The impact of fiscal shocks on real GDP and income inequality: What do Australian data say? |
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| Institution: | 1. Department of Accounting, Finance and Economics, Griffith Business School, Nathan Campus, Griffith University, 170 Kessels Road, Nathan, QLD 4111, Australia;2. Department of Economics, Faculty of Humanities and Social Sciences, University of Ruhuna, MH 81000, Matara, Sri Lanka;1. 805, Hilife Magnifique, Varthur Panathur Road, Balagere, Bangalore 560087, India;2. Xavier School of Management (XLRI), CH Area (East), Jamshedpur 831001, India;1. Université Paris-Est, IRG (EA 2354), UPEC, UPEM, Pôle du Bois de l''Étang, 5 Bd Descartes, Bureau C241A, F-77454 Marne-la-Vallée, France;2. EM Normandie Business School, Métis Lab, Paris, France;3. Institut de Recherche en Gestion (EA 2354), Université Paris Est, Créteil, France;4. College of Business Administration, King Saud University, Saudi Arabia;1. Department of Economics, University Cantabria, Avenue Los Castros, s/n, Santander CP 39005, Spain;2. Department of Management and Economics, University Beira Interior, Covilhã, Portugal;1. CEPN — Université Paris 13 and Sorbonne Paris Cité, France;2. Department of Sociology and Social Research, University of Trento, Italy;3. Department of Sociology and Social Research, University of Trento, Italy and IZA – Institute for the Study of Labor, Bonn, Germany;1. CeRP-Collegio Carlo Alberto and Ufficio Studi Compagnia, San Paolo, Italy;2. University of Turin, Dep. of Economics and Statistics, Turin, Italy;3. University of Insubria, Dep. of Economics, Varese, Italy;4. ISER University of Essex, United Kingdom, CeRP-Collegio Carlo Alberto, Turin, Italy and Dondena-University Bocconi, Milan, Italy |
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| Abstract: | This paper examines the impact of three fiscal policy shocks on per capita real GDP and income inequality in Australia during the period 1965–2014. A small structural vector autoregressive (SVAR) model is constructed for an open economy for contemporaneous identification and estimation purposes. Based on the evidence of one cointegrating vector among the variables, a structural vector error correction (SVEC) model is specified for the long run. Direct taxation, indirect taxation receipts and government spending are identified as permanent fiscal policy shocks. The convergent use of two different models (SVAR & SVEC) strengthens the credibility of the results. The results have three key policy implications. First, a reduction in direct taxation receipts increases per capita real GDP without increasing income inequality. Second, a reduction in government expenditure significantly increases income inequality. Third, the adverse effect of indirect taxation receipts on income inequality is greater than the redistributive effect of government expenditure, which questions the widely held fiscal policy strategy of using indirect taxation to finance redistributive expenditure. |
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| Keywords: | Income inequality Output Fiscal policy Open economy SVAR and SVEC Australia |
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