On the relationship between fiscal consolidation (austerity) and income inequality. Novel empirical evidence.

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.