Europe has gone through three significant economic downturns in the last 15 years. The European public debt crisis (2010–12) was the result of the 2008–09 global financial crisis, and after a few years of comparatively stable conditions, the coronavirus outbreak struck Europe as well (2020–21). In response to these downturns, policymakers took a variety of steps to lessen their effects. But how did these frequently transient policies impact revenues, deficits, and national economies?
Eurozone Revenue and Deficit Trends
The European financial sector experienced major instability as a result of the global financial crisis, which culminated in the crisis of European public debt and a double-dip recession from which the economies of the Eurozone did not emerge until 2015. Tax collections actually decreased by 6% between 2008 and 2010, and they didn’t begin to increase again until 2011. Tax collections increased until 2019 and in 2015 reached their pre-crisis level. Tax revenues decreased by 7% in 2020 due to the pandemic, but they rapidly rose above pre-crisis levels in 2021 even though the virus was still very much alive and dominated discussions of economic policy throughout the year.
Budget deficits increase throughout the worst years of a crisis (2009, 2010, 2020, and 2021) then decline after things have calmed down. After 2010, it took a while for the economy in southern Europe to recover from the public debt crisis, which can be attributed to fiscal policy measures designed to ensure the survival of the single currency. With an overall deficit of 0.4% in 2018, 2018 was the closest year to a balanced budget during the previous ten years for Eurozone Member States.
The fiscal burden of the COVID-19 pandemic was still very much present at this time, as shown by the budget deficit of 5.1 percent in 2021. This makes the high tax receipts in 2021 all the more surprising because during crises, one would anticipate lower taxes and increased spending, not higher spending and record-high tax revenues. We would either anticipate a decline in tax revenues due to tax cuts or a higher budget deficit due to increased spending when governments support their economy during times of crisis. Ineffective relief measures—governments raising more money from citizens despite reduced economic activity—or governments’ distributional considerations outweighing their intention to battle the downturn are suggested by the simultaneous observation of more spending and higher tax receipts.
Figure 2 demonstrates how the main tax categories vary in their dependability as sources of revenue for the government during all three downturns, with corporation and capital taxes being the most volatile, followed by consumer taxes. The trend of overall tax receipts is very similar to the revenue from consumption taxes. During each of the crises, social contribution and income tax revenue remained largely unaffected and only saw slight increases.
Governmental Reactions to the Crisis
Automatic stabilizers, the extra expenses or revenues incurred as a result of changes in macroeconomic conditions (for example, higher budget deficits due to higher unemployment, less income tax revenue raised, and higher unemployment benefits paid out) without any action on the part of the government, only partially explain the effects of each economic downturn on tax revenues and budget deficits. Governments invested large resources in discretionary fiscal policy, which is frequently used as temporary solutions, in addition to automatic stabilizers.
To safeguard the financial sector during the global financial crisis, central banks adopted an expansionary monetary policy, while governments bailed out banks. Expansionary monetary policy involved providing banks with liquidity assistance and a rapid decline in lending rates by central banks. Tax breaks and assistance for part-time unemployment were also provided. The majority of these policies, like the German car-scrapping premium, were transitory. The majority of these actions tried to stabilize family consumption. Businesses were also impacted by comparable reductions in value-added taxes and social contributions, but this only accounted for around one-fifth of the overall impact on decreased revenue.
Different responses were given to the European public debt crisis. Policymakers mostly responded to the public debt’s growth, which was fueled by efforts to ease the global financial crisis, by enacting measures to increase fiscal restraint. Social insurance benefits, such as pensions, were reduced in the affected southern European nations, while income taxes rose. They were made permanent in order to make sure that these activities were credible. Another crucial element was the Stability and Growth Pact’s (SGP) tightening, which paved the road for responsible public spending and avoided further debt crises. The ongoing support programs put in place following the financial crisis, the lack of recovery, particularly in southern Europe, and the financial assistance given to struggling nations are what led to the EU’s overall budget deficits.
During the COVID-19 pandemic, government assistance programs were also mostly transient. These included tax breaks, tax reporting requirements, and subsidies to encourage employment (particularly during lockdowns). Germany, for instance, dropped its VAT rates for the second half of 2020 from 7 percent to 5 percent and from 19 percent to 16 percent, respectively. Similar actions were taken in other nations. Greece, France, and Spain temporarily stopped making some tax payments, and the Netherlands started providing salary subsidies to struggling companies.
In order to save jobs across Europe, the EU further developed the Pandemic Crisis Support safety net, which primarily includes of loan guarantees and various temporary tools. Additionally, in order to give Member States the most flexibility in addressing their nation-specific issues, the EU loosened the regulations for state aid. Overall, the final policy response included both more pronounced spending increases and tax cuts or deferrals. The significant contribution made by tax deferrals and stopped payments, which were tapered off in 2021, helps to explain why tax collections increased that year.
Overall Taxation Trends
The overall tax burden in the Eurozone has increased during the past 15 years. The tax-to-GDP ratio was 39.1 percent in 2007; it grew to 41.2 percent in 2021 from a brief drop during the global financial crisis. The ratio grew even in 2020 and 2021, which can be mostly attributed to the GDP’s abrupt but transient falls during the COVID-19 pandemic. The requirement for governments to recoup the expenditures they incurred during economic crises in order for fiscal sustainability is the reason why tax-to-GDP ratios frequently increase during economic crises.
Contrarily, there has been little change in the composition of taxes; the only substantial variation is the drop in the share of corporate taxes from 8% in 2007 to 6% in 2021. The percentage of total sales devoted to the other categories has stayed largely steady.
In the past, the vast majority of crisis relief solutions were just transitory. And while certain short-term initiatives can be helpful in a crisis, politicians should concentrate their efforts on long-term solutions that support company growth and resilience (and government coffers).