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Fiscal Consolidation and Income Inequality

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1970 to 2010, we find that income inequality significantly rises both during periods of fiscal consolidation and in the aftermath of such adjustments. In addition, fiscal authority that is driven by spending cuts seems to be more detrimental for income distribution than in the case of tax hikes. Considering the linkages between banking crises and fiscal consolidation, we show that the impact on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoils. Our results also provide support for the Kuznets relationship and corroborate the idea that trade can lead to a more unequal distribution of income.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 34/2011.

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Date of creation: 2011
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Handle: RePEc:nip:nipewp:34/2011
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Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal

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  1. Luca Agnello & Ricardo M. Sousa, 2012. "How do banking crises impact on income inequality?," Applied Economics Letters, Taylor & Francis Journals, vol. 19(15), pages 1425-1429, October.
  2. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
  3. Florence Bouvet, 2010. "EMU and the dynamics of regional per capita income inequality in Europe," Journal of Economic Inequality, Springer, vol. 8(3), pages 323-344, September.
  4. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122 National Bureau of Economic Research, Inc.
  5. Baltagi, Badi H. & Chang, Young-Jae, 1994. "Incomplete panels : A comparative study of alternative estimators for the unbalanced one-way error component regression model," Journal of Econometrics, Elsevier, vol. 62(2), pages 67-89, June.
  6. Stephen M. Miller & Frank S. Russek, 1999. "The Relationship between Large Fiscal Adjustments and Short-Term Output Growth Under Alternative Fiscal Policy Regimes," Working papers 1999-04, University of Connecticut, Department of Economics, revised Mar 2002.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  8. Jeffrey R. Brown, 2010. "Tax Policy and the Economy, Volume 24," NBER Books, National Bureau of Economic Research, Inc, number brow09-1.
  9. Biorn, Erik, 2004. "Regression systems for unbalanced panel data: a stepwise maximum likelihood procedure," Journal of Econometrics, Elsevier, vol. 122(2), pages 281-291, October.
  10. Giuseppe Bertola, 2010. "Inequality, integration, and policy: issues and evidence from EMU," Journal of Economic Inequality, Springer, vol. 8(3), pages 345-365, September.
  11. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  12. Carlos Mulas-Granados, 2005. "Fiscal Adjustments and the Short-Term Trade-Off between economic growth and equality," Hacienda Pública Española, IEF, vol. 172(1), pages 61-92, June.
  13. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
  14. Ricardo M. Sousa & António Afonso, 2009. "The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis," NIPE Working Papers 3/2009, NIPE - Universidade do Minho.
  15. Agnello, Luca & Sousa, Ricardo M., 2009. "The determinants of public deficit volatility," Working Paper Series 1042, European Central Bank.
  16. Afonso, António & Sousa, Ricardo M., 2011. "What are the effects of fiscal policy on asset markets?," Economic Modelling, Elsevier, vol. 28(4), pages 1871-1890, July.
  17. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
  18. Andrea Pescatori & Daniel Leigh & Jaime Guajardo & Pete Devries, 2011. "A New Action-Based Dataset of Fiscal Consolidation," IMF Working Papers 11/128, International Monetary Fund.
  19. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  20. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  21. Frederick Solt, 2009. "Standardizing the World Income Inequality Database," Social Science Quarterly, Southwestern Social Science Association, vol. 90(2), pages 231-242.
  22. Alesina, Alberto F & Ardagna, Silvia & Perotti, Roberto & Schiantarelli, Fabio, 1999. "Fiscal Policy, Profits and Investment," CEPR Discussion Papers 2250, C.E.P.R. Discussion Papers.
  23. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
  24. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
  25. John J. Heim, 2010. "Do Government Deficits Crowd Out Consumer And Investment Spending?," Rensselaer Working Papers in Economics 1005, Rensselaer Polytechnic Institute, Department of Economics.
  26. Philippine Cour & Eric Dubois & Selma Mahfouz & Jean Pisani-Ferry, 1996. "The Cost of Fiscal Retrenchment Revisited: how Strong is the Evidence?," Working Papers 1996-16, CEPII research center.
  27. Pablo Hernández de Cos & Enrique Moral-Benito, 2011. "Endogenous fiscal consolidations," Working Papers 1102, Banco de España;Working Papers Homepage.
  28. John J. Heim, 2011. "Do Tax Cut And Spending Deficits Have Different Crowd Out Effects?," Rensselaer Working Papers in Economics 1104, Rensselaer Polytechnic Institute, Department of Economics.
  29. Fitoussi Jean Paul & Saraceno Francesco, 2010. "Europe: How Deep Is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-19, January.
  30. repec:hrv:faseco:3353756 is not listed on IDEAS
  31. John J. Heim, 2011. "Do Deficits Crowd Out Private Borrowing? Evidence From Flow Of Funds Accounts," Rensselaer Working Papers in Economics 1102, Rensselaer Polytechnic Institute, Department of Economics.
  32. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
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