The rise in inequality after pandemics: Can fiscal support play a mitigating role?

Abstract

Major epidemics of the last two decades (SARS, H1N1, MERS, Ebola, and Zika) have been followed by increases in inequality [Furceri et al. (2020), COVID Economics, 12, 138-157]. In this article, we show that the extent of fiscal consolidation in the years following the onset of these pandemics has played an important role in determining the extent of the increase in inequality. Episodes marked by extreme austerity - measured using either the government's fiscal balance, health expenditures, or redistribution - have been associated with an increase in the Gini measure of inequality three times as large as in episodes where fiscal policy has been more supportive. We survey the evidence thus far on the distributional impacts of the COVID-19 pandemic, which suggests that inequality is likely to increase in the absence of strong policy actions. We review the case made by many observers [IMF (2020), Fiscal Monitor; Stiglitz (2020), Finance & Development, Fall 2020; Sandbu (2020b), Financial Times, 26 November 2020)] that fiscal support should not be withdrawn prematurely despite understandable concerns about high public debt-to-GDP ratios.