In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18industrialized countries from 1978 to 2009, we find that income inequality significantly rises duringperiods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems tobe detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show thatthe size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality.In particular, when consolidation plans represent a small share of GDP, the income gap widens,suggesting that the burden associated with the effort affects disproportionately households at thebottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation,we find that the effect on the income gap is amplified when fiscal adjustments take place afterthe resolution of such financial turmoil. Similarly, fiscal consolidation programs combined with inflationare likely to increase inequality and the effects of fiscal adjustments on inequality are amplifiedduring periods of relatively low growth. Our results also provide support for a non-linear relationshipbetween inequality and income and corroborate the idea that trade can promote a more equal distributionof income.
|Numero di pagine||25|
|Rivista||REVIEW OF INCOME AND WEALTH|
|Stato di pubblicazione||Published - 2014|
All Science Journal Classification (ASJC) codes
- Economics and Econometrics