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Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy

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  • Jaejoon Woo
  • Elva Bova
  • Tidiane Kinda
  • Yuanyan Sophia Zhang

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/195.

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Length: 37
Date of creation: 17 Sep 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/195

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Related research

Keywords: Fiscal policy; Fiscal consolidation; Progressive taxation; Income distribution; Developed countries; Emerging markets; Inequality; Gini Coefficient; Tax and Spending policy; world income inequality; dependent variable; disposable income inequality; inequality data; social spending; rising income inequality; labor market; income inequality data; social security; redistributive impact; inequality trends; redistributive policies; kuznets curve; purchasing power; increase income inequality; covariance matrix; income equality; inequality equation; human capital; inequality measure; high income inequality; reducing inequality; inverted-u relationship; inequality changes; income redistribution; inequality declines; consumption expenditure; market income inequality; redistributive policy; measuring income inequality; distribution of income; country inequality; rising inequality; social safety nets; gini_coefficient; measures of inequality; inequality variables; inequality indicators; cross-country inequality; inequality of opportunities;

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References

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  1. Giovanni S.F. Bruno, 2005. "Estimation and inference in dynamic unbalanced panel data models with a small number of individuals," KITeS Working Papers, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy 165, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jun 2005.
  2. John M. Piotrowski & David Coady & Justin Tyson & Rolando Ossowski & Robert Gillingham & Shamsuddin Tareq, 2010. "Petroleum Product Subsidies," IMF Staff Position Notes 2010/05, International Monetary Fund.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
  4. Andrea Brandolini & Anthony B. Atkinson, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 771-799, September.
  5. L, Agnello. & R, M. Sousa., 2012. "How does Fiscal Consolidation Impact on Income Inequality?," Working papers, Banque de France 382, Banque de France.
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Cited by:
  1. Manos Matsaganis & Chrysa Leventi, 2014. "Distributive Effects of the Crisis and Austerity in Seven EU Countries," ImPRovE Working Papers, Herman Deleeck Centre for Social Policy, University of Antwerp 14/04, Herman Deleeck Centre for Social Policy, University of Antwerp.
  2. Eswar S. Prasad, 2013. "Distributional Effects of Macroeconomic Policy Choices in Emerging Market Economies," NBER Working Papers 19668, National Bureau of Economic Research, Inc.
  3. Tomas Hellebrandt, 2014. "Income Inequality Developments in the Great Recession," Policy Briefs PB14-3, Peterson Institute for International Economics.

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