Can fiscal policy mitigate income inequality and poverty? Simone Salotti Oxford Brookes University Carmine Trecroci University of Brescia
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1 Can fiscal policy mitigate income inequality and poverty? Simone Salotti Oxford Brookes University Carmine Trecroci University of Brescia Public Finance and Income Distribution in Europe ZEW - 4th SEEK Conference, May 15-16, 2014
2 In a snapshot We evaluate the distributional effects of fiscal policies and their impact on poverty Empirical analysis: 20 OECD countries, We use several measures of income inequality and take care of potential reverse causality and endogeneity Greater fiscal policy activism lower income inequality Govt. spending strong redistributive effects 2
3 Motivation Recent surge of interest on high levels of government debt and implications of fiscal consolidation efforts Substantial increase of top income shares in the USA and other anglo-saxon countries; almost flat dynamics in continental Europe The Great Recession and accompanying fiscal imbalances imply serious constraints on policy actions What are the likely consequences on income distribution? Does inequality (and poverty) respond to fiscal stock variables (debt) or flow ones (spending, taxation, deficit/surplus)? What role for large consolidation and expansion episodes? 3
4 Literature background - 1 Inequality tends to vary widely across groups of countries, but it is relatively persistent within countries Mixed early evidence: a negative trade-off between growth and inequality (Li et al., 1998), or a positive relationship (Barro, 2000)? The Kuznets hypothesis: growth first increases then reduces income inequality Overall, relatively scant econometric evidence on how fiscal policies impact on income distribution 4
5 Literature background - 2 The expenditure side of fiscal policy particularly important in reducing income inequality in advanced countries (Bastagli et al., 2012) Social security, public spending on healthcare and both direct and indirect taxes are all found to have equalizing effects (Baldacci et al., 2002; Bertola, 2010; Afonso et al., 2010; Muinelo-Gallo and Roca-Sagalés, 2011) Agnello and Sousa (2012), Ball et al. (2013): inequality rises with large consolidations, mostly as an effect of spending adjustments 5
6 Key methodological issues Multiple and often controversial measures of inequality: results are often driven by specific data sources What fiscal policy indicators? Significant endogeneity and reverse causality issues: tax and spending decisions may respond to some extent to income inequality concerns What are the effects of normal fiscal stances as opposed to those of large consolidation and expansion episodes? 6
7 The panel specification debt: gross govt debt/gdp govt_size: general govt final consumption expenditure divided by GDP W: control variables (log real per capita GDP, both in levels and squared; trade openness; education level; civil liberties; unemployment; inflation; population growth rate; nominal long-term interest rate) 7
8 The modelling strategy Alternatively, random and fixed effects Lagged RHS variables, to account for possible reverse causality (x = 2) GMM, to account for endogeneity We assume that inequality may respond to GDP level, whereas it can only affect GDP growth (Barro, 2008) 8
9 Measuring inequality Well-known measurement and availability shortcomings Therefore, we employ alternative Gini indices: 1. UN-WIDER, net income 2. Standardized World Income Inequality Database (SWIID), net income 3. Atkinson and Morelli dataset (AM), net income 4. Texas Inequality database, gross income 5. Standardized World Income Inequality Database (SWIID), gross income We also use top 1% and 10% income shares from the World Top Incomes Database (WTID) and from AM (2011) Poverty: percentage of households living below 60% of the median equivalised disposable income of the country (AM, 2011) 9
10 Average inequality over time 10
11 Average inequality over time 11
12 Average top 10% shares over time 12
13 Key findings Significant negative relationship between fiscal variables and inequality Roughly, a 2 to 6% rise of govt spending reduces Gini by 1% Govt debt changes have smaller impact Main result holds across estimation frameworks and inequality indices; stronger with those based on net income No support for Kuznets hypothesis Non-negligible impact on top income shares too Poverty significantly reduced by govt consumption No special role for large fiscal consolidations and expansions 13
14 Net income Gini indices RE FE GMM gini_un gini_swiid gini_am gini_un gini_swiid gini_am gini_un gini_swiid gini_am govt_size t *** -0.26*** -0.65*** -0.35* *** -0.91*** -0.56*** -0.71*** (-3.78) (-4.28) (-7.32) (-1.97) (-1.38) (-3.55) (-4.69) (-4.55) (-5.19) public_debt t *** -0.03*** -0.02* -0.07*** -0.03** ** (-5.76) (-5.16) (-1.92) (-4.08) (-2.14) (-1.33) (2.47) (1.04) (1.47) gdppc t ** 90.70*** ** (-2.03) (4.87) (-0.76) (-1.35) (2.19) (-0.40) (-0.97) (1.46) (0.67) gdppc_sq t * -4.68*** ** (1.89) (-5.16) (0.73) (1.25) (-2.32) (0.48) (0.99) (-1.56) (-0.68) open t *** -0.04*** *** ** (-4.49) (-5.68) (-1.43) (-3.13) (-1.46) (0.36) (-0.85) (-1.11) (-2.19) educ t *** *** (0.41) (-1.51) (-3.48) (0.43) (-0.61) (-1.75) (-1.63) (-0.41) (-3.40) liberties t *** 0.40** *** (3.47) (2.03) (1.31) (3.11) (0.97) (1.24) (0.13) (-0.09) (-1.09) infl t * ** * (-1.86) (-2.46) (-1.40) (-1.34) (-1.97) (-1.48) (-0.02) (1.06) (1.29) unempl t * *** ** (1.91) (-0.86) (3.06) (0.87) (-0.72) (2.85) (1.20) (-0.11) (0.36) pop_gr t ** * *** 2.99** (2.47) (0.56) (1.79) (1.72) (0.094) (1.45) (-0.33) (2.98) (2.56) trend 0.52*** 0.25*** 0.21*** 0.59*** 0.24** *** 0.33*** (9.34) (7.50) (4.17) (5.87) (2.21) (0.27) (0.11) (4.23) (3.27) Constant ** *** * (2.27) (-4.23) (0.92) (1.53) (-1.90) (0.42) (0.99) (-1.26) (-0.60) Observations R-squared $ Hansen J statistic AR(2) A-B test
15 Gross income Gini indices RE FE GMM gini_gross_swiid gini_gross_texas gini_gross_swiid gini_gross_texas gini_gross_swiid gini_gross_texas govt_size t ** ** (1.52) (-2.20) (0.29) (-0.89) (1.45) (-2.18) public_debt t ** -0.04*** *** ** (-2.06) (-7.13) (-0.66) (-2.96) (-0.42) (2.12) gdppc t *** ** (0.10) (2.76) (0.21) (0.94) (-1.99) (-0.64) gdppc_sq t *** * 1.93 (-0.37) (-2.97) (-0.31) (-0.98) (1.88) (0.59) open t (1.16) (0.95) (0.84) (0.68) (-1.12) (0.47) educ t (0.27) (-1.41) (0.084) (-1.35) (1.10) (0.60) liberties t *** (1.03) (2.77) (0.61) (1.39) (0.37) (0.06) infl t ** -0.04* (-2.09) (-1.73) (-1.56) (-1.32) (-1.42) (-1.41) unempl t * 0.12 (-1.51) (1.21) (-0.30) (0.76) (-1.65) (1.03) pop_gr t * (0.38) (-0.21) (0.21) (-0.50) (1.16) (1.84) trend 0.39*** 0.27*** 0.33** 0.24** 0.54*** 0.08 (6.54) (6.88) (2.36) (2.40) (3.68) (1.05) Constant ** ** (0.35) (-2.21) (-0.019) (-0.76) (2.15) (0.81) Observations R-squared Hansen J stat AR(2) A-B test
16 Net income Gini indices, fiscal episodes i) consolidation ii) consolidation i) expansion gini_un gini_swiid gini_am gini_un gini_swiid gini_am gini_un gini_swiid gini_am govt_size t *** -0.56*** -0.60*** -0.83*** -0.65*** -0.72*** -0.85*** -0.57*** -0.64*** (-4.62) (-6.07) (-4.10) (-4.62) (-6.14) (-4.72) (-4.78) (-4.23) (-4.71) public_debt t ** ** ** 0.07** ** (2.55) (0.54) (1.62) (2.23) (0.66) (2.37) (2.50) (0.82) (2.23) episode t * ** (-0.55) (1.68) (1.52) (0.24) (0.02) (-0.71) (2.13) (0.70) (-0.13) gdppc t * ** *** (-1.06) (1.23) (-0.39) (-1.71) (0.89) (-2.50) (-1.44) (2.72) (0.24) gdppc_sq t * ** *** (1.08) (-1.24) (-0.39) (1.71) (-0.88) (2.57) (1.45) (-2.78) (-0.25) open t ** -0.05** ** * -0.10** (-0.82) (-1.35) (-2.33) (-2.03) (-1.51) (-2.38) (-0.92) (-1.91) (-2.46) educ t ** -5.79** *** *** -8.55** *** (-2.02) (-2.55) (-5.58) (-1.54) (-1.62) (-3.87) (-2.11) (-0.97) (-4.96) liberties t (-0.15) (1.23) (-0.33) (-0.30) (-0.38) (-0.42) (-0.43) (-0.30) (-0.71) infl t (-0.23) (0.56) (0.98) (-0.87) (1.20) (-0.18) (0.07) (1.30) (0.96) unempl t (0.80) (1.39) (0.99) (0.32) (0.99) (1.14) (1.28) (0.63) (0.99) pop_gr t * 2.43** ** ** 2.51** (-0.66) (1.93) (2.31) (-0.40) (2.41) (0.55) (-0.63) (2.47) (2.02) trend *** 0.26*** ** *** 0.27*** (0.13) (2.89) (2.83) (0.40) (2.35) (0.57) (0.60) (5.38) (2.75) Constant * ** * (1.08) (-1.11) (-0.31) (1.76) (-0.82) (2.53) (1.47) (-2.56) (-0.15) Observations Hansen J statistic AR(2) A-B test
17 Income shares and poverty (GMM) top1_wtid top10_wtid top1_am top10_earn_am poverty govt_size t *** -0.53*** -0.21*** *** (-2.93) (-2.75) (-2.66) (-0.67) (-4.20) public_debt t ** 0.02 (0.36) (1.03) (1.04) (-2.23) (0.70) gdppc t ** (-1.37) (-0.44) (-2.16) (-0.42) (0.13) gdppc_sq t ** (1.41) (0.41) (2.17) (0.27) (-0.21) open t ** (-0.65) (-1.27) (-1.19) (-2.28) (-1.13) educ t * -7.94** (-1.59) (-1.41) (-1.38) (-1.94) (-2.35) liberties t (-0.45) (-0.01) (-1.47) (-0.43) (-0.30) infl t (0.18) (-0.40) (0.75) (-1.48) (0.33) unempl t ** ** (2.23) (1.22) (2.22) (-0.18) (0.33) pop_gr t (0.70) (1.30) (0.83) (1.20) (-0.43) lt_rate t *** (-0.93) (-1.52) (-1.28) (-3.46) trend *** 0.17*** (1.46) (1.15) (1.39) (3.19) (2.62) Constant ** (1.38) (0.55) (2.19) (0.69) (0.04) Observations Hansen J statistic AR(2) A-B test
18 Main conclusions Changes in govt spending exert considerable equalizing effects Weak role for govt debt and large fiscal changes Distributional impact of unfavourable macroeconomic shocks can be mitigated The Great Recession: likely, high debt levels will constrain mitigation and be costly in terms of income distribution 18
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