Fiscal Consolidation and Income Inequality in Latin America and the Caribbean

Abstract

This paper estimates the effects of past fiscal consolidations in Latin America and the Caribbean (LAC) on income inequality. For the 13 LAC countries with fiscal consolidation episodes identified by the narrative approach, one percent of GDP fiscal consolidation increases the disposable Gini coefficient by 0.12 percentage point on average in five years. The size of the effect tends to be larger for tax-based consolidations and for non-commodity exporters but broadly similar during booms and slumps.