Austerity and inequality: The size and composition of fiscal adjustment matter

Abstract

Understanding the distributional consequences of fiscal adjustment measures is important for equity, but also to ensure the sustainability of the measures. This column shows that fiscal adjustments increase inequality, including through unemployment. Spending?based adjustments worsen inequality more significantly than tax? based adjustments. Progressive taxation and targeted social benefits and subsidies introduced in the context of a broader decline in spending can help offset some of the distributional impact of fiscal adjustments.