Fiscal Adjustment and Income Inequality: Sub-National Evidence from Brazil

Abstract

We combine state-level fiscal data with household survey data to assess the links between sub-national fiscal policy and income inequality in Brazil over the period 1995-2011. The results indicate that a tighter fiscal stance at the sub-national level is not associated with a deterioration in inequality measures. This finding contrasts with the conclusions of several papers in the burgeoning literature on the effects of fiscal consolidation on inequality using national data for OECD economies. In addition, we find that a tighter stance is typically positively associated with a measure of “shared prosperity”. Hence, our results caution against extrapolating policy implications of the literature focusing on advanced economies to other settings.

Keywords: Income distribution, Brazil, Fiscal policy, Economic models, Time series, Fiscal Adjustment, Income Inequality, fiscal stance, fiscal consolidation, fiscal consolidations, social expenditure, taxation, government spending, fiscal operations, fiscal institutions, fiscal adjustment process, public expenditures, fiscal federalism, tax revenue, fiscal data, public spending, fiscal discipline, fiscal structure, fiscal adjustments, fiscal performance, fiscal variables, fiscal balance, fiscal decentralization, tax system, municipal expenditures, primary fiscal balance, budget deficit, public finances, fiscal responsibility, expenditure cuts, fiscal outcomes, fiscal redistribution, revenue collectio

JEL Classification: D30, O40, O11