fiscal policy, income inequality - international monetary funddnk cze bel svn nor gbr fin aut swe...

Fiscal Policy, Income Inequality & Inclusiveness

David Coady Fiscal Affairs Department

International Monetary Fund

IMF-JICA Conference Tokyo, Japan

February 17-18, 2015

Structure of the presentation

Trends in inequality

Including inequality of income and wealth

Redistributive role of fiscal policy

Design of efficient redistributive fiscal policy

Basic principles for designing fiscal redistribution

Design of spending measures (cash and in-kind transfers)

Design of tax measures (direct and indirect taxes)

2

I. Trends in Inequality

3

Disposable Income Gini Coefficient

Inequality has been increasing in most economies

4

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.55

1980 1985 1990 1995 2000 2005 2010

Gin

i co

eff

icie

nt

Latin America and Caribbean (19) Advanced (21)

Asia and Pacific (14) Emerging Europe (21)

Middle East and North Africa (12) Sub-Saharan Africa (22)

Although poverty has decreased substantially, income inequality has increased

Poverty ($2/day) and Growth 1990-2010 Gini Coefficient

BGD

KHM LKA

TWN

IND

IDN

LAO

MYS

NPL

PHL

THA

VNM

CHN

-70

-60

-50

-40

-30

-20

-10

0

10

0 2 4 6 8 10

Abso

lute

Cha

nge

in P

over

ty R

ate

Average Annual Growth Rate (GDP per Capita)

BGD

KHM

LKA

TWN

IND IDN

LAO

MYS

NPL

PHL

THA

VNM

CHN

MNG #N/A

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.2 0.25 0.3 0.35 0.4 0.45 0.5

2010

1990

2010 Average = 0.37 1990 Average = 0.35

5 Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of; LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea; PHL=Philippines; WSM=Samoa; SLB=Soloman Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan.

Gross Income Share of Top One-Percent in Selected Advanced and Developing Economies, 1925–2012

More recently, the focus has been on the rising income share of top income earners

6

0

5

10

15

20

25

Perc

ent

United Kingdom Australia CanadaSouth Africa India United StatesChina

0

5

10

15

20

25

France Germany Japan

Netherlands Sweden Mauritius

Wealth is even more unequally distributed

7

0

10

20

30

40

50

60

70

80

90

100

IDN

MYS

IND

PH

L

THA

KO

R

PN

G FJI

CH

N

SLB

LKA

TON

VU

T

KH

M

LAO

MD

V

MN

G

VN

M

NP

L

BG

D

PA

K

Wealth Gini

Disposable income Gini

= 70.7

= 37.7

Source: Disposable income Gini is taken from OECD; Luxembourg Income Study Database; Socio-Economic Database for Latin America and the Caribbean (SEDLAC); World Bank; Eurostat. Wealth Gini data comes from Credit Suisse Global Wealth Databook (2012). Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of;

LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea; PHL=Philippines; WSM=Samoa; SLB=Soloman Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan.

Intergenerational income mobility is higher in countries with low income inequality

8

AUS

CAN

DNK

FIN

FRA

GER

ITA

JPN

NZL

NOR

ESP

SWE

CHE

GBR

USA

y = 0.0251x - 0.3709

0.1

0.2

0.3

0.4

0.5

20 25 30 35

Gen

era

tio

nal earn

ing

s ela

stic

ity (

less

mo

bil

ity →

)

Gini (around 1985; higher inequality→)

Public support for redistribution has been rising

9

AUT

BEL

CAN

DNK

FIN

FRA

DEU

ISL

IRL

ITA NLD

NOR POL PRT

SVN

ESP SWE

CHE

GBR

USA NGA

ZAF

ARM

AZE

BLR

GEO

MDA

RUS

UKR

ALB

BIH

BGR

HRV

EST

HUN

LVA

LTU

MKD

MLT

MNE

ROM

SRB

SVK

TUR

ARG

BRA

CHL

MEX

PER

URY

AUS CHN

IND

JPN KOR

TWN

0.1

0.3

0.5

0.7

0.9

0.1 0.3 0.5 0.7 0.9

Late

200

0s

Late 1990s

Public Support for Redistribution

Source: Integrated Values Survey 1981-2008

II. Redistributive Role of Fiscal Policy

10

0.00

0.05

0.10

0.15

0.20

0.25

0.30

DN

K

CZE BEL

SVN

NO

R

GBR FI

N

AU

T

SW

E

LUX

DE

U

FRA

AU

S

IRL

NLD IS

R

CA

N

US

A

EST IT

A

GR

C

ESP

KO

R

Abso

lute

Gin

i red

uctio

n

From taxes

From transfers

Average market income Gini: 0.43

Average disposable income Gini: 0.29

Redistributive fiscal policy reduces inequality by one third in advanced economies, mostly through spending

11 Countries included: AUS=Australia; AUT=Austria; BEL=Belgium; CAN=Canada; CZE=Czech Republic; DEU=Germany; DNK=Denmark; ESP=Spain; EST=Estonia; FIN=Finland; FRA=France; GBR=United Kingdom; GRC=Greece; ISR=Israel; IRL=Ireland; ITA=Italy; KOR=Korea; LUX=Luxembourg; NLD=Netherlands; SVN=Slovenia; SWE=Sweden; TWN=Taiwan Province of China; USA=United States.

From transfers = 0.09

Total redistribution = 0.14

Fiscal redistribution in developing countries low reflecting low revenues and social spending

0

5

10

15

20

25

30

Advanced

{30}

Emerging

Europe

{19}

South

America

{10}

Central

America and

Caribbean

{13}

MENA

{14}

Asia and

Pacific

{22}

Sub-Saharan

Africa

{29}

Composition of social spending, 2010

(Percent GDP)

Social protection Health Education

0

5

10

15

20

25

30

35

40

45

Advanced

{31}

Emerging

Europe

{21}

Latin America

{27}

Sub-Saharan

Africa

{36}

Asia and Pacific

{24}

MENA

{21}

Composition of revenues, 2010

(Percent GDP)

Indirect taxes Income taxes and contributions

Corporate Income Tax Revenue Other tax revenue

Total revenue mean

Social protection spending also low in Asia

0

2

4

6

8

10

12

14

Social protection, public spending (percent GDP)

APD median

APD population weighted average

Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of; LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea; PHL=Philippines; WSM=Samoa; SLB=Soloman Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan.

…. and low spending reflected in low coverage of social insurance…..

14

87% 86%

38% 37%

22% 21%

0

10

20

30

40

50

60

70

80

90

100

Advanced (n=27) Emerging Europe

(n=18)

Middle East and

North Africa (n=17)

Latin America (n=21) Asia and Pacific

(n=19)

Sub-Saharan Africa

(n=27)

Percent of Population above Legal Retirement Age in Receipt of a Pension

…..especially among lower-income groups

15 Social protection includes pensions and social assistance transfers

0

10

20

30

40

50

60

0 10 20 30 40 50 60 70 80 90 100

Ben

efit

Inci

denc

e (P

erce

nt)

Coverage (Percent)

Social Protection Coverage and Benefit Share of Poorest 40%

Asia and Pacific Latin America and Caribbean Middle East and North Africa Sub-Saharan Africa

Median = 42.5

Median = 14.6

A large share of social insurance benefits goes to higher-income groups…..

16

0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80 90 100

Ben

efit

Inci

denc

e (P

erce

nt)

Coverage (Percent)

Social Insurance Coverage and Benefit Share of Poorest 40%


Median = 7.1

Median = 8.8

…..and coverage of social assistance is often incomplete

17

0

10

20

30

40

50

60

0 10 20 30 40 50 60 70 80 90 100

Ben

efit

Inci

denc

e (P

erce

nt)

Coverage (Percent)

Social Assistance Coverage and Benefit Share of Poorest 20%


Median = 37.1

Median = 20.2

Health spending low and outcomes poor…….

0

10

20

30

40

50

60

PN

G

KIR

IND

KH

M

NP

L

BG

D

SLB

IDN

PH

L

MN

G FJI

VN

M

VU

T

CH

N

THA

TON

MD

V

LKA

MYS

BR

N

SS A

fric

a

MEN

A

Cen

tral

Am

eri

ca

Sou

th A

mer

ica

Emer

gin

g Eu

rop

e

Ad

van

ced

Mortality rate, infant (per 1,000 live births)

APD median


0

1

2

3

4

5

6

7

8

9

10

KIR

SLB

NP

LVU

TTO

NM

DV

FJI

MN

GTH

AC

HN

VNM

PNG

MYS

BRN

KHM

LKA

IDN

PHL

IND

BGD

Adva

nced

Emer

ging

Eur

ope

Latin

Am

eric

aSS

Afri

caM

ENA

Health, public spending (percent GDP)

APD median



0

10

20

30

40

50

60

70

80

CH

L 2009

AR

G 2

009

CO

L 2010

UR

Y 2

009

BO

L 2007

EG

Y 2

005

BR

A 2

009

BO

L 2009

BLR

2002

PER

2009

ZA

F 2

010

HN

D 2

004

AR

M 2

011

MN

G 1

995

MEX

2010

ETH

2011

BG

D 2

000

ZM

B 2

009

IDN

2012

SLV

2011

TU

R 2

003

MO

Z 1

997

BG

R 1

995

TH

A 2

008

GTM

2010

RO

M 1

997

GH

A 1

998

IND

1996

EC

U 1

998

………with gaps in health coverage among lower-income groups

19

Share of Health Spending Benefiting the Poorest 40%

Source: Lustig (2015); Davoodi, Tiongson, and Asawanuchit (2010); Lustig et. Al (2011); World Bank..

Countries included: ALB=Albania; ARG=Argentina; ARM=Armenia; AZE=Azerbaijan; BEN=Benin; BGD=Bangladesh; BIH=Bosnia and Herzegovina; BOL=Bolivia; BRA=Brazil; CHL=Chile; CIV=Cote d’Ivoire; COL=Colombia; CRI=Costa Rica; EGY=Egypt; ETH=Ethiopia; GTM=Guatemala; IDN=Indonesia; IND=India; KEN=Kenya; KHM=Cambodia; KSV=Kosovo; LBR=Liberia; LSO=Lesotho; MEX=Mexico; MOZ=Mozambique; NAM=Namibia; NPL=Nepal; PER=Peru; SLV=El Salvador; THA=Thailand; TUR=Turkey; UGA=Uganda; URY=Uruguay; UZB=Uzbekistan; ZAF=South Africa; ZMB=Zambia.

Low education spending also leads to low education outcomes…..

0

2

4

6

8

10

12

KIR

MYS

MD

V

THA

PN

G FJI

BR

N

SLB

VU

T

IND

TON

MN

G

VN

M

PH

L

IDN

NP

L

CH

N

LKA

BG

D

KH

M

Ad

van

ced

Lati

n A

mer

ica

MEN

A

Emer

gin

g Eu

rop

e

SS A

fric

a

Education, public spending (percent GDP)

APD median


0

10

20

30

40

50

60

70

80

90

100

BRN

LKA

FJI

MN

G

THA

IDN

MYS PH

L

NP

L

VUT

BGD

SLB

KHM

Adva

nced

Emer

ging

Eur

ope

MEN

A

Sout

h Am

eric

a

Cen

tral A

mer

ica

SS A

frica

Secondary net enrollment rateAPD medianAPD population weighted average


……and gaps in coverage among lower-income groups

21

Share of Education Spending and Market Income Benefitting the Poorest 40%

Source: Lustig (2015); Davoodi, Tiongson, and Asawanuchit (2010); Lustig et. Al (2011); World Bank..

0

10

20

30

40

50

60

70

80

Countries included: ALB=Albania; ARG=Argentina; ARM=Armenia; AZE=Azerbaijan; BEN=Benin; BGD=Bangladesh; BIH=Bosnia and Herzegovina; BOL=Bolivia; BRA=Brazil; CHL=Chile; CIV=Cote d’Ivoire; COL=Colombia; CRI=Costa Rica; EGY=Egypt; ETH=Ethiopia; GTM=Guatemala; IDN=Indonesia; IND=India; KEN=Kenya; KHM=Cambodia; KSV=Kosovo; LBR=Liberia; LSO=Lesotho; MEX=Mexico; MOZ=Mozambique; NAM=Namibia; NPL=Nepal; PER=Peru; SLV=El Salvador; THA=Thailand; TUR=Turkey; UGA=Uganda; URY=Uruguay; UZB=Uzbekistan; ZAF=South Africa; ZMB=Zambia.

Energy subsidies are high and sometimes exceed social spending

22

(In percent of GDP, 2011)

0.00

2.00

4.00

6.00

8.00

10.00

12.00Th

aila

nd

Mal

div

es

Ko

rea,

Rep

ub

lic o

f

Mal

aysi

a

Bh

uta

n

Fiji

Ind

on

esi

a

Ind

ia

Pak

ista

n

Sri L

anka

Mya

nm

ar

Tax subsidies

Pretax subsidies

Education spending

Health spending

Most of the benefits from energy subsidies accrue to upper income households

Distribution of Petroleum Product Subsidies in Asian Countries by Income Groups (in percent of total product subsidies)

23

3 6

10

19

61

Gasoline

7

12

16

23

42

Diesel

19

20

21

20

21

Kerosene

4 8

13

21

54

LPG

Top quintile

Bottom quintile

III. Designing Efficient Redistributive Fiscal Policy

24

Designing efficient redistributive fiscal policy

Redistributive fiscal policy should be consistent with macroeconomic objectives

The impact of tax and spending policies should be evaluated jointly

Tax and expenditure policies need to be carefully designed to balance distributional and efficiency objectives

Design should take into account administrative capacity

25

Increasing resource mobilization key for enhancing redistributive impact of fiscal policy

• Need to increase revenue mobilization to finance development and redistributive goals

• Need to develop progressive and well targeted spending instruments – For middle/lower-middle-income countries where growth has

substantially decreased poverty, emphasis is now on more inclusive growth, e.g. through expansion of social insurance

– For lower-income countries where poverty is high, revenue low, and competing needs for spending, need well-designed safety nets (consolidation, streamlining, targeting)

• In many economies, (energy) subsidy reform can be both efficient and equitable but well-designed mitigating measures to protect poor needed

26

Reform options to achieve more efficient redistribution of social spending

27

Pensions ‒ Improve fiscal sustainability of existing pension systems through

increasing statutory retirement ages

‒ Tighten link between contributions and benefits

‒ Expand noncontributory means-tested social pensions o Set at level to alleviate poverty but low enough to minimize incentives

to remain outside the formal pension system


28

Non-pensions social benefits (1)

‒ Replace general prices subsidies with targeted transfers ‒ Develop unemployment savings accounts

‒ Consolidate social assistance programs and improve targeting by

addressing their: o Fragmentation and duplication—reduce number of programs

o Bad targeting—introduce means-testing to target benefits and reduce

fiscal costs

o Low coverage and benefits—with fiscal savings from targeting, expand coverage

o Reliance on costly in-kind benefits—use cash benefits


29

Non-pensions social benefits (2) ‒ Expand conditional cash transfer programs as administrative

capacity improves

‒ Improve design of public works programs as a safety net instrument o Avoid crowding out private sector jobs by setting wages below the

market rate for unskilled labor


30

Education ‒ Improve access to education of low-income families

o Increase investment in lower levels of education o Should focus on improving access to and progression through primary

and lower-secondary education o Focus on girls and students in rural areas o Use targeted conditional cash assistance to those with disadvantaged

access to education

‒ Increase private financing of tertiary education o Use targeted conditional cash assistance to those with disadvantaged

access to education o Charge tuition for those with ability to pay; loans to facilitate access of

low-income households


31

Health ‒ Expand coverage of publicly financed basic health package

‒ Reduce or eliminate user charges for low-income households

‒ Address supply side barriers in less developed areas

‒ Improve efficiency of health spending

Reform options to achieve more efficient redistribution of taxation

32

Personal income taxation ‒ Implement progressive Personal Income Tax (PIT) rate structures

‒ Expand coverage of the PIT

‒ Reconsider income tax exemptions, based on a critical tax-expenditure review

‒ Impose a reasonable PIT exemption threshold

Capital income taxation ‒ Develop more effective taxation of multinationals

‒ Automatically exchange information internationally

Reform options to achieve more efficient redistribution of taxation

33

Property taxation ‒Utilize better the opportunities for recurrent property taxes

o Improve administrative infrastructure

Consumption taxation ‒ Minimize VAT exemptions and special VAT rates

‒ Set a sufficiently high VAT registration threshold

‒ Use specific excises mainly for purposes other than redistribution

Issues for Discussion

• Should fiscal policy be an important tool for promoting inclusive growth in Asia?

• Should this be achieved through affecting market (e.g., through investments in education, health and infrastructure)?

• Should it be achieved through affecting disposable income (e.g., through redistributive transfers)?

• For countries wishing to expand social insurance (pensions and health), how should this be financed? 34

Thank you!

35

fiscal policy, income inequality - international monetary funddnk cze bel svn nor gbr fin aut swe...

Documents