TUAC - TRADE UNION ADVISORY COMMITTEE TO THE OECD

22/11/2013

Trade unions are concerned about the adverse effects of austerity, in particular on employment and inequality. As recent research by the IMF shows, they have any reason to do so. A working paper, published by the IMF’s Fiscal Affairs Department in September 2013, analysed the effects of fiscal consolidation and a set of fiscal variables (tax structure, specific taxes and expenditures) on income inequality in several advanced and emerging market economies over the last three decades.

It addressed the following questions: (i) Does fiscal austerity worsen income inequality? If it does, how and by how much? Does the size of fiscal adjustment matter? (ii) What are the effects on income distribution of specific fiscal policies, such as tax structure, direct and indirect taxes, social benefits spending and wage bills?

The results of the econometric analysis suggest that fiscal consolidations tend to increase income inequality and have effects on unemployment. It was found that on average, a consolidation of 1 percentage point of GDP is associated with an increase in the disposable income Gini coefficient of around 0.4-0.7 percent over the first two years. Moreover, it was found that spending-based, in particular large-sized consolidations, i. e. those greater than 1½ per cent of GDP and thus longer in duration and mostly expenditure-based, tend to significantly worsen inequality relative to tax-based consolidations. As fiscal consolidation also raises unemployment, this constitutes another channel through which consolidation affects inequality.

The analysis further revealed that the composition of austerity measures has important implications: progressive taxation and targeted social benefits and subsidies introduced in the context of a broader reduction in spending can help offset some of the adverse distributional impact of consolidation. More specifically, the findings suggest that the progressivity of taxation (as measured by the ratio of direct to indirect taxes), social benefits (including health care, social security pensions, and unemployment compensation) and subsidies tend to be consistently associated with lower inequality for disposable income in the regressions. The results also confirm that in advanced economies, reforms since the 1980s have been a factor behind rising income inequality by lessening the generosity of social benefits and the progressivity of income tax systems.

Download the full paper here: http://www.imf.org/external/pubs/ft/wp/2013/wp13195.pdf

Woo, J., Bova, E., Kinda,T., Zhang, Y. S. (2013). Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy: What Do the Data Say? IMF Working Paper 13/195; Washington D. C.