Reallocating Public Spending to Reduce Income Inequality: Can It Work?

September 6, 2019

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Format: Chicago

Djeneba Doumbia, and Tidiane Kinda. Reallocating Public Spending to Reduce Income Inequality: Can It Work?, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Can a government reduce income inequality by changing the composition of public spending while keeping the total level of expenditure fixed? Using newly assembled data on spending composition for 83 countries across all income groups, this paper shows that reallocating spending toward social protection and infrastructure is associated with reduced income inequality, particularly when it is financed through cuts in defense spending. However, the political and security situation matters. The analysis does not find evidence that lowering defense spending to finance infrastructure and social outlays improves income distribution in countries with weak institutions and at higher risk of conflict. Reallocating social protection and infrastructure spending towards other types of spending tends to increase income inequality. Accounting for the long-term impact of health spending, and particularly education spending, helps to better capture the equalizing effects of these expenditures. The paper includes a discussion of the implications of the findings for Indonesia, a major emerging market where income inequality is at the center of policy issues.

Subject: Defense spending, Education spending, Expenditure, Health care spending, Income distribution, Income inequality, National accounts

Keywords: Asia and Pacific, Defense spending, Defense spendingAotal spending, Education spending, Expenditure category, Expenditure t-1, Global, Health care spending, Income inequality, Income inequality, Income share, Inequality data, Infrastructure t-1, Market income, Net Gini coefficient, Public spending policy, Remained flat, Wealth Gini Index, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/188
Stock No:

WPIEA2019188
ISBN:

9781513511863
ISSN:

1018-5941

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