petrol, and certain nonalcoholic beverages (0.74% of GDP) Reduction of personal income tax, increase of minimum wage, increase of threshold for personal income tax exemption (0.63% of GDP); Maintaining the rate of social contribution accruing into the state funded pension scheme and increasing the minimum wage (0.34% of GDP); Increase of standard and reduced VAT rates (1.92% of GDP) Lithuania Reduction of personal income tax from 24 to 21% (–0.45% of GDP); Increase in excise duties on fuel, tobacco and alcohol (0.65% of GDP) Increase of corporate income tax and tax on dividends from 15% to 20% (0.4% of GDP) Luxembourg Indexation by 9% of personal income tax brackets (0.9% of GDP) Malta Replacement of the tax reduction for children with a tax bonus (0.3% of GDP) Abolition of the “droit d’apport” (tax paid on the capital of a new company or an increase in the capital of an existing one (0.3% of GDP) Widening of personal income tax bands (-0.2% of GDP) Increase in excise duty (0.3% of GDP) Motor Vehicle Licences reform (–0.1% of GDP); Environmental measure (0.1% of GDP) CESifo DICE Report 3/2010 Netherlands Reduction in social contributions (–0.3% of GDP) Accelerated depreciation for investments (–0.2% of GDP) Increase in excise duties (0.1% of GDP) Poland Personal income tax (–0.6% of GDP) Taxes on business (–0.2% of GDP) Excise duties (0.2% of GDP) Portugal Temporary reduction of social Support for firms with contributions for some selected liquidity problems groups (–0.2% of GDP) through changes in the procedures and timing of some tax payments (–0.1% of GDP) Reduction of the VAT standard rate by 1 percentagepoint (–0.15% of GDP) Lower tax burden related to housing assets (–0.1% of GDP) Romania Increase of social contribution rate (0.8% of GDP) Bringing forward the schedule to increase excise duties (0.1% of GDP) Updating the tax base for local property, bringing to the market value (0.1% of GDP) Slovak Republic Income tax (–0.2% of GDP); Excise duties on tobacco (0.2% of GDP) Changes in social contributions and capital transfers from the 2nd pension pillar (0.4% of GDP) 64 Lower health care premiums (–0.1% of GDP) Database Table 1 (continued) Personal income tax, including social contributions, capital gains tax and dividends taxes Slovenia Elimination of payroll tax (–0.6% of GDP) Corporate income tax and other business taxes VAT and other indirect taxes Other taxes Reduction of corporate Increase in excise tax rate by 1 percentage duties (0.9% of point (–0.1% of GDP); GDP) Additional investment allowance for companies(–0.1% of GDP); Additional investment allowance for sole proprietors (–0.2% of GDP) Spain Change of the system of VAT returns (-0.56% of GDP); Reduction in personal income tax (–0.47% of GDP); Inclusion of some professions to social security system (0.17% of GDP); Increase of VAT from 18 to 19% (0.9% of GDP) Ongoing pension reform (2nd pillar; –0.3% of GDP) Sweden Lower taxes on earned income (–0.5% of GDP); Lower corporate income tax (–0.2% of GDP); Lower taxes on pensions (–0.1% of GDP); Changed under-pricing rules for certain companies (0.2% of GDP); Tax deductibility of home improvement services (–0.1% of GDP); Lower social contributions (–0.3% of GDP) United Kingdom Lower income tax (–0.3% of GDP) Specific reduction of tax withholdings to taxpayers with mortgages (–0.15% of GDP); Abolition of the wealth tax (–0.21% of GDP) Changed deductibility of interest costs for companies (0.2% of GDP) Deferral of business rate VAT rate reduction increase (–0.1% of (–0.6% of GDP); GDP) Tobacco and alcohol duties (0.1% of GDP) Source: European Commission (2009, 198–260). Table 2 Fiscal stimulus measures in Europe, 2009 – government expenditure measures Public investment, support for business, infrastructure and research Social expenditure Other spending Labour market package – short-time work (0.1% of GDP) Austria Increases in social benefits (0.1% of GDP) Belgium Bulgaria Housing, labour market, education expenditure Higher capital spending (0.1% of GDP) Reduction in the tax wedge on labour through subsidies (0.1% of GDP) Acceleration of payment of invoices (0.1% of GDP) Application of the minimum VAT rate on building land (<0.1% of GDP) Compensating measures offsetting the impact of the increase on the excise duty on petrol (0.15% of GDP) Increase in pensions (1% of GDP); Increase in allocations for salaries in the budgetary sector by 10% (0.3% of GDP) Cyprus Increase of public infrastructure investments (1.2% of GDP); Boosting tourism promotion and encouraging domestic tourism (0.13% of GDP) 65 CESifo DICE Report 3/2010 Database Table 2 (continued) Public investment, support for business, infrastructure and research Czech Republic Infrastructure investment (0.4% of GDP) Denmark Building repair and maintenance (0.1% of GDP); Social expenditure Housing, labour market, education expenditure Indexation of pensions (0.2% of GDP) Other spending Government consumption and wages (–0.6% of GDP) Municipal investments (0.1% of GDP); Green transport infrastructure (0.1% of GDP) Advancement of enforcement of the new Labour law (0.2% of GDP); Estonia Increase in pensions (0.8% of GDP) Finland Support for enterprises’ access to finance (0.2% of GDP); Boosting construction of Funding municipal rental housing (0.05% of mergers (0.05% of GDP) GDP) Boosting infrastructure investment (0.1% of GDP) France Additional public investment (–0.3% of GDP); Sectoral aid for housing and automobile industry (0.1% of GDP) Germany Social measure in favour of the low income households (0.1% of GDP) Investment, incl. infrastructure (0.3% of GDP); Making work pay measure (0.1% of GDP) Labour market support (0.1% of GDP) Industry support (0.1% of GDP) Higher expenditure on the health-care sector (0.2% of GDP) National Fund for Social Cohesion (0.2% of GDP) Greece Restraining public sector Public wages employment growth freezing for 2009 (0.3% of GDP); (0.2% of GDP); Cuts in the public sector’s remuneration of high-level officials (<0.1% of GDP) Hungary Modernization and subsidy programme for district heating schemes (0.1% of GDP) Capping the 13th monthly pension payment for pensioners at the level of the average pension and abolishing it for some groups of early pensioners (–0.2% of GDP); Partly compensated suspension of the 13th monthly salary in the public sector and a nominal freeze of public wage (net impact: –0.25% of GDP); Savings in social transfers (–0.15% of GDP) CESifo DICE Report 3/2010 Environmental premium (0.2% of GDP); 66 10% cut in elastic public expenditure items Cuts in chapteradministered and other government programmes (e.g. transport development and environmental protection; -0.25% of GDP) Database Table 2 (continued) Public investment, support for business, infrastructure and research Ireland Reprioritization of public investment (–1.2% of GDP) Social expenditure Housing, labour market, education expenditure Social welfare package (0.3% of GDP); Other spending Reduction in overseas development aid (–0.1% of GDP) Savings in social transfers (–0.3% of GDP); “Pension levy” on public sector wages (–0.4% of GDP); Reduction in public service payroll (–0.2% of GDP); Postponement of agreed pay increase (–0.1% of GDP) Italy One-off income support to households (0.2% of GDP) Latvia Increase in social payments (2.1% of GDP) Lithuania Higher social transfers other than in kind (0.9% of GDP); Rationalization of government resources (–0.3% of GDP) Cuts in public sector wages (-0.7% of GDP) Reduction of contributions to pension funds (2nd pillar; 0.48% of GDP) Luxembourg Increase in government investment (0.7% of GDP) Reduction on transfers to local governments (–0.5% of GDP); Cuts in current government expenditure (–0.9% of GDP) Increase by 2% in old-age and assimilated pensions (0.2% of GDP); Encouragement of recourse to partial unemployment (0.4% of GDP) Malta Investment projects related to industry (0.1% of GDP); Education (0.1% of GDP) Higher incentives for investment (0.2% of GDP); Reduction in other subsidies (–0.4% of GDP); Support for tourism (0.1% of GDP); Environmental measures (0.1% of GDP); Investment in educational institutions (0.3% of GDP); Sustainable development at local level (0.1% of GDP) Infrastructure – roads, maritime facilities (0.2% of GDP); Netherlands Reduction in energy subsidies (–1% of GDP); Increase in infrastructure projects (–0.1% of GDP) Labour market measures (e.g., part-time unemployment; –0.1% of GDP); Increase in education expenditures (–0.3% of GDP) Poland Investment (0.3% of GDP); Subsidies (–0.2% of GDP) Investment (0.6% of GDP) 67 Intermediate consumption (–0.7% of GDP) CESifo DICE Report 3/2010 Database Table 2 (continued) Public investment, support for business, infrastructure and research Portugal Special support for activity, exports and SMEs (0.1% of GDP); Social expenditure Housing, labour market, education expenditure Other spending Support to household income (0.2% of GDP) Support for firms (0.1% of GDP); Renewal of school premises (0.2% of GDP); Investment (and support to investment) in energy and telecommunications infrastructure (0.2% of GDP) Romania Public investment (1% of GDP) Slovak Republic Subsidy of purchase of new Changes in welfare meascars (0.1% of GDP) ures (0.5% of GDP) Slovenia Spain Instituting a minimum “social” pension (0.1% of GDP) Cuts in personnel expenditure (–0.9% of GDP) Lower expenditure on goods and services (–1.3% of GDP) Support for SMEs and start-up companies (0.1% of GDP); Wage subsidies for shorter hours worked (0.6% of GDP); Increase in specific transfers in kind (0.1% of GDP) Subsidies for investment in new technologies and R&D (0.2% of GDP) Public sector wage bill (0.2% of GDP) Central Government Fund for Local Public Investment (0,72% of GDP); Fund to improve certain strategic sectors (0.27% of GDP) Sweden Increased investment in and maintenance of infrastructure (0.2% of GDP); Increased coaching, activation and training of unemployed (0.1% of GDP) Increased education and research expenditure (0.1% of GDP) United Kingdom Front-loading capital spending (0.2% of GDP); Social and housing expenditure (0.2% of GDP) Support for business and industry (0.2% of GDP) Source: European Commission (2009, 198–260). CESifo DICE Report 3/2010 68