The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries

The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries PDF

Author: Adrian Peralta-Alva

Publisher: International Monetary Fund

Published: 2018-06-22

Total Pages: 49

ISBN-13: 1484364368

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We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution.

The Distributional Effects of Fiscal Consolidation

The Distributional Effects of Fiscal Consolidation PDF

Author: Laurence M. Ball

Publisher: International Monetary Fund

Published: 2013-06-21

Total Pages: 24

ISBN-13: 1475551940

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This paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, we find that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments.

The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies

The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies PDF

Author: Davide Furceri

Publisher: International Monetary Fund

Published: 2017-10-20

Total Pages: 39

ISBN-13: 1484320700

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This paper provides new empirical evidence of the macroeconomic effects of public investment in developing economies. Using public investment forecast errors to identify unanticipated changes in public investment, the paper finds that increased public investment raises output in the short and medium term, with an average short-term fiscal multiplier of about 0.2. We find some evidence that the effects are larger: (i) during periods of slack; (ii) in economies operating with fixed exchange rate regimes; (iii) in more closed economies; (iv) in countries with lower public debt; and (v) in countries with higher investment efficiency. Finally, we show that increases in public investment tend to lower income inequality.

The Distributional Effects of Government Spending Shocks in Developing Economies

The Distributional Effects of Government Spending Shocks in Developing Economies PDF

Author: Davide Furceri

Publisher: International Monetary Fund

Published: 2018-03-14

Total Pages: 39

ISBN-13: 1484347978

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We construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long-lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low-income countries versus emerging markets). An additional contribution of the paper is the computation of the medium-term inequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1 percent of GDP over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.

Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy

Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy PDF

Author: Jaejoon Woo

Publisher: International Monetary Fund

Published: 2013-09-17

Total Pages: 37

ISBN-13: 1484390911

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The 2007-09 Great Recession has led to an unprecedented increase in public debt in many countries, triggering substantial fiscal adjustments. What are the distributional consequences of fiscal austerity measures? This is an important policy question. This paper analyzes the effects of fiscal policies on income inequality in a panel of advanced and emerging market economies over the last three decades, complemented by a case study of selected consolidation episodes. The paper shows that fiscal consolidations are likely to raise inequality through various channels including their effects on unemployment. Spending-based consolidations tend to worsen inequality more significantly, relative to tax-based consolidations. The composition of austerity measures also matters: progressive taxation and targeted social benefits and subsidies introduced in the context of a broader decline in spending can help offset some of the adverse distributional impact of consolidation. In addition, fiscal policy can favorably influence long-term trends in both inequality and growth by promoting education and training among low- and middle-income workers.

Macroeconomic Research in Low-income Countries

Macroeconomic Research in Low-income Countries PDF

Author: Hites Ahir

Publisher: International Monetary Fund

Published: 2021-03-24

Total Pages: 76

ISBN-13: 1513566601

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Despite strong economic growth since 2000, many low-income countries (LICs) still face numerous macroeconomic challenges, even prior to the COVID-19 pandemic. Despite the deceleration in real GDP growth during the 2008 global financial crisis, LICs on average saw 4.5 percent of real GDP growth during 2000 to 2014, making progress in economic convergence toward higher-income countries. However, the commodity price collapse in 2014–15 hit many commodity-exporting LICs and highlighted their vulnerabilities due to the limited extent of economic diversification. Furthermore, LICs are currently facing a crisis like no other—COVID-19, which requires careful policymaking to save lives and livelihoods in LICs, informed by policy debate and thoughtful research tailored to the COVID-19 situation. There are also other challenges beyond COVID-19, such as climate change, high levels of public debt burdens, and persistent structural issues.

Macro-Structural Policies and Income Inequality in Low-Income Developing Countries

Macro-Structural Policies and Income Inequality in Low-Income Developing Countries PDF

Author: Ms.Stefania Fabrizio

Publisher: International Monetary Fund

Published: 2017-01-26

Total Pages: 42

ISBN-13: 1475570457

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Despite sustained economic growth and rapid poverty reductions, income inequality remains stubbornly high in many low-income developing countries. This pattern is a concern as high levels of inequality can impair the sustainability of growth and macroeconomic stability, thereby also limiting countries’ ability to reach the Sustainable Development Goals. This underscores the importance of understanding how policies aimed at boosting economic growth affect income inequality. Using empirical and modeling techniques, the note confirms that macro-structural policies aimed at raising growth payoffs in low-income developing countries can have important distributional consequences, with the impact dependent on both the design of reforms and on country-specific economic characteristics. While there is no one-size-fits-all recipe, the note explores how governments can address adverse distributional consequences of reforms by designing reform packages to make pro-growth policies also more inclusive.

The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries

The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries PDF

Author: Adrian Peralta-Alva

Publisher: International Monetary Fund

Published: 2018-06-13

Total Pages: 49

ISBN-13: 1484363035

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We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution.

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