Fiscal policy encompasses taxation and government spending, and is the most direct tool that governments have to undertake redistributive policies (IMF, 2014). The ADB (2014) has found that government expenditure is a more effective fiscal tool than taxation as it can target low-income groups directly, and that government investment in the human capital of the poor is fundamental for inclusive growth.
The role of fiscal policy in generating funds for spending on infrastructure, social protection and human development is also noted by numerous authors, who particularly emphasise the need for governments to broaden their tax base in order to continuously finance policies that foster inclusive growth (Duflo, 2011; ABD, 2014; IMF, 2014).
Asian Development Bank. (2014). Asian Development Outlook 2014: Fiscal Policy for Inclusive Growth. Mandaluyong City, Philippines: Asian Development Bank.
The ADB recommends that policymakers use fiscal policy to foster equality of opportunity. In order to maintain fiscal prudence, this will require calibrating spending to better meet the needs of the poor and mobilising a larger tax base. This brief states that government expenditure is a more effective fiscal policy tool than taxation for reducing inequality. Government expenditure on education and healthcare is recommended as a means of directly advancing the well being of the poor while improving their productive capacity; targeted subsidies and transfers are promoted as a method of protecting the most vulnerable; and spending on public infrastructure is seen as a means of enabling the poor to take better advantage of improved healthcare and education. The ADB notes that Developing Asia will need to expand its fiscal resource base in order to fund this kind of spending. This will require broadening the income tax and VAT base, but also exploring corrective taxes, property taxes, capital gains and inheritance tax mechanisms to make the tax structure more progressive and equitable.
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IMF. (2014). Fiscal Policy and Income Inequality. Washington DC: IMF.
This report argues that fiscal policy is the main tool that governments have to influence income distribution. However, in a period of fiscal consolidation (as is still the case globally) governments must carefully balance their distributional and efficiency objectives through carefully designed spending and taxation policies. There are nevertheless policies that address inequality which minimise negative efficiency impacts. In developing countries, the authors recommend: consolidating social assistance programmes and improving targeting; introducing and expanding conditional cash transfer programmes as administrative capacity improves; expanding non-contributory means-tested social pensions; improving the access of low-income families to education and health services; and expanding coverage of personal income taxation.
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- Duflo, E. (2011). Balancing growth with equity: the view from Development. Paper presented at the Jackson Hole Symposium, Federal Reserve Bank of Kansas City, August 1.
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