The Impact of Automatic Stabilizers on the Economic Growth of Albania

during the Period 1999-2021

MATILDA VELIU

Faculty of Economy, Department of Economics, University of Tirana,

growth. The purpose of the article is to see the influence of Automatic Stabilizers (AS) on the Economic Growth of

Albania during the period 1999-2022. Most of the topics have been focused on the influence of active fiscal policy

on economic growth despite this an unclear gap exists about the influence of the automatic fiscal policy, especially

in Albania reality. The secondary data of the Ministry of Finance and INSTAT institutions about the variables and

the factors that influence them like the tax system, tax revenues, and public expenditures are analyzed for this

purpose. The conclusions reveal the necessity to improve especially the formula of the tax system according to the

challenges of the economy. For almost three decades, the data of Automatic Stabilizers (AS) have been included in

the multiple linear regression equation using the Ordinary Least Square (OLS) technique. The empirical result

shows a narrow positive impact range of Automatic Stabilizers on Economic Growth. The change in the tax system

and events such as the earthquake on November 9th, 2019, and the Covid-19 pandemic seem to have had a huge

Received: July 17, 2022. Revised: October 12, 2022. Accepted: November 10, 2022. Available online: December 14, 2022.

1 Introduction

Fiscal policies are one of the main strategies used to

improve the economic situation of a country. The

consequences of the appropriate fiscal strategy will

depend strongly on objective factors like the

country’s current economic environment, subjective

in developed countries. Factors like government size,

health expenditures, and education expenditures are

negatively associated with income inequality.

According to, [2], the secondary and tertiary

educational attainments of the labor force have a

significant positive effect on economic growth,

whereas primary education has an insignificant

negative effect. The main markets in the economy,

those of production factors (especially the labor

market), markets of goods and services, and financial

markets seem to influence the performance of overall

growth is complex, where the amplitude’s change of

one variable has not the same impact on the other

variables, leading to discussion topics.

The active fiscal policy has been for a long time a

expenditures, etc. Although many papers show

different scenarios (divergence and convergence) of

fiscal policy on the increasing rate of the economy,

no specific evidence exists for Albania, taking

specifically into account automatic stabilizers (AS).

Besides that, the variable is related to other fiscal

scheme (unemployment assistance), has changed

automatically. The “manipulation” of AS is almost

done without any bureaucratic costs because it is an

automatic fiscal tool. This creates an opportunity to

improve the negative effects of a possible recession

phase of the economy.

The theory suggests, [3], that an inappropriate tax

rate will permanently decrease the economic growth

of the country. The implementation process of fiscal

Although the revenues from taxes probably will be

managed well, simulating investments in absolute

terms, we cannot have a positive economic growth

rate if we are not able to connect the investment with

the rise of consumption, [4].

In Albania two different tax systems are applied on

citizen revenues: flat tax and progressive tax, where

the progressive tax system was modified in 2017, [5].

Focusing on the consequences of the tax system, the

paper will try to reveal:

iii. Is there any possibility for automatic

Automatic stabilizers (AS) are fiscal mechanisms

that directly influence the government budget,

increasing government expenditures or reducing

taxes when the economy goes into a recession phase.

The Overall Fiscal Balance indicator will be

examined to understand how much of the

government expenditures per year are covered by the

budget, therefore to know how the fiscal policy

performs on economic growth. By using the database

of the Ministry of Finance and other official

2 Literature Review

As was highlighted above, many researchers have

found different conclusions on the inner relationship

county to another. The discussion takes priority

especially when the economy is in recession and the

application of an appropriate fiscal policy is an

emergency to improve the situation, but also it is

going to be present even when the positive steady

state of the economy takes place.

The negative marginal effects of a possible recession

may not influence the economy if the proper

economic actions are undertaken immediately. The

determination of the optimal tax rate, or the interval

services on which the changing tax rate occurs, also

the time when it is applied.

According to the literature, focusing on taxable

goods reveals that Korea and Japan, [6], are more

revenue-neutral marginal tax reforms incorporating a

reduced tax on food & beverages. Therefore,

specifying well-taxable goods and services remains a

good start on a well-designed fiscal policy.

In recent years, the separation of revenues because

Non- Distortionary Revenues, and c) Other

Revenues.

The way tax revenues are managed and how the

implementation process of fiscal policy performs,

remains essential for the improvement of the

economy. According to the authors, [10], the

relationships between economic growth and tax

income policies are apparent and a slight marginal

study is conducted. The researchers have used

different methods and techniques for the analysis of

the data. Some main findings of the literature are

revealed in Table 1.

As Table 1 highlights, the three major impacts of

fiscal policy on economic growth are:

been changed automatically, increasing interest in

how those fiscal movements have influenced the

economic growth. The number of firms that operate

in Albania and their categorization upon some

features like the size, number of employees, and the

level of their annual profit are inputs for the

preparation of a good fiscal strategy.

When the tax changes, some entities tend to avoid it,

but according to the authors, [20], who focused the

study on 183 tax-audited Albanian entities, found

concentrated especially on the micro-aspects of the

economy.

The information provided by Table 2 confirms that

the flat tax system was simple, and less bureaucratic

than the progressive tax, but from another

perspective, the progressive tax contributes much

better to the improvement of the economic conditions

of those people who do not earn so much revenue.

effects of each system. The simulation process is

done for different tax revenues and, for the same

level of revenue is calculated the difference in a

taxable sum according to each tax system. The results

of Table 3 reinforce the conclusion above that for

people who earn less the progressive tax system is

included on the segment [40.000-70.000] All and

with a decrease rate of 51% for the salaries on the

segment [40.000-55.000] and up to 33.7% for the

salaries that are included on semi- segment [55.000-

70.000]. For the segment [40.000-70.000] All, the

absolute difference remains constant at a level of

2.560 All. The progressive tax model influences

more positively than the flat tax in this segment, but

the differences in relative terms from one range to

another decrease with a small rate, [9]. Therefore, the

relatively low for different revenues. Despite

implementing different fiscal policies, the focus on

the marginal effects of taxes seems to be crucial as

the AS variable is mainly dependent on the level of

the tax revenues. Until now, the marginal effect of

taxes was not involved well in the strategy. The

analysis of data converges with that. A statistical

approach should be incorporated well, even when the

strategy is at first draft.

The political and economic events that take place in

The reformatted progressive tax system gives a new

taxation only once, at the moment of earning. They

supposed that the tax rate must be at 19% to perform

better in the economy.

The indicators used to change the progressive tax

system according to, [22], were:

private consumption.

The fiscalization process plays a crucial role in the

result. The process tends to show online every

transaction of the entities in Albania. Only in June

2022, it was completed totally. Despite this, the

economic fluctuations remain evident, [23], showing

a potential risk for an economic recession. The

effects of the earthquake, the Covid-19, the energy

crisis, and now the consequences of the Ukraine War

rate has received the highest value of 3.8% in 2017

and after that has been remaining constant over the

two upcoming years. In the same year, the tax

revenues variable takes the highest value.

The continuity of tax revenues during the pandemic

time due to the increasing import of some items,

especially alcohol and Gasoil products, remains an

interesting fact. Although the average level of

salaries remains among the lowest in European

countries, (approximately 302 euros), the average

The changing of tax systems occurs is in 2013 and

the data of Figure 1 reveal that the fluctuation of the

process of tax revenues is an essential process that

has to be coordinated with the proper tax revenue

average value rate of it estimated by 30.3%. Then,

the estimated differences between the current

expenditure of each year and average value are

calculated. The highest value results in 2020 with a

rate of 9.57%. Meanwhile, the deviation of the

highest rate of tax revenue with its average value

reached the highest level in 2018, at exactly 25.3%.

At that time, the pandemic effect was not yet present.

If we take into consideration the deviations rate of

both two variables from their average value

respectively, it is clear that those are almost equal, a

conclusion that agrees with the analysis above.

Table 4. The ratio of Tax Revenues/Expenditures (TaxR/E) over the years in Albania.

Furthermore, keeping as target the objective above is

calculated the ratio of two variables: Tax

Revenues/Expenditures- (TaxR/E) for the period

value. On this result, the process of revenue

digitalization and the psychological effect of

fiscalization have generated positive effects. The

positive rate of tax revenue through the years

approves that, [20], the micro-entities play a huge

role. In recent years, the effects of imports are

evident, [22], despite the influences of endogenous

events (the Ukraine war, the pandemic effect, etc) on

the economy.

The relevant fact is that for the period 2017-2019 the

values of the variables remain stable and almost at

the highest respective levels compared to all the post-

as a prior target. Coordination of fiscal policy and

monetary policy is necessary.

Besides this, focusing on fiscal policy, the forecast

rate of both expenditures and revenues remains

critical for a sustainable economy. The process of

forecasting expenditures is done based on the

forecast rate of the previous year. To see how the

expenditures vary among the years, the difference of

each respective year with the lowest rate of the

variable through the period 2009-2020 estimated by

28.2%, are revealed in Figure 3. The variable has

been generally declining over time, taking the lowest

value of 28.2% in 2012.

Specifically, as shown in Figure 3, the variable takes

the highest value in 2009 and 2020, respectively by 5

points.

Over 2012-2015 and after 2019, the variable shows

an increasing positive rate. The average rate for each

period is respectively 1.95% and 3%.

Fig. 3: The variable Exp-the lowest value (E-min value) during the period 2009-2020.

The absolute difference remains interesting in 2020

because corresponds to the year when the reduction

of expenditures was a priority for the mitigation of

the negative effects of the Covid-19 pandemic.

Whilst 2009 year corresponds with the year when the

progressive tax system.

increase in the years when major events take place.

The lowest level of expenditure variable is in 2012.

As the revenues are one of the main sources of

budget expenditures, Figure 4 shows the variability

of the two variables:

b) Revenue/Expenditure (TaxR/E) ratio.

2018 results to be the year with the best performance,

taxable incomes have performed over the years and