IFS: European nations failed to maximise fiscal reform opportunities

11 Dec 15

European countries may not have taken advantage of opportunities to improve their tax and benefit systems that arose from the financial crisis, a UK think-tank has said.


Looking at Ireland, Spain, France, the UK, Italy and Germany, the Institute for Fiscal Studies found that one common theme in all of the six countries’ fiscal responses was that they failed to capitalise on the chance to improve the efficiency of their tax and benefit systems.

The IFS said that, where there is a need for spending cuts and tax rises, there is an opportunity to make improvements. “However, the lesson from the reforms so far is that we ought not to be too optimistic on this front and instead be content to settle for reforms that do not add to existing deficiencies.”

Most of the six countries analysed by the IFS implemented large fiscal adjustments with the onset of the recession and the increase in public borrowing this triggered. The think-tank gave three examples of where these had actually had a negative impact on efficiency.

The UK’s move to increase the main rate of VAT came at the cost of increasing distortions for both producers and consumers, the IFS said, and the country’s income tax schedule has also been made “considerably more complicated”.

Ireland’s reforms also “unnecessarily created uncertainty and distortions” by increasing, reducing and then again increasing VAT and by successive increases in capital gains tax.

The IFS also noted that while France’s new corporate tax credit which bases contributions on the individual earnings of a firm’s employees is welcome, it would have been better to simply reduce the relatively high level of employer social security contributions in the country.

The institute also said that both France and Italy have both relied heavily on raising taxes to reduce borrowing rather than cutting spending, and as a result both are on track to become higher tax, higher spending and higher borrowing countries than they were pre-crisis.

The UK’s approach to heavily cut public spending on the other hand has put it on course to have lower spending, lower borrowing and a similar level of taxation than before 2008.

The IFS also pointed out notable differences in the areas countries chose to cut. France, Italy and Spain refrained from cutting welfare benefits, in stark contrast to Ireland and the UK where these played a major role in delivering fiscal consolidation.

France and the UK both chose to protect health and education spending to an extent, while Italy and Spain cut these services above others.

In Ireland and the UK, pensioner households lost less from tax and benefit reforms whereas Italy preferred to protect households with children and pensioners bore the brunt of cuts.

The IFS concluded by saying that, with many countries running deficits in excess of 2% of national income and having a stock of government debt well above pre-crisis level, more fiscal consolidation measures are to come.

However judging by those already implemented, it warned that we shouldn’t be “too optimistic” that these will increase the efficiency of the tax and benefit systems. 

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