International Experience with Fiscal Redistribution

SANJEEV GUPTADeputy Director

Fiscal Affairs DepartmentInternational Monetary Fund

ColomboJuly 14, 2016

Outline of the presentation

Trends in Inequality and the Redistributive Role of Fiscal PolicyTrends in Inequality and the Redistributive Role of Fiscal Policy

Lessons for Policy Design:

Tax PoliciesTax Policies

Expenditure Policies

Lessons from Case Studies

Fiscal 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 in Inequality and e ds equa ty a d the Redistributive Role of

Fi l P liFiscal Policy

While world income inequality has been going down …

Evolution of World Inequality, 1820-201080

140

160

6

70

75

80

Historical series

Recent period

1990 1995

2000 2005

100

120

55

60

65

Gap

cen

t (G

ini)

Gini coefficient

2000

2010

2000

1990

40

60

80

40

45

50

Per

Mean income gap between top and bottom 10%2010

2005

20001995

20

40

30

35

5

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.

… within countries inequality has been increasing in most d d i d i l i advanced economies and in large emerging ones

Income Inequality in the 1980s and 2000sAdvanced Economies Developing Economies

HondurasJamaica

South AfricaBotswana

C t l Af i

0.6

0.65

Advanced Economies Developing Economies

U it d St t

0.4

0.45

Malaysia

Brazil

Chile

Colombia

Costa RicaDominican Republic

Mexico

Panama

ParaguayCentral African

Republic

Kenya

Lesotho

Mozambique

Nigeria

Rwanda

Swaziland

Zambia

0 45

0.5

0.55

i In

dex

) la

testUnited States

United Kingdom

France

Italy

CanadaJapan

Greece

Portugal

SpainAustraliaNew Zealand

Cyprus

Israel

Taiwan0 3

0.35

nd

ex)

late

st

Cambodia

Sri Lanka

I diIndonesia

Laos

Philippines

Thailand

Vietnam

China

Mongolia TurkeyAlbania

Georgia

Kyrgyzstan

TurkmenistanUzbekistan

ArgentinaBolivia

EcuadorEl Salvador

Mexico

NicaraguaPeru

Uruguay

Venezuela

Iran

MauritaniaMorocco Tunisia

Cameroon

Ghana

Guinea

Cote d`Ivoire Madagascar

Niger

SenegalTanzania

Uganda

Burkina Faso

0.35

0.4

0.45

neq

ual

ity

(Gin

Austria

BelgiumDenmark

GermanyLuxembourg

NorwaySweden

SwitzerlandFinland

IrelandCyprusTaiwan

Czech RepublicSlovak Republic

Slovenia

0.25

0.3

qu

alit

y (G

ini

In

Bangladesh IndiaNepal

Armenia

Azerbaijan

Kazakhstan

Kyrgyzstan

Moldova

Hungary

Poland

Jordan

Egypt

Pakistan

Burundi

Ethiopia

Mali

g

0.25

0.3

0 25 0 35 0 45 0 55 0 65

In

Netherlands

0.15

0.2

0 15 0 2 0 25 0 3 0 35 0 4 0 45

Ineq

0.25 0.35 0.45 0.55 0.65Inequality (Gini Index) 1980s

6

0.15 0.2 0.25 0.3 0.35 0.4 0.45Inequality (Gini Index) 1980s

Wealth inequality is significantly more pronounced than income inequality

Inequality of Wealth and Income0 9

0 6

0.7

0.8

0.9

Wealth Gini; Average = 0.68Disposable Income Gini; Average = 0.36

0.4

0.5

0.6

0.1

0.2

0.3

Sources: Davies and others (2008); Luxembourg Income Study; Organisation for Economic Co-operation and Development; Socio-Economic

0.0

JPN

CH

N

ES

P

KO

R

ITA

AU

S

NLD

TW

N

BG

D

GE

R

IND

VN

M

CA

N

GB

R

PA

K

RU

S

TH

A

TU

R

FR

A

NG

A

AR

G

ME

X

IDN

BR

A

US

A

CH

E

7

( ) g y g p p

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.

Inequality and inequality of opportunities tend

ITAGBR

USA

0.5

→)

to be related

FRAESP

CHEUSA

0.4

ss m

ob

ility

→

GERJPN

NZL0.3

s el

asti

city

(le

s

AUS

CANFIN

SWE

0.2

tio

nal

ear

nin

gs

DNK

FINNOR

y = 0.0251x - 0.3709

0.120 25 30 35

Gen

erat

20 25 30 35

Gini (around 1985; higher inequality→)

8

Distributive concerns—to a varying degree–are addressed in IMF advice

► Distributive concerns in IMF policy advice:p y

► Surveillance of economic policies

► Lending

C it b ildi► Capacity building

► 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 recognition that inequality may have social consequences, potentially undermining g g y y y gmacroeconomic stability and sustainable growth

► Recent examples where these issues have been addressed in Fund Surveillance: Ethiopia, Bolivia and ► ece t e a p es e e t ese ssues a e bee add essed u d Su e a ce t op a, o a a dKyrgyz Republic

9

Fiscal redistribution reduced inequality by one third in d d i tl th h di

0.30

Average market income Gini: 0.43

advanced economies, mostly through spending

0 20

0.25

on

From taxesFrom transfers

Average market income Gini: 0.43Average disposable income Gini: 0.29

0.15

0.20

e G

ini r

edu

ctio

Total redistribution: 0.14

0.10

Ab

solu

te

From transfers: 0.09

0.00

0.05

NK

ZE EL

VN

OR

BR IN UT

WE

UX

EU

RA

US

RL

LD SR

AN

SA

ST

TA RC

SP

OR

WN

DN

CZ

BE

SV

NO

GB F AU

SW LU DE

FR

AU IR NL IS CA

US

ES IT

GR ES

KO

TW

10

The contribution of fiscal policy to reduce inequality is smaller in developing countriesdeveloping countries

Level and Composition of Tax Revenues and Social Spending , 2010

35

40

45 EducationHealthSocial protectionTax revenuesTotal revenues

20

25

30

ent

of

GD

P

5

10

15

20

Per

ce

0

5

Advanced{30; 29}

Emerging Europe{14; 16}

Latin America and the

Caribbean

Middle East and North

Africa

Asia and Pacific{23; 19}

Sub-Saharan Africa

{34; 35}

11

Source: IMF database.

Note: Numbers in brackets refer to number of countries in the {tax; spending} country samples.

{14; 16} Caribbean{23; 21}

Africa{19; 18}

{23; 19} {34; 35}

Lessons for Policy Design

Designing efficient redistributive fiscal policy

► Redistributive fiscal policy should be consistent with macroeconomic objectives► Redistributive fiscal policy should be consistent with macroeconomic objectives

► Policies need to be carefully designed taking into account also indirect and medium-long term effectsg

► Design should take into account administrative capacity

► The impact of tax and spending policies should be evaluated jointly► The impact of tax and spending policies should be evaluated jointly

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Efficient design requires looking at tax and spending together

India

Si l t d N t I t b D il f C bi d T d T f R fSimulated Net Impact by Decile of Combined Tax and Transfer Reforms

2.5

pti

on

0 5

0.5

1.5

ho

ld C

on

sum

p

-2 5

-1.5

-0.5

cen

t o

f H

ou

seh

-3.5

2.5

1 2 3 4 5 6 7 8 9 10

Per

c

Deciles

14

Source: IMF staff estimates based on the 2011/12 Indian National Sample Survey and the Employment Unemployment Survey

Deciles

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 DevelopingIndirect 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 Advanced Developing

✓ ✓Improve access to education of low-income ✓ ✓Improve access to education of low-income families

Health Advanced Developing

✓Expand coverage of publicly financed basic health package

✓

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 Advanced Developing

✓

✓

Intensify the use of active labor market programs and in-work benefits

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

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Other lessons

Heterogeneity among countries must be taken into account when designingHeterogeneity 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 institutional design varies among countries and may have an effect on distributional outcomes (for instance decentralization/centralization of certain functions)

19

Fiscal consolidation and redistributionUnemployment Rates and Gini Coefficients During Fiscal Adjustment

(percent)1030.0

929.5

Disposable income Gini coefficient

Unemployment rate (right scale)

829.0

728.5

Sources: Solt (2014); Eurostat; and IMF World Economic Outlook

628.0Before consolidation During consolidation

20

Sources: Solt (2014); Eurostat; and 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.

Fiscal consolidation and redistributionChanges in Market- and Disposable-Income Gini Coefficients, 2007-13

0.08

0.02

0.04

0.06

-0.02

0.00

-0.06

-0.04

PR

TLV

AR

OM

GR

CN

LDG

BR

FIN

BE

LLU

XIT

AS

VN

IRL

CZ

EB

GR

AU

TD

NK

ES

TC

YP

PO

LS

WE

DE

UM

LTE

SP

SV

KF

RA

HU

NLT

U

Disposable Market

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 For more information on the exact updating factors used for each country please refer to the Country

P R G N G B L S C B A D E C P S D M E S F H L

21

updates from the income reference period to later years are based on a combination of updating factors. For more information on the exact updating factors used for each 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.

Conclusions

Conclusions

Fiscal policy is a powerful and adaptable tool for achieving distributionalFiscal 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