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Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-count

Author(s): Martin Larch – Bureau of European Policy Advisors European Commission

Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-country evidencepdf(577 kB) Choose translations of the previous link 

Summary for non-specialistspdf(71 kB) Choose translations of the previous link 

A bias towards running deficits is an entrenched feature of fiscal policy making in most developed economies.

Our paper examines whether this tendency is in any way associated with the personal distribution of income of a country. It takes inspiration from theoretical work according to which distributional conflicts may give rise to deficit spending or to delayed fiscal adjustment. Although these theories have been around for years the empirical literature on the determinants of fiscal performance has so far paid little or no attention to the possible role played by different degrees of income inequality.

Our results suggest that this neglect was not justified. Using cross-country data we find evidence that a more unequal distribution of income can weigh on a country's fiscal performance. These findings can be relevant in the aftermath of the post-2007 global financial and economic crisis in particular when designing fiscal exist strategies. The success and sustainability of such strategies may inter alia depend on their distributional implications.

(European Economy. Economic Papers 414. June 2010. Brussels. PDF. Tab. Graph. Bibliogr. Free.)

KC-AI-10-414-EN-N (online)
ISBN 978-92-79-14900-9 (online)
ISSN 1725-3187 (online)
doi: 10.2765/42402 (online)

JEL classification: D31, E62, E6, G23

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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