Fiscal consolidations and income inequality: Evaluating the evidence

Abstract

What are the effects of fiscal austerity on income inequality? In this paper I estimate the average treatment effect (ATE) of fiscal consolidations quantifying their dynamic impact by means of dose–response functions. Dose–response functions allow the ATEs to vary by the levels of treatment. I find that austerity indeed increases income inequality, however the increases manifest themselves whenever unannounced fiscal measures are relatively low, lower that 0.20% of GDP or relatively high, higher than 2.17% of GDP. For intermediate levels of fiscal measures income inequality does not change. These results hold for various measures of income inequality.