WP 06: Effects of fiscal consolidation on income inequality: narrative evidence from South America

Based on a nar­ra­ti­ve data­set cons­truc­ted by David and Leigh (2018) that covers nine South Ame­ri­can eco­no­mi­es in the peri­od 1982–2017, this paper esti­ma­tes dyna­mic effects of fis­cal con­so­li­da­ti­ons on inco­me ine­qua­lity from Jor­dá (2005)’s local pro­jec­ti­ons method. Results sug­gest that fis­cal con­so­li­da­ti­ons lead to a rise in inco­me ine­qua­lity in all spe­ci­fi­ca­ti­ons and data panels. When decom­po­sing fis­cal shocks, spen­ding-based fis­cal con­so­li­da­ti­ons appe­ar to sig­ni­fi­can­tly incre­a­se the Gini index, whi­le tax-based fis­cal con­so­li­da­ti­ons do not show sta­tis­ti­cally sig­ni­fi­cant effects on inco­me ine­qua­lity. The rise in the Gini index for dis­po­sa­ble inco­me cau­sed by a spen­ding-based fis­cal adjust­ment of 1% of GDP vari­es betwe­en 1.74 and 3.22% in five years depen­ding on the selec­ted data panel (coun­try-years). The mag­ni­tu­de of this effect is higher than in most of the pre­vi­ous stu­di­es car­ri­ed out for OECD countries.

Keywords: inco­me ine­qua­lity; fis­cal con­so­li­da­ti­on; fis­cal aus­te­rity; South Ame­ri­ca; local projections.

JEL: D30; D63; E60; E62.

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