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Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-count

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  • Martin Larch

Abstract

Summary for non-specialistsA bias towards running deficits is an entrenched feature of fiscal policy making in most developed economies.Our paper examines whether this tendency is in any way associated with the personal distribution of income of a country. It takes inspiration from theoretical work according to which distributional conflicts may give rise to deficit spending or to delayed fiscal adjustment. Although these theories have been around for years the empirical literature on the determinants of fiscal performance has so far paid little or no attention to the possible role played by different degrees of income inequality.Our results suggest that this neglect was not justified. Using cross-country data we find evidence that a more unequal distribution of income can weigh on a country's fiscal performance. These findings can be relevant in the aftermath of the post-2007 global financial and economic crisis in particular when designing fiscal exist strategies. The success and sustainability of such strategies may inter alia depend on their distributional implications.

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File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2010/pdf/ecp414_en.pdf
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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 414.

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Length: 35 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:euf:ecopap:0414

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Keywords: Income distribution fiscal performance Gini coefficient panel regression Larch BEPA;

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  1. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
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Cited by:
  1. Charles Wyplosz, 2012. "Fiscal Rules: Theoretical Issues and Historical Experiences," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 495-525 National Bureau of Economic Research, Inc.
  2. Viegas, Miguel & Ribeiro, Ana Paula, 2013. "Welfare-improving government behavior and inequality in a heterogeneous agents model," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 146-160.

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