Distributional Consequences of Fiscal Adjustments: What Do the Data Say?

Abstract

The 2007-2009 Great Recession has led to an unprecedented increase in public debt in many countries, triggering substantial fiscal adjustments. What are the distributional consequences of fiscal austerity measures? This is an important policy question. This paper analyzes the effects of fiscal adjustments for a panel of 17 OECD countries over the last 30 years, complemented by a case study of selected fiscal adjustment episodes. The paper shows that fiscal adjustments are likely to raise inequality through various channels including their effects on unemployment. Spending-based adjustments tend to worsen inequality more significantly, relative to tax-based adjustments. The composition of austerity measures also matters: progressive taxation and targeted social benefits and subsidies introduced in the context of a broader decline in spending can help offset some of the adverse distributional impact of fiscal adjustments.