4 hand, fiscal consolidations that are driven by revenue increases are associated with reductions in inequality.

Nevertheless, Ball and others (2013) find that both expenditure and taxed-based fiscal consolidations at the national level have typically raised inequality for a panel of OECD countries, even if the distributional effects of spending-based adjustments tends to be larger relative to tax-based adjustments. These conclusions are largely confirmed for a broader panel of countries that also includes emerging markets in a study by Woo and others (2013). These authors find positive and statistically significant elasticities of spending-based consolidations on inequality (of around 1.5 to 2), but the coefficients for tax-based consolidations are not statistically significant.

Several papers in this fiscal consolidation literature use so-called “action-based” data at the national level constructed for OECD economies by Devries and others (2011). The Devries and others data focuses on discretionary changes in taxes and expenditures motivated by a desire to reduce the budget deficit and as such these authors attempt to exclude fiscal policy changes that would be a response to prospective economic conditions. Such consolidation episodes are identified by examining contemporaneous policy documents. We use more “conventional” measures of the fiscal stance as described in the next section. Another difference is that these papers tend to focus on large fiscal adjustments, whereas we also consider gradual changes. Moreover, the literature tends to consider data at the national (central government) level, while we focus on evidence at the sub-national level.

Afonso, Schuknecht and Tanzi (2010) look at the impact of public social spending on income distribution for a sample of OECD countries. They find that social spending is linked to a more equal income distribution when it is coupled with good educational achievement and that there is a low marginal product of higher spending in terms of equality. But the impact of overall government spending on inequality in developing countries is less clear-cut. Lim and McNelis (2014) do not find a systematic link between the ratio of government spending to GDP and the Gini coefficient across regions of the world.

The impact of fiscal policy on inequality in developing economies is typically shaped by lower levels of taxes and transfers relative to advanced economies, which is compounded by greater reliance on regressive taxes (such as consumption taxes) and low coverage and benefit levels of transfer programs (Bastagli, Coady, and Gupta, 2012). Furthermore, overall in-kind public expenditures (on health and education for example) have been found to be regressive in several developing countries, reflecting the lack of access by lower income households to public services (Bastagli, Coady, and Gupta, ibid.).

Lustig and others (2012) undertake a static analysis of the incidence of fiscal policy for several Latin American countries, including Brazil. They find that typically the extent of inequality reduction due to direct taxes and transfers is relatively small compared to what is observed for Western Europe. In the case of Brazil, taxes and transfers lead to a 3 percentage points reduction in the Gini coefficient compared to 15 percentage points for Western European countries. In Brazil, this is mostly explained by the fact that the government spends less (as a share of GDP) on progressive transfers. Using data from the 2009 household budget