At last week’s Spring Meetings of the IMF and World Bank, economists and policymakers discussed ways to maintain the momentum of the global economic expansion—while also ensuring that the fruits of growth are shared more widely within their countries. Fiscal policy—government’s ability to tax and spend—has an important role to play.
The effectiveness of fiscal policy in mitigating inequality varies widely by country, as seen in our Chart of the Week. The chart shows the redistribution effect of fiscal policy before and after taxes, as measured by the change in the Gini coefficient. A Gini of zero expresses perfect equality, while a Gini of one expresses maximum inequality.
Here are some ways governments can use fiscal policy to make growth more inclusive:
Improved design of transfers to households. Advanced economies can support low-income families, while also encouraging work, through tax credits that are available only to those who are employed. The United States, for example, could promote employment for low-income working people by expanding the Earned Income Tax Credit and raising the minimum wage. Emerging market and developing countries, such as Jamaica and Pakistan, could expand transfers to the poor that are conditional on attendance of children at health clinics and schools.
More progressive tax systems. Advanced countries could make tax systems more progressive by reducing exemptions that favor the affluent, such as the mortgage-interest tax credit in the United States and Sweden. In emerging market and developing economies, expanding the coverage of the personal income tax by reducing exemptions and bringing more firms and individuals into the formal sector could increase fiscal revenues and equity.
Public education and training. Governments should help workers acquire and maintain the appropriate skills for the evolving global economy. In the United Kingdom, for example, further expanding vocational training and apprenticeship programs could improve employment prospects for youth.
To learn more, read chapter one of the IMF’s 2017 Fiscal Monitor.