Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy: What Do the Data Say?

By Jaejoon Woo, Elva Bova, Tidiane Kinda, Yuanyan S Zhang

September 17, 2013

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Jaejoon Woo, Elva Bova, Tidiane Kinda, and Yuanyan S Zhang. Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy: What Do the Data Say?, (USA: International Monetary Fund, 2013) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The 2007-09 Great Recession has led to an unprecedented increase in public debt in many countries, triggering substantial fiscal adjustments. What are the distributional consequences of fiscal austerity measures? This is an important policy question. This paper analyzes the effects of fiscal policies on income inequality in a panel of advanced and emerging market economies over the last three decades, complemented by a case study of selected consolidation episodes. The paper shows that fiscal consolidations are likely to raise inequality through various channels including their effects on unemployment. Spending-based consolidations tend to worsen inequality more significantly, relative to tax-based consolidations. The composition of austerity measures also matters: progressive taxation and targeted social benefits and subsidies introduced in the context of a broader decline in spending can help offset some of the adverse distributional impact of consolidation. In addition, fiscal policy can favorably influence long-term trends in both inequality and growth by promoting education and training among low- and middle-income workers.

Subject: Disposable income, Fiscal consolidation, Fiscal policy, Income distribution, Income inequality, National accounts, Personal income

Keywords: Asia and Pacific, Correlation coefficient, Determinants of income inequality, Disposable income, Europe, Fiscal Consolidation, Fiscal Policy, Gini coefficient, Global, Income, Income distribution, Income equality, Income Gini coefficient, Income inequality, Income share, Incomes database, Inequality, Inequality data, Low income, Market income, Order of magnitude, Personal income, Simple average, Sub-Saharan Africa, Tax and Spending policy, Wage bill, Western Europe, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/195
Stock No:

WPIEA2013195
ISBN:

9781484390917
ISSN:

1018-5941

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