Government spending reallocations and inequality: evidence from middle-income countries

We assess the impact of spending reallocations on inequality in a fiscally neutral scenario for a sample of 51 middle-income countries over the period between 2005 and 2015. This is relevant given that developing countries that aim to address increasing inequalities cannot easily rely on either deficit and debts nor increased revenues to finance social spending sectors, such as education, health and social protection. We also look at the impact on different parts of the income distribution and at the role of the Global Financial Crisis of 2007–2009. Overall, we find that reallocations to the education sector are associated with a reduction in income inequality. These benefit all subgroups across the population, including the poor and the relatively rich within a country’s income distribution. Reallocation of spending in favour of health, social protection and agriculture is more nuanced and less generalized across the sample of countries. We therefore conclude that greater consideration should be given to the redistributive effects of government budget reallocations than is typically the case.