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Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy : What Do the Data Say?

Author/Editor: Jaejoon Woo | Elva Bova | Tidiane Kinda | Yuanyan Sophia Zhang
Authorized for Distribution: September 17, 2013
Electronic Access: Free Full Text (PDF file size is 1,074KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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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Series: Working Paper No. 13/195
Subject(s): Fiscal policy | Fiscal consolidation | Progressive taxation | Income distribution | Developed countries | Emerging markets
    Published:   September 17, 2013        
    ISBN/ISSN:   9781484390917/1018-5941   Format:   Paper
    Stock No:   WPIEA2013195   Pages:   37
    Price:   US$18.00
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