International Experience with Fiscal Redistribution SANJEEV GUPTA Deputy Director Fiscal Affairs Department International Monetary Fund Colombo July 14, 2016 Outline of the presentation Trends in Inequality and the Redistributive Role of Fiscal Policy Lessons Tax for Policy Design: Policies Expenditure Lessons Fiscal Policies from Case Studies Consolidation and Income Distribution Conclusions 2
The presentation builds on the findings included in the recent IMF book http://www.imfbookstore.org/proddetails.asp?id=irfpea&pg=1&type=bl 3 Trends e ds in Inequality equa ty and a d the Redistributive Role of Fiscal Policy Fi l P li
While world income inequality has been going down Evolution of World Inequality, 1820-2010 80 Recent period 75 Historical series 2000 6 65 120 2010 60 55 Gini coefficient 100 1990 1995 2005 50 45 40 140 2005 2000 2010 Mean income gap between top and bottom 10% Gap Percent (Gini) 1995 1990 70 160 80 60 40 35 30 20 Sources: Bourguignon, The Globalization of Inequality. The indexes of PPP that Angus Maddison used for the historical data referenced the year 1990. The data for the recent period use PPP data based on price statistics that were collected in 2005, which sometimes resulted in significant revisions to the parity indexes. This explains much of the discontinuity between the two series in 1990. 5 within countries inequality has been increasing in most advanced d d economies i and d iin llarge emerging i ones Income Inequality in the 1980s and 2000s Advanced Economies Developing Economies 0.45 0.65 0.4 0.3 03 0.25 In nequality (Gini Index) latest Ineq quality (Gini In ndex) latest U it d St t United States 0.35 South Africa Botswana 0.6 Israel United Kingdom Greece AustraliaItaly Spain New Zealand JapanPortugal Canada Taiwan Cyprus France Ireland Luxembourg Germany Austria Czech Republic Switzerland Slovak Republic Denmark Finland Belgium Sweden Slovenia Norway Netherlands 0.2 Honduras 0.55 0.5 0.45 0 45 0.4 0.35 0.3 0.15 0 15 0.15 02 0.2 0.25 0 25 03 0.3 0 35 0.35 Inequality (Gini Index) 1980s 04 0.4 0 45 0.45 Rwanda Paraguay Nigeria Colombia Jamaica C t l Af i Central African Zambia Lesotho Republic Brazil Panama Swaziland Chile Kenya Malaysia Mexico Uganda Peru Ghana Philippines Ecuador ChinaUruguay Cote d`ivoire Madagascar El Salvador Nicaragua Morocco Bolivia Tunisia Sri Lanka Georgia Burkina Faso Turkmenistan ArgentinaMauritania Thailand Guinea Senegal Tanzania Cambodia Laos Uzbekistan Cameroon Turkey Iran Mongolia Albania Vietnam Niger gvenezuela KyrgyzstanIndonesia Jordan I di Azerbaijan Bangladesh India Mali Moldova Burundi Nepal Egypt Poland Armenia Kazakhstan Ethiopia Pakistan Hungary 0.25 0.25 0 25 Dominican MozambiqueCosta Rica Republic 0.35 0.45 0.55 0 35 0 45 0 55 Inequality (Gini Index) 1980s 0.65 0 65 6
Wealth inequality is significantly more pronounced than income inequality Inequality of Wealth and Income 09 0.9 Wealth Gini; Average = 0.68 Disposable Income Gini; Average = 0.36 0.8 0.7 06 0.6 0.5 0.4 0.3 0.2 0.1 CHE USA BRA IDN MEX ARG NGA FRA TUR THA RUS PAK GBR CAN IND VNM GER BGD NLD TWN ITA AUS ESP KOR JPN CHN 0.0 Sources: Davies and others ((2008); ) Luxembourg g Income Study; y Organisation g for Economic Co-operation p and Development; p Socio-Economic Database for Latin America and the Caribbean (CEDLAC and the World Bank). Note: Data labels in the figure use International Organization for Standardization (ISO) country codes. 7 Inequality and inequality of opportunities tend to be related Generattional earnings s elasticity (les ss mobility ) 0.5 GBR ITA CHE FRA 0.4 USA ESP JPN GER 0.3 NZL SWE AUS 0.2 FIN CAN NOR DNK y = 0.0251x - 0.3709 0.1 20 25 30 Gini (around 1985; higher inequality ) 35 8
Distributive concerns to a varying degree are addressed in IMF advice Distributive concerns in IMF p policy y advice: Surveillance of economic policies Lending C it building b ildi Capacity First began to crop up in IMF-supported programs in the late 1980s and work intensified in the wake of the global financial crisis Growing g recognition g that inequalityy mayy have social consequences, potentially y undermining g macroeconomic stability and sustainable growth Recent ece t e examples a p es where e e tthese ese issues ssues have a e bee been add addressed essed in Fund u d Su Surveillance: e a ce Ethiopia, t op a, Bolivia o aa and d Kyrgyz Republic 9 Fiscal redistribution reduced inequality by one third in advanced d d economies, i mostly tl th through h spending di 0.30 Average market income Gini: 0.43 Average disposable income Gini: 0.29 From taxes From transfers 0 20 0.20 0.15 Total redistribution: 0.14 From transfers: 0.09 0.10 0.05 TW WN ES SP KO OR IT TA GR RC ES ST US SA IS SR CA AN IR RL NL LD FR RA AU US LU UX DE EU SW WE FIN UT AU GB BR NO OR BE EL SV VN CZ ZE 0.00 DN NK Absolute e Gini reductio on 0.25 10
The contribution of fiscal policy to reduce inequality is smaller in developing countries Level and Composition of Tax Revenues and Social Spending, 2010 45 Education Health Social protection Tax revenues Total revenues 40 Perce ent of GDP 35 30 25 20 15 10 5 0 Advanced {30; 29} Emerging Europe {14; 16} Source: IMF database. Note: Numbers in brackets refer to number of countries in the {tax; spending} country samples. Latin America Middle East and the and North Caribbean Africa {23; 21} {19; 18} Asia and Pacific {23; 19} Sub-Saharan Africa {34; 35} 11 Lessons for Policy Design
Designing efficient redistributive fiscal policy Redistributive fiscal policy should be consistent with macroeconomic objectives Policies need to be carefully designed taking into account also indirect and medium-long g term effects Design should take into account administrative capacity The impact of tax and spending policies should be evaluated jointly 13 Efficient design requires looking at tax and spending together India Perc cent of Househ hold Consump ption Si Simulated l t d Net N t Impact I t by b Decile D il off Combined C bi d Tax T and d Transfer T f Reforms R f 2.5 1.5 0.5-0.5 05-1.5-2 2.5 5-3.5 1 2 3 4 5 6 7 8 9 10 Deciles Source: IMF staff estimates based on the 2011/12 Indian National Sample Survey and the Employment Unemployment Survey 14
Tax policy: reform options to achieve more efficient redistribution of taxation Direct taxes Advanced Developing Implement progressive personal income tax (PIT) rate structures Relieve low-wage earners from tax or social contributions Expand coverage of PIT More effectively tax multinational corporations Utilize better opportunities for recurrent property taxation 15 Tax policy: reform options to achieve more efficient redistribution of taxation Indirect taxes Advanced Developing Minimize VAT exemptions and special VAT rates Use specific excises mainly for purposes other than redistribution 16
Expenditure policy: reform options to achieve more efficient redistribution of spending Education Improve access to education of low-income families Health Advanced Developing Advanced Developing Expand coverage of publicly financed basic health package Ensure or maintain access of low-income groups to essential health services 17 Expenditure policy: reform options to achieve more efficient redistribution of spending Social transfers Intensify the use of active labor market programs and in-work benefits Advanced Developing Expand conditional cash transfer (CCT) programs as administrative capacity improves Increase effective pension retirement age while protecting low-income pensioners Expand noncontributory means-tested social pensions 18
Other lessons Heterogeneity among countries must be taken into account when designing fiscal policies: income levels and pre-tax & transfers levels of inequality differ significantly among countries administrative capacity may constrain policy options (for instance for ensuring tax compliance or effective targeting) institutional design varies among countries and may have an effect on distributional outcomes (for instance decentralization/centralization of certain functions) 19 Fiscal consolidation and redistribution Unemployment Rates and Gini Coefficients During Fiscal Adjustment (percent) 30.0 10 Disposable income Gini coefficient Unemployment rate (right scale) 29.5 9 29.0 8 28.5 7 28.0 6 Before consolidation During consolidation Sources: Solt (2014); Eurostat; and IMF, IMF World Economic Outlook. Note: Fiscal adjustment episodes are defined as in Escolano and others 2014 based on changes in cyclically adjusted primary balances in countries with positive primary gaps. The sample covers 91 episodes across 49 advanced and developing economies between 1945 and 2012. 20
Fiscal consolidation and redistribution Changes in Market- and Disposable-Income Gini Coefficients, 2007-13 0.08 0.06 0.04 0.02 0.00-0.02-0.04 Disposable Market P PRT LVA R ROM GRC G NLD N GBR G FIN B BEL L LUX ITA SVN S IRL CZE C BGR B AUT A DNK D E EST CYP C POL P S SWE DEU D MLT M ESP E SVK S FRA F HUN H LTU L -0.06 Source: EUROMOD statistics on Distribution and Decomposition of Disposable Income, accessed at http://www.iser.essex.ac.uk/euromod/statistics/ using EUROMOD version No. G2.0. Note: An increase in the Gini coefficient indicates an increase in inequality. The Gini coefficient for market income is estimated based on disposable-income micro data by adding back (in the case of taxes) or deducting (in the case of benefits) each income component, using the EUROMOD microsimulation model. Estimates for market-income Gini in 2007 and 2013 are based on European Union Statistics on Income and Living Conditions 2008 (income reference period: 2007) and European Union Statistics on Income and Living Conditions 2010 (income reference period: 2009), respectively. For the latter, market-income updates from the income reference period to later years are based on a combination of updating factors. factors For more information on the exact updating factors used for each country, country please refer to the Country Reports (https://www.iser.essex.ac.uk/euromod/resources-for-euromod-users/country-reports). Changes between years and tax-benefit components are not necessarily statistically significant. Data labels in the figure use International Organization for Standardization (ISO) country codes. 21 Conclusions
Conclusions Fiscal policy is a powerful and adaptable tool for achieving distributional objectives Improving both distributional outcomes and efficiency is possible Considering taxes and spending programs together enhances the effectiveness of fiscal redistribution 23