Approaches to distributional impact assessment in the national budget process across the EU

JCMS |

by Nicola Bazoli (FBK-Irvapp), Carlo Fiorio (University of Milan, FBK-Irvapp), Sonia Marzadro (FBK-Irvapp), Jonathan Pycroft (European Commission), and Loris Vergolini (University of Bologna, FBK-Irvapp)

In recent decades, equity has gained prominence in public discourse following the Great Recession and the sovereign debt crisis, which exacerbated income inequality. Distributional Impact Assessment (DIA), intended as a set of tools capable of assessing the distributional effects of policy measures, can be a powerful tool to help policymakers identify the potential drivers of inequality in the budget process.

In our recent article in the Journal of Common Market Studies, we examine the extent to which DIA is used for budgetary measures in EU Member States, and we also shed light on what may limit the use of DIA. We investigate these aspects by analysing official budget documents and interviewing officials from ministries in the 27 Member States. The study highlights the need for greater interaction with data-producing authorities and suggests that experts carrying out DIA analysis should be given sufficient time and resources. The findings support the importance of DIA in budget documents, emphasising its role in avoiding socially harmful measures, understanding economic inequality and evidence-based policy making.

The results emerging from our work reveal a significant lack of integration of DIA in the budget processes of EU Member States. Only seven of the nineteen Euro Area countries, to which EU Regulation No. 473/2013 applies, have included DIA in their budget plans. Of these, only Croatia includes DIA in its stability and convergence programme. However, a more positive trend is observed in documents introducing expenditure and revenue measures, where more than half of EU Member States have adopted DIA. The study underlines the need for greater use of DIA in all EU Member States, although most already take it into account in their policy-making processes, with some differences in the frequency of use.

Regarding the most commonly used methods for DIA, we show that EU Member States rely on national microsimulation models and EUROMOD, which are mainly fed with tax data, followed by data from EU-SILC, the Labour Force Survey and social security data. Overall, administrative data is widely preferred due to its lower noise and accessibility compared to survey data. Administrative data are often requested within the public administration and tend to be more up-to-date than survey data. However, officials in several countries acknowledged data limitations and expressed the need for more detailed and timely information to improve the quality of the DIA.

In the interviews with officials, we identify the main factors that could promote the development of DIA. Officials mainly supported direct action by the European Commission (EC) in providing methodological guidance and training on how to carry out DIA and the provision of a web interface for access to DIA-specific software, especially in countries with less DIA tradition. However, some factors were more divisive, such as the timing of the budget process, data availability and political will. While there is a call for guidance from the EC, many officials prefer to retain autonomy in presenting their results and are less concerned about EC-provided templates for DIA in budget documents.

These two analyses allow us to build a set of indicators:

  • The intensity of DIA use, defined as the number of official documents where DIA analysis is included or performed in the period 2018-2020.
  • The number of obstacles that a Member State may face in implementing DIA, based on the sum of reasons that impede the inclusion of DIA.
  • The degree to which EU Member States would be more open to change regarding the intensity of DIA use.

Figure 1 shows a negative and strong (R2=0.72) correlation between more intensive use of DIAs and the number of barriers to using DIA. This highlights how organisational obstacles (e.g., staff shortage, lack of time, complexity of the political processes) are detrimental to DIA implementation.

Figure 1. Relationship between the intensity of DIA use (x-axis) and barriers to DIA use (y-axis).

Figure 2 illustrates the relationship between the current intensity of DIA use in EU Member States and their willingness to change or maintain the status quo regarding the extension of DIA in the budgetary process. The scatter plot shows a clear negative relationship: a higher frequency of DIA use correlates with less openness to DIA extension. In particular, a cluster of countries in the lower right quadrant, including France, Denmark, the Netherlands and Sweden, already have a high DIA intensity and are satisfied with their current practices. Conversely, several EU Member States with lower DIA intensity, with the exception of Germany, are more open to change and receptive to receiving support to expand DIA. The exception of Germany is attributed to the decentralised nature of its procedures, reflecting decisions at regional government level rather than a central government mandate.

Figure 2. Relationship between the intensity of DIA use (x-axis) and the degree to which Member States would be more or less comfortable with implementing a set of proposals for expanding their use of DIA in the DPB or the budgeting process (Y-axis).

Our findings suggest key recommendations for expanding the use of DIA in the budgetary process across EU Member States. These recommendations include the EC providing more feedback on the inclusion of DIA in official documents and offering non-binding guidance on how to conduct DIA. There is also a call to raise the issue at the ECOFIN Council in order to promote dissemination. Basic steps for all EU Member States include setting up a dedicated DIA team and using tools such as EUROMOD Online. More advanced modelling techniques are recommended for those with expertise. Moreover, DIA is seen as crucial in the pursuit of socially just digital and green transitions, in line with the EU’s goal of leaving no one behind in its unique social market economy. The study encourages future cooperation between the EC and EU Member States to implement these recommendations and strengthen the role of DIA in policymaking.