The Rise in Inequality after Pandemics: Can Fiscal Support Play a Mitigating Role?

IMF Working Papers, April 30, 2021

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Major epidemics of the last two decades (SARS, H1N1, MERS, Ebola and Zika) have been followed by increases in inequality (Furceri, Loungani, Ostry and Pizzuto, 2020).
The extent of fiscal consolidation in the years following the onset of these pandemics has played an important role in determining the extent of the increase in inequality.
Episodes marked by extreme austerity—measured using either the government’s fiscal balance, health expenditures or redistribution—have been associated with an increase in the Gini measure of inequality three times as large as in episodes where fiscal policy has been more supportive.
The evidence surveyed on the distributional impacts of the COVID-19 pandemic suggests that inequality is likely to increase in the absence of strong policy actions.

Survey of early evidence indicates disproportionate distributional effects from the COVID-19 pandemic, implying rising inequality without strong policy responses.
Cited observers and contributions reviewed include IMF 2020; Stiglitz 2020; Sandbu 2020b advocating against premature withdrawal of fiscal support despite concerns about high public debt-to-GDP ratios.

Fiscal consolidation after pandemics is a key determinant of subsequent changes in inequality.
Measures used to classify austerity episodes include: government fiscal balance, health expenditures, and redistribution policies.
Extreme austerity episodes correlate with much larger increases in the Gini coefficient compared with supportive fiscal episodes.

Strong fiscal support following pandemics can mitigate increases in inequality.
Policymakers should weigh the distributional consequences of fiscal consolidation post-pandemic and consider delaying premature withdrawal of fiscal support even when public debt-to-GDP ratios are high.
Maintaining or protecting health expenditures and redistribution mechanisms in the aftermath of pandemics is implied as critical to limiting rises in inequality.