Fiscal policy and inequality in middle- and high-income countries: redistributive effects of tax and spending shocks

Isiaka, A., Mihailov, A. ORCID: https://orcid.org/0000-0003-4307-4029 and Razzu, G. ORCID: https://orcid.org/0000-0003-2640-8314 (2025) Fiscal policy and inequality in middle- and high-income countries: redistributive effects of tax and spending shocks. Macroeconomic Dynamics, 29. e12. ISSN 1469-8056 doi: 10.1017/S1365100524000142

Abstract/Summary

Motivated by the sharp increases in public spending following the global financial crisis, we employ the GMM Panel VAR approach at annual frequency between 2004 and 2014 to investigate the dynamic response of alternative income distribution variables to shocks imposed on tax revenues and three key components of social expenditures: social protection, health and education. We confirm the potential of fiscal policy to reduce income inequality in the medium to longer run, but point to the differential approaches to pursue such a goal in middle- versus high-income countries. We find that the particular expenditure component under consideration matters in terms of the dynamic effect on inequality and on different parts of the income distribution, as well as in terms of the implied time profile. In middle-income countries, positive education spending shocks are the most effective in achieving better distributional outcomes over a medium run of several years. By contrast, in high-income countries, positive health spending and tax shocks have a more pronounced favourable dynamic distributional effect.

Item Type	Article
URI	https://centaur.reading.ac.uk/id/eprint/115744
Identification Number/DOI	10.1017/S1365100524000142
Refereed	Yes
Divisions	Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
Publisher	Cambridge University Press
Download/View statistics	View download statistics for this item