Abstract:
Equity concerns regarding increases and persistence of adverse distributional outcomes
tend to rear up during instances of austerity consideration since increasing inequality
levels tend to have material significances on a people’s way of life as well as a nation’s
economic growth by disproportionately affecting economic opportunities for the lower
and median incomes. Motivated by the lack of empirical clarity and conflicting evidence
in the extant austerity-inequality nexus literature this thesis enriches our understanding of
the effect of fiscal consolidation programmes on output and income inequality. More
specifically, by engaging in a systematic literature review, this study explores the
relationship between austerity and income inequality. Furthermore, by employing
different empirical model specifications1 for a panel of 16 OECD countries for the period
1980 to 2019, this research work explores the dynamic distributional effects of fiscal
consolidation programmes as well the role of public debt in determining distributional
outcomes during austerity implementation. The novel evidence obtained suggests that:
adverse distributional effects persist for 15 years following adjustment implementation
through both revenue and expenditure channels; furthermore – point estimates for the
Bottom 40% of the income distribution are higher by the 15th year than previous peak
periods; distributional impacts arising from influences of public debt levels are amplified
during instances of fiscal adjustment with adverse distributional effects on average,
manifesting from medium debt levels.
