Scheibe, C; (2016) Fiscal consolidations and their effects on income inequality. (UCL Centre for Comparative Studies of Emerging Economies Working Paper Series 2016/4). UCL School of Slavonic and East European Studies (SSEES): London, UK.

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Abstract

This paper investigates the effects of fiscal consolidations on income inequality. Although fiscal consolidations have become a popular policy instrument and research topic, their effects on income inequality are relatively unexplored. We thus econometrically analyse the evolution of Gini coefficients during and after austerity measures. The paper relies on panel data techniques using a sample of 17 high-income countries during the period of 1978 – 2009. We find that a consolidation (measured by a deliberate improvement of the primary budget balance) significantly increases income inequality. More specifically, an improvement of the primary budget balance by about one percent of GDP is associated with an increase in market income inequality of 0.6% and a smaller increase in net income inequality the following year. In addition, this paper explores the discretionary effect of different consolidation compositions. To do so, we differentiate between consolidations that are either exclusively undertaken through spending cuts, tax increases or a combination of both. Thereby, we show that tax-only consolidations tend to be equality-friendly but also rather small in size while the opposite is true for spending-only and mixed consolidations. These findings point to a more pronounced trade-off between different consolidation policy goals than is currently believed.

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