Abstract

World Economic and Financial Surveys

Title Page

World Economic and Financial Surveys

Fiscal Monitor October 2017

Tackling Inequality

Copyright

© 2017 International Monetary Fund

Cover: IMF Multimedia Services Division

Composition: AGS, An RR Donnelley Company

Cataloging-in-Publication Data

Joint Bank-Fund Library

Names: International Monetary Fund.

Title: Fiscal monitor.

Other titles: World economic and financial surveys, 0258-7440

Description: Washington, DC : International Monetary Fund, 2009- | Semiannual | Some issues also have thematic titles.

Subjects: LCSH: Finance, Public—Periodicals. | Finance, Public—Forecasting—Periodicals. | Fiscal policy—Periodicals. | Fiscal policy—Forecasting—Periodicals.

Classification: LCC HJ101.F57

ISBN: 978-1-48431-248-3 (paper)

978-1-48431-749-5 (ePub)

978-1-48431-750-1 (Mobi)

978-1-48431-741-9 (PDF)

Disclaimer: The Fiscal Monitor is a survey by the IMF staff published twice a year, in the spring and fall. The report analyzes the latest public finance developments, updates medium-term fiscal projections, and assesses policies to put public finances on a sustainable footing. The report was prepared by IMF staff and has benefited from comments and suggestions from Executive Directors following their discussion of the report on September 21, 2017. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.

Recommended citation: International Monetary Fund (IMF). 2017. Fiscal Monitor: Tackling Inequality. Washington, October.

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Contents

  • Assumptions and Conventions

  • Preface

  • Executive Summary

  • Chapter 1. Tackling Inequality

    • Introduction

    • Inequality and Fiscal Redistribution

    • Progressivity at the Top and at the Bottom

    • Equalizing Opportunities through Education and Health

    • Policy Implications and Conclusions

    • Box 1.1. Global Inequality Today and in 2035

    • Box 1.2. Equally Distributed Equivalent Income as a Measure of Social Welfare

    • Box 1.3. Bolivia: Inequality Decline during a Commodity Boom

    • Box 1.4. Measuring Tax Progressivity

    • Box 1.5. Taxing Wealth and Wealth Transfers

    • Box 1.6. Adopting a Universal Basic Income to Support Subsidy Reform in India

    • Annex 1.1. Inequality Data Set

    • Annex 1.2. Inequality Dimensions: Wealth, Opportunities, and Gender

    • Annex 1.3. Model Simulations

    • Annex 1.4. The Estimation of Elasticities

    • Annex 1.5. Growth Regressions

    • Annex 1.6. Empirical Assessment of a Universal Basic Income

    • Annex 1.7. Health Outcomes and Inequality in Public Health Spending

    • References

  • Country Abbreviations

  • Glossary

  • Methodological and Statistical Appendix

    • Data and Conventions

    • Fiscal Policy Assumptions

    • Definition and Coverage of Fiscal Data

      • Table A. Economy Groupings

      • Table B. Advanced Economies: Definition and Coverage of Fiscal Monitor Data

      • Table C. Emerging Market and Middle-Income Economies: Definition and Coverage of Fiscal Monitor Data

      • Table D. Low-Income Developing Countries: Definition and Coverage of Fiscal Monitor Data

    • List of Tables

      • Advanced Economies (A1–A8)

      • Emerging Market and Middle-Income Economies (A9–A16)

      • Low-Income Developing Countries (A17–A22)

      • Gross Financing Need (A23–24)

      • Structural Fiscal Indicators (A25–A27)

  • Fiscal Monitor, Selected Topics

  • IMF Executive Board Discussion Summary

  • Figures

    • Figure 1.1. Global Income Inequality: Gini Coefficient, 1988–2015

    • Figure 1.2. Decomposition of Global Income Inequality, 1988–2013

    • Figure 1.3. Average Income Inequality across Regions and over Time, 1985–2015

    • Figure 1.4. Change in Inequality by Region, 1985–2015

    • Figure 1.5. Ratio of Share of Wealth Held by Top 1 Percent to Share Held by Top 10 Percent

    • Figure 1.6. Change in Gini Coefficient and GDP Growth, 1985–2015

    • Figure 1.7. Growth of Real Income per Capita, by Income Percentile in the Population, 1988–2008

    • Figure 1.8. Regional and World Trends in Extreme Poverty Headcount, 1990–2013

    • Figure 1.9. Redistributive Impact of Taxes and Transfers in Advanced Economies, 2015 or Latest Year

    • Figure 1.10. Composition of Tax Revenues, by Region

    • Figure 1.11. Composition of Social Spending, by Region

    • Figure 1.12. Redistributive Impact of Income Taxes and Transfers, 2015 or Latest Year

    • Figure 1.13. Median Tax Progressivity in Organisation for Economic Co-operation and Development Member Countries

    • Figure 1.14. Selected Advanced Economies: Top Statutory Personal Income Tax Rate over Time

    • Figure 1.15. Concentration of Income above the 95th Percentile, 1970–2012

    • Figure 1.16. Top Marginal Personal Income Tax Rate across Social Welfare Function Weight for Top Earners

    • Figure 1.17. Average Corporate Income Tax Rate, 1990-2015

    • Figure 1.18. Average Coverage of Social Assistance Programs among Middle- and Low-Income Countries, by Region, Latest Available Year

    • Figure 1.19. European Union Countries: Marginal Effective Tax Rates in Bottom Quartile of Income Distribution

    • Figure 1.20. Key Features of Various Forms of Universal Basic Income

    • Figure 1.21. Universal Basic Income Gross Fiscal Cost and Distributional Impact

    • Figure 1.22. Financing Options for Universal Basic Income Scheme: South Africa, 2012

    • Figure 1.23. Coverage and Progressivity of Safety Net Systems in Eight Country Cases

    • Figure 1.24. Ratio of Female to Male Enrollment, Primary and Tertiary Education, 2000 and 2014

    • Figure 1.25. Inequality in Access to Education and Test Scores by Socioeconomic Status

    • Figure 1.26. Education Inequality and Inequality of Opportunity

    • Figure 1.27. US Social Mobility and Education Outcomes by Parents’ Income, by State

    • Figure 1.28. Inequality in School Resources and Education Outcomes

    • Figure 1.29. Inequality in Longevity in High-Income Countries

    • Figure 1.30. Infant Mortality in Emerging Market Economies and Low-Income Countries, 1994–2014 25

    • Figure 1.31. Basic Health Coverage in Emerging Market Economies and Low-Income Countries, 1994–2014

    • Figure 1.32. Trends in Out-of-Pocket Spending, 2003–14

    • Figure 1.33. Basic Health Coverage Inequality and Health Outcomes

    • Figure 1.1.1. Distribution of Global Income, 2015 and 2035

    • Figure 1.1.2. Population by Individual Income Level and Region, 2015 and 2035

    • Figure 1.2.1. Relationship between Social Welfare (or Equally Distributed Equivalent Income) and Average Income

    • Figure 1.3.1. Contribution of Individual Factors to GDP Growth

    • Figure 1.3.2. Contribution of Individual Factors to Decline in Gini Coefficient

    • Figure 1.4.1. Average Tax Rate across Incomes

    • Figure 1.4.2. Lorenz Curves

    • Figure 1.6.1. India: Progressivity and Coverage of Public Distribution System and Fuel Subsidies

    • Figure 1.6.2. India: Generosity of Public Distribution System and Fuel Subsidies

    • Annex Figure 1.1.1. Gini Income Inequality Data Set: Five-Year Window, Unbalanced Sample, 1980–2015

    • Annex Figure 1.1.2. Gini Income Inequality Data Set: Five-Year Window, Balanced Sample, 1985–2015 and 1995–2015

    • Annex Figure 1.2.1. Wealth and Income Shares of Top Percentiles of Households, Selected OECD Countries, 2010 or Latest Available Year

    • Annex Figure 1.2.2. Household Wealth Composition by Quintile and in Top Percentiles, Average among OECD Countries, 2010 or Latest Available Year

    • Annex Figure 1.2.3. Wealth Distribution, 1990–2015 or Latest Available Year

    • Annex Figure 1.2.4. Decomposition of Income of Top 1 Percent

    • Annex Figure 1.2.5. Great Gatsby Curve: Income Inequality and Social Mobility

    • Annex Figure 1.2.6. Income Inequality and Inequality of Opportunity

    • Annex Figure 1.2.7. Gender Inequality Measures, 2015

    • Annex Figure 1.3.1. United States: Average Effective Personal Income Tax Rate

    • Annex Figure 1.3.2. United States: Changes in Effective Average Personal Income Tax Rate from Expanding Earned Income Tax Credit

    • Annex Figure 1.3.3. United States: Macroeconomic Impact of Expansion of EITC under Various Financing Options

    • Annex Figure 1.3.4. United States: Distributional Impact of Expansion of EITC under Various Financing Options

    • Annex Figure 1.3.5. United States: Changes in Effective Average Personal Income Tax Rates from EITC and Financing with Progressive Taxation

    • Annex Figure 1.3.6. United States: Macroeconomic Impact of Universal Basic Income under Various Financing Options

    • Annex Figure 1.3.7. United States: Distributional Impact of Universal Basic Income under Various Financing Options

    • Annex Figure 1.3.8. United States: Changes in Equally Distributed Equivalent Income under Reform Packages

    • Annex Figure 1.4.1. Elasticities of Taxable Income, Based on Top Income Shares

  • Tables

    • Annex Table 1.3.1. Industrial Sector Characteristics

    • Annex Table 1.4.1. Median of Estimated Elasticities

    • Annex Table 1.5.1. Progressivity and Growth: Annual Regressions

    • Annex Table 1.5.2. Progressivity and Growth Regressions: Five-Year Intervals

    • Annex Table 1.6.1. Gross Fiscal Cost and Redistributive Impacts of Universal Basic Income: All Individuals

    • Annex Table 1.6.2. Gross Fiscal Cost and Redistributive Impacts of Universal Basic Income: Children and the Elderly

    • Annex Table 1.6.3. Calibration of Universal Basic Income to Current Noncontributory Transfers

    • Annex Table 1.7.1. Life Expectancy at Birth and Basic Health Coverage Inequality

    • Table A. Economy Groupings

    • Table B. Advanced Economies: Definition and Coverage of Fiscal Monitor Data

    • Table C. Emerging Market and Middle-Income Economies: Definition and Coverage of Fiscal Monitor Data

    • Table D. Low-Income Developing Countries: Definition and Coverage of Fiscal Monitor Data

    • Table A1. Advanced Economies: General Government Overall Balance, 2008–22

    • Table A2. Advanced Economies: General Government Primary Balance, 2008–22

    • Table A3. Advanced Economies: General Government Cyclically Adjusted Balance, 2008–22

    • Table A4. Advanced Economies: General Government Cyclically Adjusted Primary Balance, 2008–22

    • Table A5. Advanced Economies: General Government Revenue, 2008–22

    • Table A6. Advanced Economies: General Government Expenditure, 2008–22

    • Table A7. Advanced Economies: General Government Gross Debt, 2008–22

    • Table A8. Advanced Economies: General Government Net Debt, 2008–22

    • Table A9. Emerging Market and Middle-Income Economies: General Government Overall Balance, 2008–22

    • Table A10. Emerging Market and Middle-Income Economies: General Government Primary Balance, 2008–22

    • Table A11. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Balance, 2008–22

    • Table A12. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Primary Balance, 2008–22

    • Table A13. Emerging Market and Middle-Income Economies: General Government Revenue, 2008–22 89

    • Table A14. Emerging Market and Middle-Income Economies: General Government Expenditure, 2008–22

    • Table A15. Emerging Market and Middle-Income Economies: General Government Gross Debt, 2008–22

    • Table A16. Emerging Market and Middle-Income Economies: General Government Net Debt, 2008–22

    • Table A17. Low-Income Developing Countries: General Government Overall Balance, 2008–22

    • Table A18. Low-Income Developing Countries: General Government Primary Balance, 2008–22

    • Table A19. Low-Income Developing Countries: General Government Revenue, 2008–22

    • Table A20. Low-Income Developing Countries: General Government Expenditure, 2008–22

    • Table A21. Low-Income Developing Countries: General Government Gross Debt, 2008–22

    • Table A22. Low-Income Developing Countries: General Government Net Debt, 2008–22

    • Table A23. Selected Advanced Economies: Gross Financing Need, 2017–19

    • Table A24. Selected Emerging Market and Middle-Income Economies: Gross Financing Need, 2017–18

    • Table A25. Advanced Economies: Structural Fiscal Indicators

    • Table A26. Emerging Market and Middle-Income Economies: Structural Fiscal Indicators

    • Table A27. Low-Income Developing Countries: Structural Fiscal Indicators

Assumptions and Conventions

The following symbols have been used throughout this publication:

… to indicate that data are not available

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist

– between years or months (for example, 2008–09 or January-June) to indicate the years or months covered, including the beginning and ending years or months

/ between years (for example, 2008/09) to indicate a fiscal or financial year

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

“n.a.” means “not applicable.”

Minor discrepancies between sums of constituent figures and totals are due to rounding.

As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

Further Information and Data

This version of the Fiscal Monitor is available in full through the IMF eLibrary (www.elibrary.imf.org) and the IMF website (www.imf.org).

The data and analysis appearing in the Fiscal Monitor are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness, but it cannot be guaranteed. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.

For details on the terms and conditions for usage of the contents of this publication, please refer to the IMF Copyright and Usage website, www.imf.org/external/terms.htm.

Preface

The projections included in this issue of the Fiscal Monitor are based on the same database used for the October 2017 World Economic Outlook and Global Financial Stability Report (and are referred to as “IMF staff projections”). Fiscal projections refer to the general government unless otherwise indicated. Short-term projections are based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions. The medium-term fiscal projections incorporate policy measures that are judged by the IMF staff as likely to be implemented. For countries supported by an IMF arrangement, the medium-term projections are those under the arrangement. In cases in which the IMF staff has insufficient information to assess the authorities’ budget intentions and prospects for policy implementation, an unchanged cyclically adjusted primary balance is assumed, unless indicated otherwise. Details on the composition of the groups, as well as country-specific assumptions, can be found in the Methodological and Statistical Appendix.

The Fiscal Monitor is prepared by the IMF Fiscal Affairs Department under the general guidance of Vitor Gaspar, Director of the Department. The project was directed by Abdelhak Senhadji, Deputy Director; Catherine Pattillo, Assistant Director; and David Coady, Division Chief. The main authors of this issue are Mercedes Garcia-Escribano (team leader), Brooks Evans, Xiangming Fang, Maura Francese, Claudia Gerber, Emine Hanedar, João Jalles, Hui Jin, Emmanouil Kitsios, Alexander Klemm, Li Liu, Sandra Lizarazo Ruiz, Victor Mylonas, Adrian Peralta Alva, Delphine Prady, Baoping Shang, and Sébastien E. J. Walker. The chapter also benefited from contributions by Tomas Hellebrandt, Lisa Kolovich, Paolo Mauro, Monique Newiak, Tigran Poghosyan, and Philippe Wingender. Excellent research assistance was provided by Kyungla Chae, Mark Albertson, Devin D’Angelo, Saida Khamidova, Young Kim, and Candice Liu. The Methodological and Statistical Appendix was prepared by Young Kim. Nadia Malikyar and Erin Yiu provided excellent coordination and editorial support. Michael Harrup from the Communications Department led the editorial team and managed the report’s production, with production assistance from Houda Berrada and editorial assistance from Sherrie Brown, Susan Graham, Nancy Morrison, and Vector Talent Resources.

The analysis benefited from comments and suggestions by staff members in other IMF departments, as well as by Executive Directors following their discussion of the report on September 21, 2017. The Fiscal Monitor also benefited from comments by Martin Ravallion (Georgetown University), Andrea Guedes, Gabriela Inchauste, Igor Kheyfets, Aart Kraay, Christoph Kurowski, and Christoph Lakner (all World Bank). Both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.

Executive Summary

Rising inequality and slow economic growth in many countries have focused attention on policies to support inclusive growth. While some inequality is inevitable in a market-based economic system, excessive inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth. This Fiscal Monitor discusses how fiscal policies can help achieve redistributive objectives. It focuses on three salient policy debates: tax rates at the top of the income distribution, the introduction of a universal basic income, and the role of public spending on education and health.

Inequality, Growth, and Fiscal Redistribution

Global inequality—measured across all citizens of the world by abstracting from national borders—has been declining in recent decades, reflecting strong income growth in some large emerging market economies such as China and India. However, the picture of inequality within countries is mixed: while income inequality has increased in most advanced economies, trends in other economic groups have been more varied. In fact, inequality has declined in almost half the countries for which data are available. The forces underlying rising inequality also vary across time and regions. A key source has been technological change favoring higher skills.

Economic growth is fundamental. In many countries, growth has ensured that increases in inequality are compatible with improving living standards for households across all deciles of the income distribution, although there are significant differences across countries regarding the extent to which growth has been inclusive. This diversity of experiences and empirical analysis suggest that there is no systematic adverse trade-off between increasing growth and decreasing inequality.

A substantial share of the differences in inequality across economic groups and over time can be attributed to differences in redistributive fiscal policies. In advanced economies, direct taxes and transfers reduce income inequality on average by about one-third, with three-quarters of this reduction achieved through transfers. In developing economies, fiscal redistribution is much more limited, reflecting lower and less progressive taxation and spending and greater reliance on regressive indirect taxes.

Progressivity of Income Taxes and Transfers

Progressive taxation and transfers are key components of efficient fiscal redistribution. At the top of the income distribution, marginal income tax rates that increase with income levels can achieve greater progressivity. While various instruments can enhance progressivity at the bottom of the income distribution, this Fiscal Monitor focuses on the universal basic income (UBI)—an identical transfer to the entire population—a proposal that has been widely debated recently and is being tested in several countries. Overall, the appropriate combination of progressive tax and transfer instruments should reflect country-specific circumstances, including administrative capacity, the performance of the existing safety net, underlying fiscal pressures, and social preferences.

Progressivity at the Top …

How steeply should marginal (and average) tax rates increase with income? Optimal tax theory suggests significantly higher marginal tax rates on top income earners than current rates, which have been on a declining trend. Could declining progressivity be a response to concerns about potential negative effects of progressivity on growth? Empirical results do not support this argument, at least for levels of progressivity that are not excessive. Advanced economies with relatively low levels of progressivity in their personal income tax (PIT) may therefore have scope for raising the top marginal tax rates without hampering economic growth. Different types of wealth taxes can also be considered. Emerging markets and low-income developing countries should focus on gradually expanding the coverage of the PIT and raising indirect taxes—including excise taxes on luxury goods and consumption items that generate negative externalities, such as fossil-fuel-based energy, alcohol, and tobacco—to generate funding for progressive spending.

How should capital income (including profits, interest, and capital gains) be taxed? Capital income is distributed more unequally than labor income, its share in total income has risen over recent decades, and it is often taxed at a lower (and declining) rate than labor income. Adequate taxation of capital income is needed to protect the overall progressivity of the income tax system by reducing incentives to reclassify labor income as capital income and through a more uniform treatment of different types of capital income. Many countries should emphasize reducing opportunities for tax evasion and avoidance. Taxes on real estate or land are both equitable and efficient and remain underused, but may require a sizable investment in administrative infrastructure, particularly in low-income developing countries.

… and at the Bottom

The UBI has received growing attention in academic, policy, and public discourse, and several countries are experimenting with different forms. While some countries already have some components of a UBI in place (such as universal child benefits and social pensions), no country has yet adopted a UBI that covers its entire population. Proponents argue that a UBI can address poverty and inequality more effectively than means-tested programs in the presence of information constraints, high administrative costs, and other obstacles (including social stigma) that limit the take-up of benefits. Others see a UBI as an instrument for addressing greater income decline and uncertainty generated by the impact of changing technology (particularly automation) on jobs. It is also advocated as a way to build support for structural reforms. Opponents highlight that universality implies an unnecessary leakage of benefits to higher-income groups. The associated high fiscal cost raises concerns about the program’s affordability and the risk of crowding out other high-priority spending that promotes inclusive growth. UBI opponents also find problematic the delinking of income from labor force participation.

Is there a case for the adoption of a UBI? Under what circumstances could it be desirable, and how should it be financed? Or should governments focus on strengthening their capacity to use means-tested transfers? Whether a UBI is a good substitute for an existing social benefit system will depend on that system’s performance as well as on the government’s administrative capacity and prospects for enhancing targeting.

In developing economies, where it is more likely for the current benefit system to be very sparse and coverage of lower-income groups might be very low, the adoption of a UBI may be an option for governments wishing to strengthen their safety nets in the short term. However, to be effective and preserve fiscal sustainability, such an expansion would need to be financed through efficient and equitable increases in taxes or cuts in spending, such as eliminating universal price subsidies or broadening the consumption tax base, including through taxes on consumption with negative externalities. Capacity constraints for mobilizing revenues may be an important factor that weighs on developing a universal safety net.

At the other end of the spectrum, for systems with generous benefits, broad coverage, and high progressivity, replacement of the existing system with a UBI would result in substantial decreases in benefits for many lower-income households—a likely scenario in advanced economies. It is therefore preferable to focus efforts on further strengthening existing systems through directly addressing any remaining coverage gaps in social safety nets due to eligibility rules or incomplete take-up and well-designed wage subsidies for low-income workers to provide incentives for work. The adoption of a UBI in such circumstances would therefore have to be motivated by other considerations, such as enhancing income insurance in the context of rising job insecurity due to rapid technological change and automation or building public and political support for structural reforms, such as eliminating food or energy subsidies and broadening the consumption tax base.

The fiscal cost of a UBI will depend on the level at which it is set. To illustrate, if it were set at 25 percent of median per capita income, the fiscal cost would be about 6–7 percent of GDP in advanced economies and 3–4 percent in emerging markets and developing economies. The impact on inequality, before financing, would be substantial in all countries, with one measure of inequality, the Gini coefficient, decreasing on average by five points. The reduction in poverty in emerging markets and developing economies would also be significant. The net redistributive impact of a UBI will, however, depend on how it is financed. This Fiscal Monitor analyzes a UBI with illustrative country cases, using microsimulation methods and a general equilibrium model to account for behavioral responses, financing, and the trade-off between equity and efficiency.

Addressing Inequalities in Education and Health

Investments in education and health can help reduce income inequality over the medium term, address the persistence of poverty across generations, enhance social mobility, and ultimately promote sustained inclusive growth. Yet many countries still have sizable gaps in education and health services. Closing these gaps will also help address inequalities in other dimensions, such as gender and regional disparities.

Despite progress in education, sizable enrollment gaps between socioeconomic groups remain in almost the entire developing world. Globally, even when students from socioeconomically disadvantaged families are enrolled in education systems, they have substantially poorer actual learning outcomes than those from more affluent backgrounds, reflecting low-quality education.

Disparities in health outcomes are not narrowing in many countries. In advanced economies, the gap in life expectancy between males with tertiary education and those with secondary education or less ranges from about four to fourteen years and has even widened in some countries. The ratio of the infant mortality rate in the top socioeconomic quintile to that in the bottom quintile has increased in about half of emerging markets and developing countries, mostly reflecting slower improvements among the disadvantaged. While progress in health coverage has contributed to improvements in health outcomes, significant gaps remain in some emerging market economies and many low-income countries. Increasingly, health outcomes are determined by factors other than health care, including nutrition, education, and healthy behaviors, particularly in advanced economies.

Addressing remaining inequalities will require better targeting of public spending to disadvantaged groups to improve access to quality education and health care. This would also enhance overall efficiency.