Economic growth and income distribution implications of public spending and tax decisions

Zsolt Darvas

Society and Economy, 2020, vol. 42, issue 4, 351-365

Abstract: Both the level and composition of public expenditures and revenues have implications for economic development, as argued by the ‘fiscal multiplier’ and the ‘quality of public finance’ literature. Public finance decisions also influence the distribution of income. By reviewing the literature, I argue for a fair distribution of income as reflected in low income inequality, not particularly because of the impact of income inequality on long-term growth (which is a controversial issue), but primarily because income inequality typically implies inequality of opportunity. European Union countries have very diverse public finance structures and different levels of effectiveness, and there is room for improvement in growth and equality impacts in all countries. A general guideline would be that the most effective approach comprises progressive taxes and inheritance taxes, spending on education, health and public infrastructure, and better government effectiveness. At the height of the 2008 global and the subsequent European financial and economic crises, the fiscal consolidation strategies of EU countries largely relied on cutting public investment and social spending (except pensions), which is the opposite of what is suggested in the literature. Better fiscal rules and good fiscal institutions are needed to safeguard growth- and distribution friendly expenditures in a crisis.

Keywords: taxation; public pending; economic growth; income inequality (search for similar items in EconPapers)
JEL-codes: D63 H20 H50 O40 (search for similar items in EconPapers)
Date: 2020
Note: The first version of this paper was prepared for the Budapest Public Finance Seminar 2019 on ‘Growth implications of state budget income and expenditure structure’, 23 May 2019, Budapest, Hungary, organised by the Hungarian State Treasury. I thank Boris Cournede and conference participants for useful comments and suggestions.
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Working Paper: The economic growth and income distribution implications of public spending and tax decisions (2020)
Working Paper: Economic growth and income distribution implications of public spending and tax decisions (2020)
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