Reallocating Public Spending to Reduce Income Inequality: Can it Work?

52 Pages Posted: 17 Oct 2019

See all articles by Djeneba Doumbia

Djeneba Doumbia

World Bank

Tidiane Kinda

International Monetary Fund (IMF)

Date Written: September 2019

Abstract

Can a government reduce income inequality by changing the composition of public spending while keeping the total level of expenditure fixed? Using newly assembled data on spending composition for 83 countries across all income groups, this paper shows that reallocating spending toward social protection and infrastructure is associated with reduced income inequality, particularly when it is financed through cuts in defense spending. However, the political and security situation matters. The analysis does not find evidence that lowering defense spending to finance infrastructure and social outlays improves income distribution in countries with weak institutions and at higher risk of conflict. Reallocating social protection and infrastructure spending towards other types of spending tends to increase income inequality. Accounting for the long-term impact of health spending, and particularly education spending, helps to better capture the equalizing effects of these expenditures. The paper includes a discussion of the implications of the findings for Indonesia, a major emerging market where income inequality is at the center of policy issues.

Keywords: Economic policy, Financial crises, Expenditure efficiency, Unemployment, Education spending, Income inequality, public spending reallocation, institutions, WP, health spend, education spend, infrastructure spend, defense spend, social spend

JEL Classification: D30, D63, H5, I38, E01, E2, Z13, H71, I3

Suggested Citation

Doumbia, Djeneba and Kinda, Tidiane, Reallocating Public Spending to Reduce Income Inequality: Can it Work? (September 2019). IMF Working Paper No. 19/188, Available at SSRN: https://ssrn.com/abstract=3471379

Djeneba Doumbia (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Tidiane Kinda

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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